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Exelon (EXC) Christopher M. Crane on Q1 2016 Results – Earnings Call Transcript

Exelon Corp. (NYSE: EXC ) Q1 2016 Earnings Call May 06, 2016 11:00 am ET Executives Dan L. Eggers – Senior Vice President-Investor Relations Christopher M. Crane – President, Chief Executive Officer & Director Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP Joseph Nigro – Executive Vice President, Exelon; Chief Executive Officer, Constellation, Exelon Corp. Analysts Steve Fleishman – Wolfe Research LLC Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Julien Dumoulin-Smith – UBS Securities LLC Praful Mehta – Citigroup Global Markets, Inc. (Broker) Operator Good morning and welcome to the Exelon Corporation’s Q1 2016 Earnings Conference Call. My name is Prasanthi and I’ll be facilitating the audio portion of today’s – and active broadcast. All lines have been placed on mute to prevent any background noise. For those of you on this stream, please take note of the options available in your event console. At this time, I would like to turn the show over to Dan Eggers, Senior Vice President of Investors Relations. Dan L. Eggers – Senior Vice President-Investor Relations Thank you, Prasanthi. Good morning, everyone, and thank you for joining our first quarter 2016 earnings conference call. Leading the call today are Chris Crane, Exelon’s President and Chief Executive Officer; and Jack Thayer, Exelon’s Chief Financial Officer. They are joined by other members of Exelon’s senior management team who will be available to answer your questions following our prepared remarks. We issued our earnings release this morning along with the presentation, both of which can be found in the Investor Relations section of the Exelon’s website. The earnings release and other matters which we discuss during today’s call contain forward-looking statements and estimates that are subject to various risks and uncertainties. Actual results could differ from our forward-looking statements based on factors and assumptions discussed in today’s material, comments made during this call, and our Risk Factors section in the earnings release, and the 10-Q, which we expect to file on May 10. Please refer to today’s 8-K, the 10-Q, and Exelon’s other filings for a discussion of factors that may cause results to differ from management’s projections, forecasts and expectations. Today’s presentation also includes references to adjusted operating earnings and other non-GAAP measures. Please refer to the information contained in the appendix of our presentation and our earnings release for a reconciliation between the non-GAAP measures to the nearest equivalent GAAP measures. We’ve scheduled 45 minutes for today’s call. I’ll now turn the call over to Chris Crane, Exelon’s CEO. Christopher M. Crane – President, Chief Executive Officer & Director Good morning. Thanks for joining us this morning. Once again we had a great quarter financially, where we closed near the upper end of the range even with the milder weather. And operationally, our utilities and plants continue to operate at high levels. The big news for the quarter is we closed the Pepco Holdings transaction in March. We are excited to have Pepco utilities as part of the Exelon family. We know this has been a long journey and it took much longer than any of us anticipated, but we appreciate the patience of our investors as we pursued the merger. Our employees who worked tirelessly from the inception to the completion of the deal and the many stakeholders who’ve supported was critical to getting the deal done. PHI is an important piece of our strategy to become a more regulated company with more stable earnings streams. While we are still in the early stages of integrating PHI, PHI’s earnings outlook is consistent, if not better, than what we showed you at EEI. It brings meaningful benefits to our customers, communities in Delaware, District of Columbia, Maryland, New Jersey, including bill credits and reliability investments. More than $500 million in total commitments have been made and will be achieved due to this merger. We’re now focused on integrating Pepco into Exelon. We will bring our management model and our best practices to improve the experience of our customers. The transaction confirms Exelon’s role as a leader in the industry. We serve 10 million customers, more than any other utility company. We will spend nearly $23 billion in capital across our utilities and generating business over the next three years, which is the second-highest among our peers. We are the largest pure T&D by rate base and within the top five when including rate base generation. We are the second-largest generator of electricity in the country, the largest competitor by a factor of nearly two, while producing power at the lowest carbon intensity of any large generator. We are the leader in the retail electric provider in the country serving 139 terawatts. The culture of the industry leadership is found throughout our organization, positioning us very well for the future. Switching to operational performance. Our first quarter operating performance was strong and we’re on track for a strong year. At our legacy utilities, our SAIFI and CAIDI are on track to meet reliability targets; we are in top quartile in both. At the GenCo, our nuclear plants ran at a capacity factor of 95.8%, our solar and wind assets outperformed their energy capture targets. Switching to Illinois in the nuclear plants. While there is much to celebrate this quarter, we also need to make tough decisions on the future of Clinton and Quad Cities nuclear stations in Illinois. The board has given me authority to go forward with early retirements for Clinton and Quad Cities plants, if for Clinton adequate legislation is not passed during the spring legislative session that is scheduled to end May 31, and if for Quad Cities adequate legislation is not passed and the plant does not clear the upcoming PJM auction. Otherwise, we plan to retire Clinton on June 1, 2017, and Quad Cities on June 1, 2018. This is consistent with planned refueling outage and capacity market obligations. We committed to our employees, our shareholders and the communities to try to find a path to profitability for our distressed assets. This is because these plants are vital to the communities that they are located in and provide economic and environmental value to the state. The state’s own analysis showed that closing Clinton and Quad Cities would result in $1.2 billion in lost economic activity and 4,200 jobs lost, and a significant reduction of supply of reliable electricity for Illinois residents and businesses. We worked hard over the last few years to find a path to sustainable profitability. To bring $120 million in strategic capital to these plants, we’ve pursued legislation and regulatory market changes. We’ve been successful in some areas: the PJM market reforms that were put into place last year, the cost reductions that we’ve achieved, and the large number of stakeholders who have worked so hard to help in this fight. We have strong allies in our cause, our employees, our plant communities, the bill sponsors and co-sponsors, our partners in labor, and our vendors among others. I want to thank them all very much for their support and regret the impact on this decision that we have on them. But for reasons outside of our control, we have not seen progress in Illinois policy reforms, also the Supreme Court stay creates uncertainty regarding the EPA’s Clean Power Plan. Power prices have fallen to a 15-year low in PJM, causing the economics of Clinton and Quad Cities to further deteriorate. These plants have lost $800 million in cash flow from 2009 to 2015. Just to be clear, we are not covering our operating costs or our risks, let alone receiving a return on our invested capital. We’ve done all we can up to this point and we continue to work through the spring legislative session to enact the much needed reforms. However, without adequate legislation we no longer see a path to profitability and no longer can sustain the ongoing losses. On a more positive note, we continue to see a pathway to reform in New York where Governor Cuomo, the legislature, the Public Service Commission have recognized a need to preserve the state’s nuclear plants. New York is quickly moving forward to implement a clean energy standard that will allow us to continue to operate our challenged Ginna and Nine Mile plants. I’ll turn the call over to Jack to discuss the first quarter results further. Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP Thank you, Chris, and good morning, everyone. My remarks today will cover our first quarter results, 2016 guidance, update our gross margin disclosures and provide an update on developments since Q4. I’ll start on slide eight. As Chris stated, we had a strong quarter financially and operationally across the company. For the first quarter we delivered adjusted non-GAAP operating earnings of $0.68 per share, near the top of our guidance range of $0.60 per share to $0.70 per share. This compares to $0.71 per share for the first quarter of 2015. Exelon’s utilities delivered a combined $0.37 per share. During the quarter, we saw unfavorable mild weather at PECO and ComEd versus planned, which was partially offset by lower bad debt expense at BGE. There are only eight days of PHI included in our results, which had a minimal impact on the quarter. Generation had a great quarter, earning $0.34 per share. We had strong performance from our nuclear assets with better capacity factors than budgeted. And while weak power prices and lower volatility were a drag, our Constellation team delivered strong results. Our generation to load matching strategy continues to provide value and we benefited from a lower cost to serve our customers. For the second quarter, we are providing guidance of $0.50 to $0.60 per share. This compares to our realized earnings of $0.59 per share for the second quarter of 2015. The appendix contains details on our first quarter financial results compared to the first quarter of 2015 results by operating company on slide 16 and 17. Turning to slide nine, we are affirming our full-year guidance range of $2.40 to $2.70 per share which now includes the contribution from PHI and assumes an average of 926 million shares outstanding for 2016. This should help calibrate your segment models. On slide 10, we are still working through a comprehensive financial plan now that we have closed the PHI deal, but want to address the pieces that we can today. We are reaffirming our earnings growth at our legacy utilities of 7% to 9% per year from 2015 to 2018. On PHI, we are still working through the plan, but see the contribution equal to or better than what we showed you at EEI and consistent with sustaining our 7% to 9% utility growth target. On slide 11, to meet these growth targets we are going to be busy on the regulatory front. The PHI utilities have been out of rate cases for at least two years. We are continuing to invest $800 million per year to improve reliability and customer service leading to the low-earned ROEs that we show on slide 30 in the appendix. However, by the third quarter, we plan to file distribution cases in all of PHI’s jurisdictions and expect decisions in all cases by the middle of next year providing needed revenue release. Atlantic City Electric and Pepco Maryland have already filed their cases. ACE filed an electric distribution base rate case on March 22 with the New Jersey Board of Public Utilities requesting an $84 million revenue increase and a 10.6% return on equity. It also included PowerAhead, a five-year $176 million grid resiliency plan. On April 19, Pepco requested a rate increase of $127 million with the Maryland’s Public Service Commission. The rate cases include smart meter recovery and a two-year $32 million grid resiliency plan. In addition to reducing the number and length of outages, Pepco’s five-year smart grid program is generating nearly $4 in customer benefits for every $1 invested. In addition, ComEd made its annual formula rate filing with the Illinois Commerce Commission. ComEd requested a revenue requirement increase of $138 million reflecting approximately $2.4 billion in capital investments made in 2015. Those investments, which included $663 million for smart grid-related work has helped strengthen and modernize the electric system, resulting in record power reliability and customer satisfaction, operational savings, and new ways to save on electric bills for ComEd customers. More details on the rate cases can be found on slide 33 – slides 34 through 37 in the appendix. Slide 12 provides our first quarter gross margin update. In 2016 total gross margin is flat to our last disclosure. During the quarter we executed on $200 million of power new business and $100 million of non-power new business. We are highly hedged for the rest of this year and well-balanced on our generation to load matching strategy. Total gross margin decreased in the first quarter by $150 million in 2017 and $200 million in 2018, as PJM power prices moved approximately $1.60 to $2.10 lower since the beginning of the year. We ended the quarter approximately 5% to 8% behind ratable in both of these years when considering cross-commodity hedges with a majority of modeling concentrated in the Midwest to align to our fundamental view of spot market upside at NiHub. Power prices have risen since the start of the second quarter and we are timing our hedging activity to lock in the value of the recent price increases while remaining well positioned to capture our fundamental view. On slide 13, I wanted to give you a quick update on some tax implications that are associated with the completion of the PHI merger. With the inclusion of PHI, we expect to realize $700 million to $850 million of additional cash from 2017 to 2019 related to legacy NOLs and the impacts of bonus depreciation. However, now, as a very modest cash tax payer for 2018, we have less ability to take the domestic production activities deduction, or DPAD, in 2018 which effectively increases our overall consolidated tax rate by as much as 200 basis points or the equivalent of $0.06 to $0.08 per share in 2018. Although this is a one-time negative impact to 2018 ExGen earnings, it comes with significant positive cash flow and we expect to return to normalized tax rates in 2019. With the variability of interest rates, I’d like to remind you that ComEd’s allowed ROE is based on a 30-year treasury rate plus 580 basis points, and thus sensitive to moves in this rate. Every 25 basis point move in treasury rates results in a $0.01 move in EPS. Before turning the call over to Chris, I wanted to raise a few scheduling points. We’ll be hosting an Analyst Day on August 10 in Philadelphia and we’ll get details around shortly. Therefore, we will not be having a second quarter earnings call and will release earnings before Analyst Day. I will now turn the call back to Chris for his closing remarks. Christopher M. Crane – President, Chief Executive Officer & Director Thanks, Jack. Just closing out on slide 14, the capital allocation philosophy. I want to cover that before we turn it over to Q&A, and take a moment to reiterate our capital allocation philosophy. Balance sheet strength remains a top financial priority. We have a strong strategy to deliver stable growth, sustainable earnings, and an attractive dividend to our shareholders. We will be growing that dividend at 2.5% each year for the next three years, starting with the dividend payable in June. From a capital deployment perspective, we will continue to harvest free cash flow from the generation business to invest primarily in our utilities to benefit our customers, invest in long-term contracted assets which meet our return requirements, and return capital to our shareholders. This is the right strategy for our markets and our assets. Thanks and we’ll open the line up now for your questions. Question-and-Answer Session Operator And we do have audio question from Stephen Byrd (17:13). Christopher M. Crane – President, Chief Executive Officer & Director Hey, Steve (17:15). Unknown Speaker Start on the Illinois legislation. And wonder if you could speak to the breadth of support that you have for the proposal. And then also if you could just go through the mechanics of if it was implemented, how it’d work? So we can start to think about modeling the impacts. Christopher M. Crane – President, Chief Executive Officer & Director Joe, you want to cover that? Joseph Nigro – Executive Vice President, Exelon; Chief Executive Officer, Constellation, Exelon Corp. Sure. Steve (17:36), the support is the same support we had for the original bill, labor, the host communities. And in addition, we now have the support of some groups that represent climate scientists and others that are concerned with greenhouse gas emissions. In terms of how the program would work, let me just start with a policy analogy that I think all of you are familiar with. Existing state RPS programs for renewables provide compensation of qualified resources through renewable energy credits, RECs. The REC value is the difference between available wholesale revenues and the costs needed to keep the existing renewables in operation and get new renewables built. All this is done in order to get the benefit of greenhouse gas reductions while protecting customers. If wholesale revenues go up, the needed REC payment goes down. We see that happening every day in REC spot markets. The ZEC program is designed the same way. It’s a payment for the state value of zero emission credits from nuclear plants which represents the difference between the needed revenues and the costs of operating the plants. In the case of the New York and Illinois programs, the way it would work is that experts at the Commissions will determine on a prospective basis the cost of operating the plants plus risks, less available market revenues. And where there is a delta between that, in other words where the costs and risks are not covered by available market revenues, the ZEC program will kick in and provide compensation for greenhouse gas avoidance. The program is not a PPA or a contractor difference. If revenues or costs are different, there is no true-up. And – so, Steve (19:26), I think if you have additional questions, perhaps after the call we could work with Dan and Emily to set up a meeting, go through more programmatic details. Unknown Speaker That’s great. That’s a great start. Thank you. And then just shifting over to renewables more broadly, could you just speak to your degree of appetite for more acquisitions? It sounds like you’ll be a full taxpayer, I believe, in 2019, if I have that correct. But just broadly, what degree of opportunities do you see out there in renewables? Is this an area that you would expect that you’ll see further growth in? Christopher M. Crane – President, Chief Executive Officer & Director It is definitely throttled based off of our tax capacity and we are looking at that now. You do get a certain amount of dilution with delaying the benefits of the tax attributes of the project, so we have some projects in the pipeline now and are re-evaluating others to see if they’re – they would be viable to go forward in the near-term. Unknown Speaker Understood. Thank you very much. Operator And your next question comes from the line of Steve Fleishman. Christopher M. Crane – President, Chief Executive Officer & Director Hi, Steve. Steve Fleishman – Wolfe Research LLC Hi. Good morning. A couple of – first, a logistical question. The Ginna $101 million that you mentioned that you’re getting, is that – is kind of a trued-up amount including past years, is that in your guidance for this year? Or is that kind of like a one-time item or how are you treating that? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP Steve, that’s in our guidance. Steve Fleishman – Wolfe Research LLC Okay. Including any back from prior periods? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP That’s correct. Steve Fleishman – Wolfe Research LLC Okay. And then a question just – is there any way you can give us some sense on the cash flow or losses from Clinton and Quad Cities, let’s say, in your guidance for last year or something of that sort? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP So we’ve stated that it’s greater than $800 million since 2009. There are some variables in there on cash savings going forward or cash losses going forward, power prices coming down, cost cutting initiatives; and we do have an element of overheads that would not be as controllable. So you would see the run rate to be similar to what has happened in the past. Steve Fleishman – Wolfe Research LLC Okay. Christopher M. Crane – President, Chief Executive Officer & Director Steve, you know, on this point – so for 2017, the cost exceeded available market revenues or at current marks (22:12) by $140 million. But I think importantly and Joe raised this point, it’s not the whole picture. The closure also avoids millions of dollars in basis and unit-contingent risks that we face by operating the plants. And stated differently, in order to reverse course we need Illinois as well as New York to provide a structure that allows us to cover our cash costs plus normal operating risks in order to reverse this course. Steve Fleishman – Wolfe Research LLC Okay. And $140 million that’s kind of cash flow? Does that include like CapEx, or is that just kind of cash flow without CapEx? Christopher M. Crane – President, Chief Executive Officer & Director That’s cash flow. Steve Fleishman – Wolfe Research LLC Okay. One last question just on the – in the event legislation doesn’t happen and you need to shut the plants, what – is there any cost related to that? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP As you saw in the K, and we reiterate in the Q, there is some unfunded liabilities on the decommissioning trust. Those numbers are in there at full 100% ownership of the plants. And so the way that we would have to handle that is – you know, you can start out with parent guarantees, but you have to have it funded over a 10-year period, I think 60% by the end of the fifth year, and then the rest by the end of the 10 years. Steve Fleishman – Wolfe Research LLC Okay. Those numbers in the K are still good then, so that we just can use those? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP They’re updated in the Q. Christopher M. Crane – President, Chief Executive Officer & Director That’ll be coming Tuesday. Steve Fleishman – Wolfe Research LLC Okay. Thank you. Operator And your next question comes from the line of Jonathan Arnold. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Hey, good morning, guys. Christopher M. Crane – President, Chief Executive Officer & Director Good Morning. Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP Good Morning. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Just to clarify one thing on the current proposal that I think was emerged last night around the legislation. So originally this applies to all nuclear plants in the state, but is it correct that this would just be Clinton and Quad? And can you just explain how that works in terms of the discussion of the ZEC structure? Christopher M. Crane – President, Chief Executive Officer & Director Joe? Joseph Nigro – Executive Vice President, Exelon; Chief Executive Officer, Constellation, Exelon Corp. Sure. Jonathan, all plants could apply, but quite obviously the only plants that would receive revenue under this program would be those where the costs exceed the revenues. And so there is – it’s a 20 terawatt-hour cap which has enough room in it to accommodate Clinton and Quad Cities. And our expectation is that Exelon would seek to have those two plants participate. The other plants would not participate. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Okay. And that’s sort of nuanced in how the legislation’s worded effectively? Joseph Nigro – Executive Vice President, Exelon; Chief Executive Officer, Constellation, Exelon Corp. That’s correct. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Okay. Joseph Nigro – Executive Vice President, Exelon; Chief Executive Officer, Constellation, Exelon Corp. It’s the same offer to you, Jonathan; if you’d like, after the call, we could sit down and work through some of the details. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Okay. That’ll be great. And is there any… Christopher M. Crane – President, Chief Executive Officer & Director And, Jonathan, just to interject just to make the clear point, they would provide the opportunity to be compensated for cost plus risk. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Okay. That was one thing. The second thing, in your fourth quarter deck, you have this forecast around leverage ratios and the like going out through 2018, which, I believe, was assuming that Pepco would not happen. This was of the ExGen. Can you give us a sense of how that progression would look if you kind of market to the – with Pepco scenario? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP Sure. So, Jonathan, we still anticipate reducing leverage of ExGen by $3 billion over the five-year planning period, albeit this is not to the extend that we would have under the standalone scenario, because ExGen’s free cash flow is now being deployed to help fund PHI’s capital spending program. And we’ll provide more detail on the puts and takes of that at the Analyst Day in August. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. So $3 billion is kind of the new ExGen delevering number? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP That’s right. That’s over the next five years, we have a large maturity. And I believe it’s 2019, that we would look to retire at maturity. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Okay. So that’s over five years? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP That’s correct. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. And then the 2.3 ExGen debt-to-EBITDA that you were looking at for 2018, roughly what does that look like now? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP It, over the five-year period, would go to right around three times. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. So that’s again over five years, rather than three years? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP That’s correct. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Okay, great. Thank you. And then I guess you mentioned in the prepared remarks the prices have rebounded… Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP So, Jonathan – sorry, just let me correct, 2.7 times at the end of the five-year period. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. So whereas you have 2.3 times in 2018, it’s now 2.7 times after five years? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP Yes. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Okay, great. Thank you. And then you mentioned that prices have rebounded. So can you give us a rough sense of how the kind of gross margin mark would look if you use more like today’s prices? Joseph Nigro – Executive Vice President, Exelon; Chief Executive Officer, Constellation, Exelon Corp. Yeah. Jonathan, good morning. It’s Joe Nigro. I think if you look at our hedge disclosure at the end of the quarter and then factor in the changes since the end of March, you would see all of that drop in 2017 and 2018 being recovered. We’ve seen an appreciable move, as you know, in prices since the end of March. We’re actually higher in NiHub than we were at the end of the year. We’re higher at West Hub than we were at the end of the year, so we would have recovered all that drop and probably adding to it. We calculated that a couple of days ago, but the market has continued to move higher, so we probably have seen it actually go over where it ended the quarter. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Great. Okay. That’s it. Thank you very much, guys. Christopher M. Crane – President, Chief Executive Officer & Director Thanks. Operator And your next question comes from the line of Julien Dumoulin-Smith. Julien Dumoulin-Smith – UBS Securities LLC Yeah. Hi. Good morning. Christopher M. Crane – President, Chief Executive Officer & Director Good morning. Julien Dumoulin-Smith – UBS Securities LLC So perhaps to follow up on the same theme, can you elaborate a little bit on the balance of the nuclear portfolio that is ex-Clinton, ex-Quad? How you think about their cash flow profile? And if you don’t get this legislation, what the prospects are for further rationalization? I don’t mean to jump the gun too much here, but just talking about the future a little bit more? Christopher M. Crane – President, Chief Executive Officer & Director So there’s varying cash flows by assets depending on their location. They are positive at this point. If you look at the other units that are more challenged, you’re looking at Ginna and Nine Mile. One – we know about Oyster Creek and it’s coming up in 2019, the other one that has a real focus on it right now is Three Mile Island. Julien Dumoulin-Smith – UBS Securities LLC Got it. And specific to Illinois, is there any commentary around – so let’s say we don’t get it in 2016 or 2017, does that trigger another set of reviews? Again, not to push it too much. Christopher M. Crane – President, Chief Executive Officer & Director At this point we’ll have to watch the capacity auction clearing in the out years. It’s tight on energy at some of the assets, but they are positive. Julien Dumoulin-Smith – UBS Securities LLC Got it. Okay, great. And then turning back to the utilities real quickly, can you comment, or I’m curious, if you will, what the earned ROEs embedded at Pepco for 2016 – just what’s the baseline on the Pepco side as far as you see it post the close? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP Julien, in terms of – I think we included it on slide, I believe it’s 30, the earned for 2015. Obviously, while we’re in the pendency period during the rate cases that – obviously, there’s regulatory lag, so we’re going to see that decline, but we’ll have a much deeper dive in the PHI as part of the August 10 meeting. You can see on slide 29 the rate base statistics and I think can work through some assumptions on regulatory lag using that information. Julien Dumoulin-Smith – UBS Securities LLC Got it. And perhaps not to jump the gun too much on the Analyst Day, but what is the thought process on the baseline for a future regulated CAGR? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP I think the thought is the 7% to 9% that we confirmed on the call and PHI is absolutely consistent with that expectation. We, as we mentioned, are seeing improvement relative to what we forecasted or projected at EEI using PHI’s internal forecast. And Dennis and team continue to work to identify further opportunities around efficiency as well as regulatory policy to work to get those earned and allowed ROEs in line with the success we’ve experienced within Maryland, Pennsylvania and Illinois. Julien Dumoulin-Smith – UBS Securities LLC Got it. You wouldn’t roll it forward though? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP I’m not certain I understand what do you mean roll it forward? Julien Dumoulin-Smith – UBS Securities LLC The 7% to 9%, just roll it forward to CAGR off a 2016 base? Christopher M. Crane – President, Chief Executive Officer & Director We’ll address that at the Analyst Day. Julien Dumoulin-Smith – UBS Securities LLC All right. No worries. Thank you. Christopher M. Crane – President, Chief Executive Officer & Director I mean, embedded in there is 7% to 9% through 2018, so just thinking it through, it’s in there. Julien Dumoulin-Smith – UBS Securities LLC Got it. Thank you. Operator And your next question comes from the line of Brian Chen (32:25). Christopher M. Crane – President, Chief Executive Officer & Director Hey, Brian (32:30). Unknown Speaker Going over to slide 13, the EPS impact that you’ve laid out in that top table, I just want to verify that that is not including the use of capital from that positive cash flow impact that you’ve got on the second row right? Christopher M. Crane – President, Chief Executive Officer & Director That’s right, Brian (32:46). Unknown Speaker Okay. Great. And then I just want to verify that Quad Cities didn’t clear in the 2018 and 2019 auction, correct? So the closure of Quad Cities shouldn’t have any sort of residual obligation that you have for the 2018, 2019 capacity through (33:03)? Christopher M. Crane – President, Chief Executive Officer & Director That’s correct. Unknown Speaker Great. Thanks a lot. Operator And your next audio question comes from Praful Mehta. Praful Mehta – Citigroup Global Markets, Inc. (Broker) Hi, guys. Christopher M. Crane – President, Chief Executive Officer & Director Good morning. Praful Mehta – Citigroup Global Markets, Inc. (Broker) Good morning. So just on the leverage a little bit, just to ensure we understand both at the holding company level and at ExGen. You’ve kind of talked about the ExGen debt and what you see over the 20 – the five year period. How are you looking at holding company debt given the leverage you’ve assumed post Pepco transactions? Is there any objective to delever a little bit at the holding company as well? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP So Praful, as you’ve heard us comment in the past, we do target at 20% FFO to debt on a consolidated basis and that was one of the benefits of adding PHI to the Exelon family. And so we will certainly be looking at our leverage ratios at the GenCo. I think you’ll also see us consider to the extend we have available cash at the holding company as well, we just need to see as we get further out what the realized power prices are and what the free cash flow coming off of the GenCo is in those five years. Praful Mehta – Citigroup Global Markets, Inc. (Broker) Got you. And just so if you think about from the sources/uses perspective, the source is primarily out of ExGen coming to fund CapEx at the utilities and then deleveraging both at ExGen and the parent. Is that a fair way to think of it or is there some cash generation coming out of the utilities as well over the next two year, three year period? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP I would say, on a net basis, utilities are consumers of cash. So you’re correct. That ExGen cash flow as well as debt raise at the utilities is the primary source for funding the significant CapEx that we see, $25 billion over the next five years at the utilities. Praful Mehta – Citigroup Global Markets, Inc. (Broker) Got you. Thank you. And then just finally, we saw that the power new business and the to-go business, the EBITDA, or the growth margin of that is going from $250 million in 2016 up to about a $1 billion by 2018. Could you just give us a little bit of context of what’s driving that significant ramp-up in that side of the business? Joseph Nigro – Executive Vice President, Exelon; Chief Executive Officer, Constellation, Exelon Corp. Yeah. Hi. It’s Joe Nigro. That’s pretty standard shape that we have. If you go back and look at disclosures over the years, you would expect to see much less new business in the prompt years – in the prompt year, in this case 2016, than you would in the out years, for example, in 2017 and 2018. Embedded in that power new business is things like the execution of our retail business and the margins associated with that. So as we get closer to the swap period more and more of those contracts get layered in, we begin to reduce that bucket of power new business. I mean, there’s other elements of our business that follow that same timing shape, so this isn’t unique in the sense of seeing a ramp up between the prompt year to two years forward and we’re very comfortable with the numbers that we’ve put out there. Praful Mehta – Citigroup Global Markets, Inc. (Broker) Got you. Thank you so much guys. Operator And this does conclude today’s conference call. You may now disconnect. Christopher M. Crane – President, Chief Executive Officer & Director Thank you. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com . Thank you!

NRG Yield’s (NYLD) CEO Mauricio Gutierrez on Q1 2016 Results – Earnings Call Transcript

NRG Yield, Inc. (NYSE: NYLD ) Q1 2016 Earnings Conference Call May 5, 2016 10:30 AM ET Executives Kevin Cole – Senior Vice President-Investor Relations Mauricio Gutierrez – Interim President and Chief Executive Officer Christopher Sotos – Head of Strategy and Mergers & Acquisitions, Director of NRG Yield Kirkland Andrews – Executive Vice President, Chief Financial Officer and Director Analysts Grier Buchanan – KeyBanc Capital Markets Inc. Angie Storozynski – Macquarie Group Shahriar Pourreza – Guggenheim Partners Michael Morosi – Avondale Partners Steve Fleishman – Wolfe Research Operator Good day, ladies and gentlemen. And welcome to the First Quarter 2016 NRG Yield Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference is being recorded. I would now like to hand the meeting over to Kevin Cole, Head of Investor Relations. Please go ahead. Kevin Cole Thank you, Karen. Good morning and welcome to NRG Yield’s first quarter 2016 earnings call. This morning’s call is being broadcasted live over the phone and via the webcast, which can be located on our website at www.nrgyield.com, under Presentations & Webcasts. As this is the earnings call for NRG Yield, any statements made on this call that may pertain to NRG Energy will be from the perspective of NRG Yield. Please note, that today’s discussion may contain forward-looking statements, which are based on assumptions that we believe to be reasonable as of this date. Actual results may vary differently. We urge everyone to review the Safe Harbor in today’s presentation as well as Risk Factors in our SEC filings. We undertake no obligation to update these statements as a result of future events, except as required by law. In addition, we’ll refer to both GAAP and non-GAAP financial measures. For information regarding our non-GAAP financial measures and the reconciliation to the most directly comparable GAAP measures, please refer to today’s presentation and press release. Now, with that, I’ll turn the call over to Mauricio Gutierrez, NRG Yield’s Interim President and Chief Executive Officer. Mauricio Gutierrez Thank you, Kevin, and good morning, everyone. Joining me and also providing remarks this morning are Chris Sotos, the incoming CEO; and Kirk Andrews, NRG Yield’s Chief Financial Officer. I am very excited about today’s call. We are reporting strong result for the first quarter announcing the transition of the CEO position and moving forward with our growth objectives. I’m sure many of you have participated in NRG’s first quarter earnings call, given the relationship between NRG and NRG Yield. But let me just repeat what I said on that call. NRG Yield remains a critical part of the overall NRG Energy strategic platform and NRG is committed to certainty and visibility in both conventional and renewable development to reinvigorate the virtuous cycle between the two companies. In my last quarterly call, I discussed my goal for 2016, deliver on our financial commitment to grow our dividend by over 15% in 2016, enhance our growth pipeline through access to NRG’s development efforts, ensure confidence in governance and management structure of NRG Yield, and to evaluate alternative financial solutions to facilitate growth during this period of equity market dislocation. I’m glad to report that we have or are on track to achieve many of these goals. Turning to Slide 3 for the business updates, NRG Yield continues to validate its value-proposition through offering a steady high-performing source of dividend growth to our shareholders. During the first quarter of 2016 the company achieved $188 million of adjusted EBITDA and $43 million of cash available for distribution. Additionally, I am pleased to say we are also increasing our quarterly dividend for the 10th consecutive time, and are reaffirming our full year guidance including our target dividend growth of 15% annualized. Next, I am pleased to say that we continue to push forward on our growth plans in concert with NRG. In addition to executing across our distributed generation, which now stands at $141 million invested through the first quarter, NRG has announced its intention to offer its remaining 51% interest in the 250 megawatt California Valley Solar Ranch project. You should expect an update on this transaction during the second quarter earnings call. As interim CEO, I evaluated with the NRG Yield Board of Directors what we believe is the optimal management structure, and today announced that Chris Sotos, NRG Energy’s current Head of Strategy and Mergers & Acquisitions and current Director of NYLD, will be the dedicated CEO for NRG Yield, employed solely by NRG Yield. While over the next several weeks we will be conducting an outreach with investors to introduce Chris. He has had a long and successful career in the power sector with over 20 years of experience, 12 of which at NRG Energy. Chris has managed the team that created NRG Yield, been part of the board since its IPO, and was responsible for identifying, evaluating and executing on many of the acquisitions that make up Yield today and its ROFO portfolio. Chris will assume the CEO role effective from May 6 and be able to focus entirely on the company strategy, capital structure and path forward by the end of the second quarter. Representative of the strong strategic alignment between two companies, I will assume the role of Chairman of the NRG Yield board. John Chlebowski will return to his role as the Lead Independent Director. And the board appointed John Chillemi, NRG’s Head of Business Development to fill the existing vacancy on the board. Of course, I and the board will ensure a seamless transition of the CEO position. Chris is the first fulltime employee of NRG Yield, and he will continue to evaluate the optimal management structure and perhaps field out additional few dedicated roles. I appreciate our investors have been through a lot in the past year. And as you all know well, the top priority of mine and the NRG family is to offer investors a simpler and more visible story with consistent and regular interactions with the investment community. As so, in this vein, Chris, I ask that he will be able share a few words to share our visibility and strategy to shareholders, of this intention to lead Yield with the same dividend growth-oriented principals set forth at our IPO. Chris? Christopher Sotos Thank you, Mauricio, and good morning. It gives me great pleasure to address you as not only the incoming CEO, but as the dedicated CEO to NRG Yield. Mauricio has given you a good look at my background and fit for the role, so I won’t repeat his comments. Instead, I’ll keep my remarks brief, but I did want to reassure the investor community that you should expect the continuation of the core fundamental drivers and objectives behind the value proposition of NRG Yield that have made it successful. As Mauricio highlighted earlier, I played a key role in the creation and execution of NRG Yield’s goals and objectives. And we should expect this strategy to remain consistent, although I will explore the possibility of expanding its dedicated team to ensure that NRG Yield is always focused on consistent value creation for our shareholders, to take advantage of opportunities throughout all parts of the cycle. Now, let me turn the call back over to Mauricio. But again, I want to thank you for the time today. I look forward to meeting and interacting with you over the weeks and months ahead. Mauricio Gutierrez Thank you, Chris. And with that, let me turn it over to Kirk, for a more detailed discussion on our financial result. Kirkland Andrews Thank you, Mauricio. Beginning with the left slide on Slide 5 of the presentation, during the first quarter NRG Yield delivered favorable financial results with adjusted EBITDA of $188 million and CAFD of $43 million. Our performance in the first quarter was positive across all of our settlement. And NRG Yield continues to benefit from the diversification of this platform, where approximately 45% of our adjusted EBITDA comes from the conventional and thermal segment, and 55% from renewable. Specifically, in the renewable segment, first quarter results benefitted from strong production across both our solar and wind fleet. This especially indicates that also wind during the quarter, where production about 17% above our median expectation. The wind resources also continues to exhibit significant volatility however, and while the first quarter was quite strong, production during the month of April was peak relative to our expectation. Today, NRG Yield is also reaffirming full-year guidance, including adjusted EBITDA of $805 million and CAFD of $265 million. Finally, consistent with our commitments to investors to reach $1 of annualized dividend per share by the fourth quarter of 2016, NRG Yield paid dividends of $0.225 per share in the first quarter. We are pleased to announce the 10th consecutive quarterly increase to $0.23 per share in the second quarter of 2015, placing us on a trajectory to meet that goal by the fourth quarter. Moving to the right on Slide 5, NRG Yield also continued to execute on commitments to its business renewable and residential solar partnerships with NRG Energy. In the first quarter, NRG Yield invested in incremental $40 million and $11 million into those two partnerships respectively. As you can see, we have now cumulatively deployed approximately $115 million of capital into those partnerships. Resulting in joint ownership of nearly 1,000 megawatt of long-tenure, fully contracted, strong credit quality, geographically diversified, and most importantly, strong cash flow producing disturbed solar assets. NRG Yield maintains an additional $135 million of capital commitment to these partnerships, including $53 million for residential solar. However, given NRG’s pivot with respect to the residential solar business, as was discussed on the NRG earnings call earlier. NRG Yield now expects to invest only around $20 million more in the residential partnership. Importantly, this change does not affect NRG Yield’s perspective on residential solar as an investable asset class nor does it affects our 2016 financial guidance or impacts our ability to meet our objectives of 15% annualized dividend growth through 2018. As a result of our reduced expectation for capital deployment for the residential solar partnership near-term liquidity will be enhanced providing flexibility to invest across other areas of the business. Now turning to Slide 6, I want to take a moment to emphasize an aspect of NRG Yield’s capital structure that is often underappreciated, which is the natural deleveraging effect which results from the fact that a majority of our balance sheet debt was with amortizing non-recourse project financing. As many of you know this project debt is sized relative to the tenure and cash flows of the long-term contracts of our projects, which are with investment-grade counterparties, all while committing project distributions that underlie the dividends we then pay to our shareholders. This benefit is not reflected in our cash available for distribution metric, which represents cash available after debt service and that is both principle and interest. As shown on the chart over the next five years alone, based on the current portfolio NRG Yield will repay approximately $1.5 billion out of this project debt across its existing portfolio, an amount that is over 50% of today’s equity market capitalization, to put this in perspective. Second, this natural deleveraging also increases NRG Yield’s long-term flexibility on growing the platform, as it provides increase in capacity, finance, future accretive growth, especially at times when the equity markets may not be as accommodating. With that, I’ll turn it back to Mauricio for closing remarks or Q&A. Mauricio Gutierrez Thank you, Kirk. And before we turn to Q&A, let me provide some closing thoughts. I hope my excitement for Chris becoming the new dedicated CEO is coming through on today’s call. I have known and worked closely with Chris over my entire career at NRG. And I know he’s the right person at the right time for NRG Yield. As I move to Chairman of the Board I am in a unique position of being able to say that from the perspective of both companies that fundamental drivers behind the value proposition of NRG Yield have not changed, nor would I expect them to change with the naming of Chris Sotos as a CEO. Chris will not be available during Q&A, but I can assure you he is eager to engage with you in the days and weeks to come. So with that, operator, we’re ready to open the line for questions. Question-and-Answer Session Operator Thank you. [Operator Instructions] our first question comes from the line of Matt Tucker from KeyBanc. Grier Buchanan Hey, guys. This is Grier Buchanan on for Matt. Nice quarter and thanks for the question. Just a couple of follow-ups on home solar restructuring, one, on the monetization of those assets, could you just share your thoughts from the NRG perspective on why third-parties and Sunrun and Spruce rather than NRG Yield. And then, two, any chance you could quantify the expected unit economics on those residential system sales? Thanks. Kirkland Andrews Sure. It’s Kirk. I will address the first part of that question. Certainly, we are mindful of the opportunity around residential solar energy NRG Yield is concerned. But with respect to the partnerships, I think they achieved two objectives. One of which I’ll make reference to in the remarks that were made by NRG on the earnings call earlier today. And that is that it comports a lot more closely with the financial metrics that NRG’s investors are familiar with and value, and that is EBITDA. As you probably know, in the dropdown context, NRG is still consolidating to all of that. And so the long-term lease revenues and expenses associated with that will continue over the course of the remaining life of the lease, rather than in the monetizing open area. The other important thing is from a financial complexity standpoint, it is simpler. And that is certainly a benefit for NRG Yield. The partnerships that was announced this morning does not include any ongoing relationship or importantly taxed equity. It is simply a monetize and hold. And because we see a more robust opportunity going forward, especially through the distributed generation of what NRG calls business renewable, as I said in my remarks this is an opportunity to free up capital as we expand and diversify the portfolio, not only to take advantage of the growing portfolio that we see from NRG on the renewable side, business renewables and utility scale, but also expanding the opportunities across the asset class. So I think this arrangement and certainly in the near-term works for both parts of the production. Grier Buchanan That makes sense, and certainly consistent with the announcement back in February. Along those lines, could you just clarify – I’m looking at Slide 5, the remaining capital of $135 million in that partnership. There is $53 million earmarked for residential solar, but you disclosed that only expect to invest another $20 million. So will that $33 million, I think you mentioned that could be – that’s liquidity that could be used for other purposes, will that be allocated to business renewables or should we just think about that as TBD. Kirkland Andrews Yes. When I talked about that – when I referred to enhancing liquidity, obviously, liquidity is both the function of where it currently stands and prospectively from a financial planning standpoint. On the previous trajectory, as we would, given the magnitude of the capital remaining under that program that $135 million, our financial forecast in the use of about liquidity as we roll forward reflects the anticipation of utilizing that. We revised that anticipation that all but about $30 million, if you just do the math there, it’d be more than $35 million we’re now going to use, that gives us incremental financial flexibility as move forward because we are not deploying that $30 million. And so it’s certainly the use of proceeds, but it’s less likely we see the complete, the remainder, under the business renewables, because that’s already part of our financial. And that’s $82 million that’s referred to in the [page that you referred] [ph]. It’s more likely to be used for other opportunities. As NRG has announced its intention and has made that intention known to NRG Yield in the second quarter. CVSR certainly can be used to fund that, but importantly relative to the path we were on board that does turn out to be the case. That’s $30 million of incremental capital for existing, example, CVSR. That would not further tapped into, if you will, the liquidity reserve relative to the path we are on there. So on that first $30 million, it’s neutral to the plan and yet expands the portfolio. Grier Buchanan Got it. Thanks for the time. Mauricio Gutierrez Thank you. Kirkland Andrews You bet. Operator Thank you. And our next question comes from the line of Angie Storozynski from Macquarie. Angie Storozynski Thank you. So I have two questions, one is you mentioned a potential alternative finance inclusion, so I wanted to know, what they are? And, secondly, would you consider teaming up with some developer or, I don’t know, an infrastructure investor to provide NYLD with more of a visibility into long-term growth? Thank you. Mauricio Gutierrez Hi… Kirkland Andrews Sure, Angie. Go ahead. Mauricio Gutierrez Hi, Angie. So I will say that to your latter part of that question, the answer is, yes. We are exploring opportunities to potentially partner with infrastructure funds or additional developers that can enhance the growth and the – for the pipeline that we have. But, clearly, going forward, that will be Chris’ priority. For the first part of the question, Kirk? Kirkland Andrews What I’ll say in the near-term and I’m going to talk about this in the context of CVSR. And I think, I mentioned this on the last call, in our fourth quarter earning call. CVSR is among the assets currently, although I referenced in my prepared remarks the fact that we have a natural deleveraging portfolio. Where CVSR currently stands today, the level of debt there, which I believe a little less than $800 million, and that’s across the entirety of CVSR. Relative to the overall cash flow there is incremental debt capacity there as it is today. And that is probably the best example in terms of alternative uses of capital to help finance dropdowns or free up capital as we move forward. But we are certainly leaving no stone unturned, but I think in terms of near-term execution opportunities, it’s reasonable to expect that that is probably most likely among them and that is taking advantage of that excess debt capacity of CVSR. Angie Storozynski So there’s no project-level debt, but doesn’t it eat into cash flows, because that set amortizes? Kirkland Andrews Yes, it certainly would be lower than the existing cash flows today. But we’d only do so if it was ultimately accretive, so the way to think about it is, there is an existing level of CAFD at CVSR today. Some portion of that would be used for debt service. The remainder, you can think about as equity in cash flow on the dropdown. And, of course, what that means is, the remaining portion of the purchase price not funded by debt is also lower. So we’re obviously very focused on making sure that we can see a path clear on CVSR as well as future dropdowns or acquisitions that we can enhance the CAFD. So that the CAFD along the equity cash flow on the excess capital above and beyond that project financing is accretive relative to the current CAFD. That’s deal is probably the highest level of importance for us. Angie Storozynski Okay. Thank you. Operator Thank you. And our next question comes from the line of Shahriar Pourreza from Guggenheim. Kirkland Andrews Good morning, Shahriar. Shahriar Pourreza Hi, everyone. How are you? Just real quick, just one question, on the delevering slide that you have on slide 6, so when you think about sort of the residential reduction and then solar spend plus the natural delevering you’re seeing at the business through amortization of the debt, you’re kind of making comments around CVSR and being able to have some additional capacity at the project level. Is it fair to say that given sort of where this amortization is heading and the delevering is heading, can you fund the growth beyond 2018, without hitting the equity markets, for tapping the equity markets? Kirkland Andrews I would say, we could certainly use that as supplement. But I would not over the long run in terms of really funding substantial amount of growth using loans [ph] for example on the 15%. I think that is certainly necessary and helpful, but is not sufficient to really continue that as meaningfully beyond anything. Shahriar Pourreza Any room to back-lever? Kirkland Andrews Yes, it’s something – I mean, that’s something, so that’s the best way I’m trying to think about that, that’s a variation of it I think can get also true. But if you think about back-levering at our corporate level, very importantly, that is not something that we would do today, because we are very focused on maintaining adherence to our balance sheet principles and the metrics that we laid out there. But that’s certainly an opportunity, but we’d have to do so without tapping into corporate debt at the current CAFD level. Shahriar Pourreza And then just, Kirk, one last thing on the equity market, is it still sort of remaining closed? Kirkland Andrews Well, I think closed is a function of two things. One, in terms of the efficiency, I mean, obviously we haven’t seen a whole lot of Yield paper coming out in the last year. And it’s certainly – our concern is sort of the file to offer spread in terms of the discount. We want to have confidence if that’s manageable, because we’re very focused on raising equity we can deploy creatively. And the other component is just the overall cost in capital that’s implied by the current share pricing. I said in the past, and I continue to feel that based on where we’re trailing are today we’re not in a hurry to issue at these prices. But our equity issuance is both the function of an absolute and a relative. Absolute, I just spoke to. Relative means that the equity we issue at whatever price, the use of proceeds have to represent clear accretion both from a CAFD standpoint and on total return standpoint. Shahriar Pourreza Excellent. Thanks guys. Operator Thank you. And our next question comes from the line of Michael Morosi from Avondale Partners. Michael Morosi Hi, guys. Thank you for taking the question. Should I interpret the commitment to growth or the renewed commitment to dividend growth as saying that, NRG Yield is kind of stepping away from the notion of the Yield co. as asset manager or that NRG yield is willing to kind of trade around its portfolio and basically view its existing asset base as a potential source of funds? Kirkland Andrews Sorry, Mike, I am not completely clear on your question, with respect to NRG Yield. Can you clarify? Michael Morosi Yes, I mean, basically doing your – basically being a buyer and seller of assets, as a way to manage shareholder return? Kirkland Andrews Yes. So with real state overall, although we have no current intentions to monetize an asset if that’s what you’re thinking about. But the best way to think about it is the principle or the philosophy behind that is, we are not wed to assets. We are wed to growing CAFD per share. And so, if there is an opportunity to monetize an asset at value, we are certainly agnostic in terms of the portfolio. But we are not indifferent as to be effect of that transaction or any. It has to be accretive to grow that CAFD per share. Michael Morosi That’s fair. Thanks. And then, as it relates to other potential equity offerings. We’re hearing more and more about companies looking at ATM-type offerings. Is that something that you consider? Kirkland Andrews We have, yes. I certainly think that’s a tool in the tool-chest. But, obviously, in terms of order of magnitude it’s helpful. But I don’t think at this juncture it’s something that that we’re in a massive hurry to put in place. I think as we can – hopefully, we need to see their trajectory in terms of the appreciation in the share price. And that is certainly a lever that we would pull, but it doesn’t substantially move the needle in the near-term in terms of building dry powder for a significant acquisition, but it is certainly helpful. Michael Morosi Very good. Thanks a lot, guys. Operator Thank you. And we are approaching the end of the call. We have time for one more question. Our final question for today comes from the line of Steve Fleishman from Wolfe Research. Steve Fleishman Hi, good morning. Mauricio Gutierrez Hi, Steve. Steve Fleishman Kirk, just on the slide with the debt pay-down, and the like, project debt pay-down, I don’t know if there is a way to give a sense. But obviously you – because the PTAs don’t last forever, you really need the debt on the projects to be paid down over the life. So it’s hard to kind of judge, how much, if any, extra debt capacity is really created by that versus the debt reduction that you actually need. Is there a way to kind of think of a sense of that? Kirkland Andrews Yes, I think that’s a fair question, Steve. So I’ll answer it in two ways. One, certainly I gave the example of CVSR today. And that is something that I continue expect to see us if we’re able to quantify by action. But let me think back on a way that we can give you some sense of what that capacity is. That said the other part of that equation, which I’ve been very mindful of and was at the time that we came out the IPO and continue to be, in addition to that debt capacity piece, the natural delevering nature of those particular assets means that we remove the debt service. Basically, it’s the same point as the contract rolls off, which gives us a tremendous amount of flexibility on a re-contracting basis as we move forward. Obviously, they continue, that’s CAFD. And if it has to be on a non-levered basis, they will be it, but there is a lot of cushion with the removal of that debt burden on an asset-by-asset basis. And the other thing I’d say is that, I think you’ll find in that – although we didn’t go through in the specific part of the – the first part of your question, behind that Page 6, which we included, I think the pro-rata share of the equity method part of the portfolio, CVSR currently among them, but I think we gave you an asset-by-asset table in the appendix, back on I think Page 13. So that at least gives you more granularity behind that. But let me think on a way that we can give you a little bit better sense of that debt capacity on what I’ve alluded to on CVSR. Steve Fleishman That’s helpful. Maybe I’d ask the question in a more simplistic way, which is that, based on your view of the portfolio, you would say that there is room for excess – for additional project debt overall. Kirkland Andrews Yes. Steve Fleishman And that’s part of it, so what the exact number is, fine. But you believe there is room to kind of add project add. Kirkland Andrews Yes. Steve Fleishman Okay. Kirkland Andrews And I would be willing to add to that that I think that CVSR is probably the most substantial example of that right now. Steve Fleishman Okay. Okay. Thank you. Kirkland Andrews You bet. Mauricio Gutierrez Thank you. Operator Thank you and that concludes our question-and-answer session for today. I would like to turn the conference back over to management for any closing comments. Mauricio Gutierrez No, I think that’s it. Thank you for your time. Christopher Sotos Thank you. Operator Thank you, ladies and gentlemen. Thank you for your participation in today’s conference. This does conclude the program. And you may now disconnect. Everyone have a good day. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com . Thank you!

Covanta Holding’s (CVA) Steve Jones on Q1 2016 Results – Earnings Call Transcript

Covanta Holding Corporation (NYSE: CVA ) Q1 2016 Earnings Conference Call April 27, 2016 8:30 AM ET Executives Alan Katz – Vice President-Investor Relations Steve Jones – President and Chief Executive Officer Brad Helgeson – Chief Financial Officer and Executive Vice President Analysts Tyler Brown – Raymond James Andrew Buscaglia – Credit Suisse Noah Kaye – Oppenheimer & Company Michael Hoffman – Stifel Scott Levine – Imperial Capital Dan Mannes – Avondale Partners Operator Good morning, everyone, and welcome to the Covanta Holding Corporation’s First Quarter 2016 Financial Results Conference Call and Webcast. This call is being taped and a replay will be available to listen to later this morning. For the replay, please call 877-344-7529 and use the replay conference ID number of 10084165. The webcast as well as the transcript will also be archived on www.covanta.com. At this time for opening remarks and introductions, I would like to turn the call over to Alan Katz, Covanta’s Vice President of Investor Relations, sir? Alan Katz Thank you and good morning. Welcome to Covanta’s first quarter 2016 conference call. Joining me on the call today will be Steve Jones, our President and CEO; and Brad Helgeson, our CFO. We will provide an operational and business update, review our financial results and then take your questions. During their prepared remarks, Steve and Brad will be referencing certain slides that we prepared to supplement the audio portion of this call. Those slides can be accessed now or after the call on the Investor Relations section of our website, www.covanta.com. These prepared remarks should be listened to in conjunction with these slides. Now on to the Safe Harbor and other preliminary notes. The following discussion may contain forward-looking statements and our actual results may differ materially from those expectations. Information regarding factors that could cause such differences can be found in the Company’s reports and registration statements filed with the SEC. The content of this conference call contains time-sensitive information that is only accurate as of the date of this live broadcast, April 27, 2016. We do not assume any obligation to update our forward-looking information unless required by law. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Covanta is prohibited. The information presented includes non-GAAP financial measures. Because these measures are not calculated in accordance with GAAP, they should not be considered in isolation from our financial statements, which have been prepared in accordance with GAAP. For more information regarding definitions of our non-GAAP measures and how we use them as well as the limitations as to their usefulness for comparative purposes, please see our press release, which was issued last night and was furnished to the SEC on Form 8-K. With that, I’d like to turn the call over to our President and CEO, Steve Jones. Steve? Steve Jones Thanks, Alan, and good morning everyone. For those of you using the web deck, please turn to Slide 3. We’ve had a good start to the year and we’re marking great progress on our key initiatives. In terms of financial results, Q1 adjusted EBITDA was $76 million, a decline of $3 million from Q1 2015, and free cash flow was a negative $5 million lower by $21 million. The decline in adjusted EBITDA was driven largely by the impact of lower year-over-year commodity prices, approvals for variable incentive compensation and lower energy revenues from our biomass facilities, partially offset by the positive impact of growth in our environmental solutions business. Free cash flow was impacted by these same factors as well as by higher maintenance CapEx as a result of increased scheduled maintenance activity in the quarter. Given the lower year-over-year power prices in 2016, note that we did more maintenance this year than last year. Our financial results were in line with expectations as of our last call and in last night’s press release we affirmed our guidance for 2016. In terms of our strategic initiatives, we continue to grow our environmental solutions business with another quarter of record revenue. We also acquired another small material handling facility in Augusta, Georgia earlier this month. This will support the profile waste programs at our Energy-from-Waste facilities in Florida, Alabama, and Virginia. We completed the first step in our China asset swap in sale and are now going through the process to complete this transaction, which is the sale of equity of CITIC. We still expect to complete this process by the end of this quarter. Our continuous improvement initiative is going well and we have uncovered a number of opportunities across the business. I continue to be impressed with the size of the projects that we’re working on in this area. We had a strong quarter operationally with boiler availability, energy production and metal recovery right on target. We’re also in the final weeks of our heaviest maintenance period of the year, and overall things are going very well. Now let’s move on to the markets and operations. I’ll start with the waste business. Please turn to Slide 4. Our North American Energy-from-Waste same-store volume was flat while pricing was higher by $6 million versus Q1 2015. This was driven primarily by the impact of profile waste. In March, we completed a full-year of service at the Queen’s MTS taking waste deliveries to our Niagara and Delaware Valley facilities via rail. This contract is going well and we continue to displace lower priced spot waste with New York City waste in these markets as the city ramps up volumes. Looking at our Covanta Environmental Solutions business, EfW profiled waste grew 16% this quarter compared with Q1 2015. We completed two acquisitions so far in 2016. And the integration in the materials handling facilities and services businesses that we acquired in 2015 has gone well in terms of both cost synergies and sales force integration. Now let’s move on to energy. Please turn to Slide 5. As many of you have likely seen, the power markets, particularly in the Northeast, we’re under significant pressure in the first quarter given the mild winter and low gas prices. Average market pricing for the quarter was $28 per megawatt hour. However, our full-year expectation is that the portfolio will likely still be around $50 per megawatt hour. Production was in line with expectations and there have been no changes to our outlook for the full year. We did hedge a bit more for this year and for 2017 as you can see in our energy portfolio detail on Slide 16. I’ll note that, as expected, earlier this month we shutdown all of our biomass facilities and don’t anticipate any additional biomass revenues for the remainder of the year. We’ll have some minimal carrying costs moving forward, which we included in our guidance. Note that we continue to look at options for these assets. Let’s spend a few minutes on the metals business. I’m now on Slide 6. Market pricing continued to have a significant impact on metals revenue year-over-year. The average price for the HMS number 1 Index was $158 per ton in Q1 versus $255 per ton in the same quarter last year. However, we’re starting to see some positive movements with recent HMS Index prices coming in above $200 per ton. Given the recent move in the markets, we now expect our average revenue per ton for ferrous to be between $80 and $90 for the full year. In terms of volumes, ferrous volumes increased by 9% this quarter as a result of new recovery systems that we installed in 2015. The impact of our Fairless Hills facility and more metal in the waste stream, which we believe was driven by lower market prices. This increase is after the effect of the cleaning process at Fairless, which reduces volume. Non-ferrous volume increased by 6% versus Q1 2015, also driven primarily by investments made to increase recovery at certain facilities, so overall metals volumes have been very good. Forward prices for – of recycled aluminum are holding steady and our outlook for the full year non-ferrous price is unchanged at approximately $600 per ton. While we’re still a ways off from historical averages, it’s encouraging to see some price support in the ferrous market. Now let’s move on to operating expense and CapEx. Please turn to slide seven. Total EfW maintenance spend in the quarter, including both expense and CapEx, was up 19% versus Q1 2015. As I mentioned, this increase was primarily the result of a relatively lighter outage scope in Q1 last year in an effort to capture higher power prices. Our outlook for the full year Energy-from-Waste maintenance spend is unchanged at $350 million to $370 million. We completed about a third of our total expected maintenance spend in Q1 and will complete another 30% in Q2, very much on track in terms of – we’re very much on track in terms of our full year maintenance spend. North American Energy-from-Waste other plant operations expenses were down 1% on a same-store basis this quarter compared with Q1 2015 primarily due to cost savings from our continuous improvement initiatives. We’ve been reducing the amount of fuel and other chemicals used in our processes and this has had a favorable impact on costs. This is a classic example of continuous improvement productivity. I’ll wrap up with some thoughts on our business outlook for the rest of this year and beyond. Our core business is running extremely well. While the commodity markets continue to be volatile, we’re focusing on things that we can control. We’re generating record revenue on profiled waste and continuing to build out our environmental solutions platform. Our continued improvement effort is moving ahead nicely. In terms of growth projects Dublin is coming along very well with construction approximately 60% complete. We’re currently installing the stoker, boiler and air pollution control equipment. We still expect to have first fire by this time next year and are on track for commercial operations by the fourth quarter of 2017. We also continued to look for other growth opportunities, both here in the U.S. and abroad. One of these, Perth, which we discussed a bit at our analyst day, is still in the development stage. We’re looking closely at the cost of construction and the contracts, and should come to a conclusion on whether we want to move ahead with this project in the next several months. There are a number of other opportunities that are in the pipeline for expansions, new builds and growth within the Environmental Solutions business. We’re off to a great start for the year and I continue to be excited about the avenues for growth that I see for this business. With that, I turn the call over to Brad to discuss the first quarter results in more detail. Brad Helgeson Thanks, Steve. Good morning, everyone. I’ll begin my review of our first quarter 2016 financial performance with revenue on slide nine. Revenue was $403 million, up $20 million versus Q1 2015. North America Energy-from-Waste revenue declined $5 million year-over-year on a same-store basis. Within that amount waste and service revenue increased by $5 million, with higher average revenue per ton driven by the continued growth of profiled waste volume, as well as contractual escalation. Energy revenue declined by $3 million and recycled metal revenue declined by $7 million, both driven by lower year-over-year market prices. North America EfW contract transitions were a net positive $3 million year-over-year, with two months of benefit from our Fairfax facility, now operating under a Tip Fee contract structure, partially offset by lower debt service revenue. Outside of North America EfW operations, the Environmental Solutions business was up $16 million primarily as a result of the acquisitions that we completed in 2015. All other operations netted to a $6 million increase, with higher year-over-year service fee revenue from the New York City MTS Contract, partially offset by lower biomass revenue. As Steve mentioned, we’re no lower operating any of the biomass facilities given the economics in the current energy price environment. Moving on to slide 10, adjusted EBITDA was $76 million in Q1 2016, compared to $79 million in Q1 2015. The year-over-year decline was driven by lower energy and recycled metal prices in the North America EfW portfolio, which reduced adjusted EBITDA by $10 million on a same-store basis. Contract transitions added $1 million to adjusted EBITDA in the quarter, with the Fairfax transition partially offset by lower debt service revenue. New business, including the New York City MTS contract, which commenced towards the end of the first quarter last year and acquisitions in the Environmental Solutions business, together added $8 million to adjusted EBITDA in the quarter. The other significant impact in the quarter when compared to the prior year was the relatively heavier scheduled maintenance outage calendar, which Steve discussed. Turning to slide 11, free cash flow was negative $5 million in the first quarter, compared to positive $16 million in the prior year. This was driven by the operational factors that impacted adjusted EBITDA in the quarter totaling $3 million, higher maintenance CapEx of $10 million year-over-year and higher cash payments for interest and taxes totaling $5 million. Cash flow from working capital was similar to the same period in 2015. The first quarter is often a seasonal low point for cash flow and free cash flow can sometimes be negative in a given quarter depending on maintenance activity, as we had this quarter, or working capital movements, as we’ve seen in the past. In any event, these are seasonal and timing factors and therefore nothing should be extrapolated from this for our full year outlook. Our expectations for full year free cash flow are unchanged as we affirmed in yesterday’s press release. Our growth investment outlook, which is detailed on slide 12, is unchanged for the year. We invested $14 million in organic growth projects in the first quarter primarily related to metal recovery systems and some investments in new equipment for the Environmental Solutions business. Investments in the infrastructure to support the New York City MTS contract and in the emissions control system at the Essex County facility are on track, as expected, as well as our Dublin spend this quarter. As Steve mentioned, the Dublin facility construction is progressing well. Turning to slide 13, I’ll quickly touch on our balance sheet and leverage ratios. Net debt increased in Q1 to $2.4 billion, versus $2.3 billion at the end of 2015, resulting from further drawdown of the Dublin facility project debt and seasonal revolver borrowings. The net-debt-to-adjusted-EBITDA ratio for Q1 was 5.7 times. As I’ve discussed in the past, we expect leverage to remain elevated until we begin to realize contribution from the Dublin project, after which we expect leverage to trend lower, as we seek to return to our long-term target of approximately four times. The calculation of the leverage ratio covenant under our senior secured credit facility was 3.1 times at March 31, versus the covenant limit of four times. Remember this ratio isn’t impacted by the increased leverage from Dublin as that non-recourse debt is excluded from the calculation during facility construction. So even though our consolidated metrics are elevated for the time being, we remain well within our debt covenants as we move through this period in our investment cycle. In conclusion, I’ll quickly reiterate the theme of Steve’s commentary. 2016 is off to a very strong start in the execution of our strategic, operating and financial objectives for this year and beyond. And with that, let’s open up the line for questions. Question-and-Answer Session Operator Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Tyler Brown of Raymond James. Please go ahead. Tyler Brown Hey. Good morning, guys. Nice start to the year. Steve Jones Thanks, Tyler. Tyler Brown Hey, Steve, so we’ve been working on continuous improvement now for the better part of a year. You guys have added some talent there to really drive the cadence. It sounds like you’ve been successful, but can you guys talk a little bit about what types of projects are in that opportunity stack? Secondly, maybe are those initiatives here in the beginning targeted at the Tip Fee fleet? And three, do you still believe that there’s annually maybe $10 million to $15 million of annual cost saves out there over the next couple of years? Steve Jones Yes. Sure, Tyler. We’re working on a number of different projects. I’d say the four biggest buckets are really around outage optimization because when you spend $350 million to $370 million a year on outages, I think there’s efficiency that can occur there. Stable operations, which is you’ve probably heard me talk about this before. This is basically having your best – it’s as if you had your best operator on your control board every minute of the day, and so we’re working on that. We’re looking at reagent optimization, which is really kind of the chemicals that we use in the plant, and then lastly, boiler fouling. All of those buckets are much higher benefits than I’ve been used to in the past. So, since we’re in early stages of continuous improvement, the returns are kind of bigger buckets of savings at this point. And it’s like some of these like stable ops, the savings in 2016, we’re looking at upwards to $1 million of savings in 2016, for example. And so we have about seven or eight people on the team right now. Some of those – most of those have black – folks are black-belt qualified already. And as we’re projecting out through 2016, we’re still seeing that $10 million to $15 million benefit rolling through the P&L. So things are go – been going very well from that perspective. It’s still early on realize that when you start these programs there’s a lot of data gathering and work that needs to be done. So I’d still say it’s early in the process, even though I’ve been talking about it for about a year. It’s still relatively early in the process, but I am very encouraged by the size of the projects that we’re uncovering. Tyler Brown Okay. Yes. Brad Helgeson Tyler. Tyler Brown Yes. Brad Helgeson Sorry. Just to answer I think one other part of your question. The focus here, certainly initially, is on the larger Tip Fee facilities. Steve Jones Yes. Good point. Brad Helgeson You’re right about that. Tyler Brown Okay, okay, great color. And then, Brad – excuse me – from a modelling – for modelling purposes, so as biomass completely shuts down in China, kind of eventually goes away, will the total plant operating expense X maintenance, will that actually decline sequentially, calling into a new baseline into Q2 or Q3? Brad Helgeson It should. Yes. Tyler Brown Okay. Brad Helgeson Yes. And that’s all – that’s all being equal. Yes. Tyler Brown Yes. Okay, perfect. And then just lastly under the current kind of knee-pool environment, can you guys talk even at a high level, about how we should be thinking about PPA expirations in 2017? And maybe what that looks like from an EBITDA headwind? Brad Helgeson Yes. I mean based on the forward prices that we observe in the market today up there, we’d expect a pretty meaningful hit to us. In 2017, as we’ve talked about in the past, we’re still a little bit away from it, but we’re probably in the $20 million to $25 million EBITDA impact next year. Tyler Brown Okay. All right. Perfect. Thank you very much. Operator And our next question comes from Andrew Buscaglia of Credit Suisse. Please go ahead. Andrew Buscaglia Hey, guys. Thanks for taking my question. Steve Jones Hey, Andrew. Andrew Buscaglia Can you touch on – you had some interesting commentary. It sounds like profiled waste in your Environmental Solutions group. Group is really starting to gain some traction. Can you talk a little bit about your expectations this year for further M&A growth on that side of things? And where you see that shaking up for the full year? Steve Jones Yes. So I mean, I’m really pleased with this business. It’s been growing well. You heard the profiled waste going into the Energy-from-Waste facilities is up 16% kind of year-on-year. That continues to be really nice growth. The Tip Fees in this area are better than municipal solid waste. We’ve talked about that before. You can get two times or three times higher Tip Fees, so we’ll continue to focus on this area. As we – as M&A going forward, we’re still looking for opportunities. With other calls on our capital and the fact that commodity pricing is low, we’re being careful on how we put our capital to use. But if we can find good opportunities that have the returns similar to the returns we’ve been getting on the assets we’ve already bought the businesses, we’ve already bought, we’ll certainly look at those. And quite frankly, one of the things, we grew quicker than I’d anticipated. Brad and I both have said, if you’d asked us a year-and-a-half ago, would we have had this many acquisitions so far. We wouldn’t have said this number. So one of the things I’ve really asked the team to look at is, let’s focus on integration as we go through 2016, and make sure that we’re getting all the benefits we can out of the assets that we – and the businesses that we’ve already bought. But we’re still looking in the market, to answer your question. Andrew Buscaglia Okay. Yes, that’s helpful. And then if you could just touch on the impairment charge in the quarter. You didn’t mention it, I don’t think in the prepared remarks, but are there any other things like that out there that you’re looking at that we could see in the future? Is there anything else that you’d like to talk about at this time? Steve Jones Well, if you look at – and – if you look at the impairment charge, it was related to an Energy-from-Waste facility where we basically have told the customer that we triggered a termination right. I don’t see a lot of those out there. In this particular case we really weren’t making that much money for the operating work that we’ve been doing. And one of the things I’ve been telling the team here is I’m not really worried about size. So having a certain number of Energy-from-Waste facilities isn’t important to me. It’s really about whether we’re getting paid for the work that we do. And I think in this case we, as a team, looked at this and said, we’re really not getting the kind of returns on the work that we’re doing there. So we triggered that termination right and then took the – and then the impairment occurred. So again, I don’t – there’s not a lot of those out there, but you’ll see us being kind of more rigorous as time goes on about whether we’re getting the right margins on the efforts that we put out there. Andrew Buscaglia All right. Thanks, guys. Steve Jones Sure. Operator And our next question comes from Noah Kaye of Oppenheimer & Company. Please go ahead. Noah Kaye Good morning. Maybe we can start with the pipeline of project opportunities. You mentioned Perth this morning and you talked about other projects in Australia before, China saying they’re going to build 300 new waste energy plants in the next several years, EU’s circular economy package and many member states having to move away from landfilling, it just seems like there’s a more supportive environment internationally at this point for waste energy facilities. And so I was wondering if, kind of in light of that, you could talk about maybe how you see the pipeline and the set of opportunities now versus a year or so ago? Steve Jones Yes. It’s interesting, there are some expansions in the U.S. and we’ve talked a little bit about those, there’s a couple of expansions around. But you’re right, Noah, the regulatory support and climate for energy from waste outside the U.S. is better than inside the U.S., and so there’s opportunities – I think at our Investor Day we talked about we like to do kind of a new plan every other year. We’re trying to get the pipeline filled from that perspective so we have Durham-York this year, Dublin next year, and then we’re looking at is Perth, we able to do Perth at returns that we think are reasonable based on the risk associated with the project. We’re going to be continuing to look at Australia. I mentioned China. The 13th five-year plan which came out a month or so ago was very supportive energy from waste, so there’s a number of opportunities there. We’ll look at the EU obviously, putting Dublin in the ground gives us a nice bulkhead to do other things in the EU. So we’re working on a number of projects. I’m a little reluctant to do project development in the public domain for competitive reason. So let’s assure we’ve got a lot going on. And I think in the past we were working a little bit, and maybe focused a little bit more on the kind of the transitions that were occurring in the U.S. Most of those were behind us so I think the team did a nice job here getting those transitions behind us and the mark-to-market behind us. So now we’re able to focus a little bit more on business development and growth. And you see that in energy from waste facilities, you’re also seeing that in the profile waste business. Noah Kaye Okay. Very helpful. And then maybe just a follow-up question for me on the profiled waste, again, really nice growth, 16% as you said year-over-year. Steve Jones Yes. Noah Kaye And it seems like more of the waste that you’re getting in that is really being driven by sustainability concerns from corporate participants. I was wondering if you could talk about that trend, maybe how you’re seeing the mix of profiled waste shift a little bit and some of the initiatives that you have to kind of keep that growing. Thanks. Steve Jones Yes. Sure. I’ve talked about this in the past. You’re seeing a lot of companies now want to go to zero waste to landfill. And then I mentioned even New York City, the mayor there has mentioned that. So that’s tending to drive the profiled waste business as companies try to meet their sustainability goals and zero waste to landfill goals. They’re coming to companies like Covanta in order to get a sustainable solution for their waste. And that’s continuing to grow. One of the things we’ve done around that is we’re building that business out. You’ve seen the growth associated with that. We’re adding sales people. We’ve got a much greater focus on that marketplace now. And we’re also working with our plant operations folks to be able to take that waste safely and reliably into our Energy-from-Waste facility. So there’s a lot of work underway. But a few years back, we saw this as a trend that’s occurring with corporations. And that’s what’s driving the U.S. really. It’s not government’s driving the U.S. in Energy-from-Waste, it’s corporations who want to not utilize landfills because, and you’ve heard me say this, putting your waste in landfills is not a great alternative. It creates a lot of greenhouse gas, a large greenhouse gas impact. And I think companies are really starting to embrace that and that’s driving the business. Noah Kaye Okay. Thanks so much. Appreciate it. Steve Jones Thanks, Noah. Operator And our next question comes from Michael Hoffman of Stifel. Please go ahead. Michael Hoffman Thank you, Steve and Brad, for taking my questions. Steve Jones Sure, Michael. Michael Hoffman On gross margins, you’ve had a mix shift because of profiled waste were mostly from energy solutions and contract revisions that have had the margins coming down. At what point do we see the benefit of six sigma, the mix shift having stabilized and this margin compression arrests? How do you see that time wise? Brad Helgeson Yes. It’s – hey, Michael. It’s Brad. Michael Hoffman Hi, Brad. Brad Helgeson It’s a difficult question to answer with precision just because there are a number of variables in play. So one of the variables being the rate at which we continue to add revenue that is service type revenue in the environmental solutions business. Commodity prices obviously impact that significantly. Commodity prices are come with 100% margin either for better or worse. Continuous improvement, we talked about a benefit which we baked into our guidance for this year of $10 million total between revenue and costs, though that’s likely to be more weighted towards cost and that’s something that we would expect to continue to grow over time. Certainly that’s our goal. But it’s something that’s very difficult to pinpoint that given all of those variables, that by the fourth quarter this year or second quarter of next year you’ll be able to really see continuous improvements specifically driving the margin from X to Y. Michael Hoffman Okay. I get all that. But you’re the quintessential modeler. You love doing this. So in your mind, when do you think you – if all things being equal, we live with the conditions you have for pricing in your metals, electricity, the mix you have today, this is a – the margin issue settles out here in this next 12 months? Steve Jones It’s another big factor actually, as I answered that question, that when you think about the consolidated total that will come into play later next year is of course the Dublin project… Michael Hoffman Dublin? Steve Jones Yes, which comes in at a very, very high margin, so that’ll be a significant mix shift. So you throw all that in the pot and stir it around, I would say that by the end of next year and certainly into 2018, you’re going to see a much different margin profile. Michael Hoffman Okay. So talked about capital and capital deployment. How would you frame the return characteristics of profiled waste spending and environmental solutions spending at this point in the cycle of that, the growth of those business? Brad Helgeson Yes. We look at whether we’re buying a $500,000 shredder in one of our new environmental solutions facilities or we’re investing in a new Energy-from-Waste facility. We look at the return in the same way, everything sort of needs to stack up to the same benchmarks. And so on that basis, we’re seeing the investments, both in the acquisitions. And then especially to the extent that there are opportunities for add on more organic growth-type investments into the businesses that we acquire, we’re looking at returns, cash-on-cash, IRR on the assets of low to mid-teens. And those – it’s still relatively early days. I want to give it that caveat. But I would say that the early returns are certainly favorable to our initial expectations in our models when we justified the investments. Michael Hoffman Okay. Thank you on that. And then on capital spending $86 million what’s in the cash flow statement on Page 7 of our PowerPoint. It’s – $36 million is maintenance. You get to Page 12, it talks about the growth. It shows $59 million, but if you do $36 million out of $86 million, that’s $50 million. So how do I reconcile what my modeling for that growth spending from a cash standpoint? Brad Helgeson Yes maybe rather than getting into it here, why don’t we – let’s take that offline and make sure we get the reconciliation exactly the way you want to look at it. Michael Hoffman Okay, great. Thank you very much. Brad Helgeson Thank you. Steve Jones Thanks, Michael. Operator And our next question comes from Scott Levine of Imperial Capital. Please go ahead. Scott Levine Hey. Good morning, guys. Steve Jones Good morning, Scott. Brad Helgeson Good morning. Scott Levine Just running through the various assumptions for 2016 guidance and comparing them to what you had in your slides for the fourth quarter. It looks like, obviously, you’re raising the metals assumption for revenue by $5 million give or take. It looks like you’re leaving the energy revenue or the revenue assumptions and the pricing intact. Just wondering whether based on the 1Q results coming in relative to your expectations if we should be moving upwards in the range or whether there are some offsets that we should be taking into consideration? Just trying to – it’s pretty wide guidance expanse. Just trying to get your, some additional color behind where we should be favoring within the range, if you can provide it. Steve Jones Yes, on energy we’re slightly negative to where we were when we looked at the forward prices when we gave guidance. And that’s reflected in the updated. We didn’t update the overall ranges because the change isn’t, I think, significant enough to justify changing the range. But you can see that in our expectation for a lower market price. And also actual lower average hedge price for the balance of 2016. So I’d say prices overall have weakened by on the order of a few million dollars relative to where we were. But again, it’s still well within the range that we talked about. So not worth changing the outlook. Scott Levine Fair enough. Go ahead. Brad Helgeson I would just say that there’s the offsetting factor on the metals side of things. We did tweak the range there as well. And the two pretty much offset each other. Scott Levine And given where you’ve come in for Q1, should we, and the fact that you’re pulling forward some of the planned maintenance, any changes in seasonality we should expect for the second quarter or maybe as the year progresses, based on the way Q1 came in or not meaningful as well. Brad Helgeson Yes, not meaningfully. And when I say not meaningfully, I mean to put it in perspective, if we talk about a percentage one way or the other of our spend, on maintenance, it’s $4 million that could come right before a quarter end or after a quarter end. So there is going to be just natural variability. And I think our outlook for the first half is going to be consistent, generally consistent with history which has been 60% to 65% of our maintenance spend, both expense and capital in the first half. As Steve talked about and as you’ve seen in the numbers. Relative to last year, we had a little bit more of that in the first quarter, so we’ll have a little bit less probably in the second quarter. But again it’s really the – it’s the first half versus the second half that’s really what drives it. And again we’ll be in that 60% to 65% range. Scott Levine Gotcha. One last one, if I may, on environmental and profiled waste. Firstly, would you be willing to share, I don’t know if you shared, how large is the profiled waste business in terms of revenue at this point? Brad Helgeson Yes, we did about $80 million last year and we are targeting to do – and this is just profiled waste in the energy – into the Energy-from-Waste plants. We’re targeting to do close to $100 million this year, so about a 15% year-over-year increase. Scott Levine Got it. And then the acquisitions sheaf and then the latest purchase from U.S. Ecology, could you quantify the revenue earnings associated with that are they relatively small or any additional color there? Brad Helgeson Yes, they’re so small. I mean we haven’t talked about the individual contribution of any of these acquisitions. And these together were less than $10 million purchase price. I would say that the multiple that we have talked about that we’re achieving on these at least going into the investment of about seven times. I would say that’s a fair assumption on these as well. Scott Levine Very good. Thanks, Brad. Operator And our next question comes from Dan Mannes of Avondale Partners. Please go ahead. Dan Mannes Thanks. Morning, everyone. Brad Helgeson Morning, Dan. Steve Jones Good morning, Dan. Dan Mannes First a follow-up on guidance, kind of to follow-up on Scott’s question, maybe more on the metals side given that current HMS prices is above your annual rate, are you maybe being conservative in terms of maybe some slippage in pricing? I don’t know if you can talk through what you’ve baked into your guidance relative to where we are on spot HMS? Steve Jones So the HMS, when it printed, was it about 183, and then it’s trailed up from there. We’re watching, we don’t have a lot of visibility to far out. I mean you guys can look at the same numbers we can. There has been seasonality in the past, so the first quarters tended to be a little stronger. So we changed from 125 to 150 up to 150 to 175 as our estimate for the full-year. And we’ll kind of watch that as time goes on. And obviously it commences higher than that right now. And if the seasonality doesn’t occur, then yes, I think the numbers move up. But we don’t have a lot of visibility on where it’s going to head at this point. Dan Mannes Got it. And I know you obviously your whip solved [ph] there last year. So… Steve Jones Yes, exactly. Dan Mannes So the second thing is on New York City. Number one, is the initial MTS, is that – are you at the full run rate in the first quarter? Is there still a ramp? And secondly, could you give us any update on the Manhattan MTS? Steve Jones Yes, so 14 out of 15 boroughs are delivering waste now to the MTS and but we’re getting paid our full fee. So from an economics standpoint consider us fully ramped although the city is still doing some things around one of the burrows. And then on the Manhattan you know we’re still expecting probably late 2017, early 2018 is the current expectation. So not a lot has changed there, we still haven’t got our notice to, our kick off notice at this point, so we’re kind of watching the construction. You obviously can drive by the city is continuing to build that Manhattan MTS so it’s moving along. Dan Mannes Got it. And then my last question and this is a follow-up on a previous question about the impairment. When I look at the assets that you’ve generally repaired or shut down they’ve tended to be on the smaller side, 300 tons, 400 tons, 500 tons per day. I guess, obviously, is there – we know there’s a lot of economics of scale in waste to energy, but how much of this relates to the increased cost of running older facilities? And is there a risk that over time we’re going to see that threshold number move up from say 400 tons per day to 1,000 tons per day and maybe over time a larger number of your plants are at risk or am I maybe misreading this issue a little bit? Steve Jones I think you’re misreading a little bit. This is a smaller plant. We’re getting paid to operate the plant. We just weren’t making a lot of money on it and most of our, realize this too, most of our EBITDA comes from our top 15 or so plants. So some of these smaller plants they give us certain scale for procurement reasons and doing maintenance and it costs bigger fleet but they don’t have a impact on our financial results. Dan Mannes Understood. Thank you very much. Steve Jones Sure. Operator And this concludes our question-and-answer session. I’d like to turn the call back over to Mr. Jones for any closing remarks. Steve Jones Well, great. Thanks again for everyone participating in the discussion today. It’s always a pleasure to talk about the business and we look forward to speaking with all of you next quarter. So thanks again and have a great day. Operator And thank you, sir. Today’s conference has now concluded and we thank you all for attending today’s presentation. You may now disconnect your lines and have a wonderful day. 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