Casella Waste Systems Inc (CWST) 2004 Q2 法說會逐字稿

Good day, everyone, and welcome to the Casella Waste Systems' second-quarter earnings release conference call. Today's conference is being recorded. At this time for opening remarks and introduction, I would like to turn the call over to Mr. Joseph Fusco of Casella Waste Systems.

Thank you for joining us this morning and welcome. We're joined today by John Casella, Chairman and Chief Executive Officer of Casella Waste Systems; Jim Bohlig, our President and Chief Operating Officer; Richard Norris, Senior Vice President and Chief Financial Officer; and Charlie Leonard, our Senior Vice President for Solid Waste Operations. Today, we will be the discussing our fiscal year 2004 second-quarter results. These results were released yesterday afternoon. Along with the review of our financial performance, we will update you briefly on the Company's activities and our business environment and answer your questions as well.

First, as always, I must remind everyone that various remarks that we may make about the Company's future expectations, plans, and prospects constitute forward-looking statements for the purposes of the SEC's Safe Harbor provision. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in our prospectus and other SEC filings. In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change, and therefore, you should not rely on those forward-looking statements as representing our views as of any date subsequent to today.

Also, during this call, we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in the financial table section of our earnings release, which was distributed yesterday afternoon and is available in the investor section of our website, www.casella.com/investor. If you are still interested, I will turn it over to John Casella, who will begin today's discussion.

Thanks, Joe, and welcome everyone to our second-quarter fiscal '04 conference call. As evidenced by the release, we continue to move the business forward, executing our strategic plan, particularly in the area of adding additional disposal capacities. As we said over a year ago, our ability to create value would clearly be linked to our success adding additional disposal capacity to our franchise. We're very excited to discuss those developments today and the state of the business with you.

With regard to the quarter, I would characterize the quarter and the business as flat or stable. Revenue at 112 million, EBIT at 25.2, and operating income at 10.2 million. Price and volume on a year-over-year basis are up slightly, however any benefit from that is really more than offset by the economic reality that we still see and face. I would characterize the economic picture in our region in the northeast that we really believe that the deterioration that we have seen over the last several quarters has ended, but we really, truly have not seen an upswing as yet. Richard will give you a more detailed picture of the numbers for the quarter in just a minute, but first, before he does, I would like to give you a sense of some of the issues that we will be going through and giving you some detail on today.

First, I am pleased to report not only have we added the sixth disposal facility, but all of the transactions previously announced are still on track for completion. We put the finishing touches on and executed the final operating agreements in Ontario, and we expect to be operating the facility by the beginning of January. We recently purchased Wood Recycling in Southbridge, Massachusetts, and are operating that construction, demolition, debris and as a limited MSW landfill. There is, in our view, a terrific opportunity to reposition the facility and make it an integral part of the MSW disposal infrastructure in Massachusetts. And our efforts from a permitting perspective and a regulatory perspective are moving ahead very nicely.

In Old Town, the state and G.P. have signed their agreement and we continue to move the process forward with the state of Maine and are close to finalizing an operating agreement for the Old Town landfill. We expect this to be completed by the end of this calendar year. Negotiations with McKean County, Pennsylvania over the operating agreement for their landfill are ongoing as well. Our target for the facility is to complete negotiations on the operating agreement in early January and take over the operations of the facility in March, 2004.

It has been a good few months and Jim Bohlig will give you the details as we discussed last quarter on the completed transactions, the Southbridge, Ontario, and the Templeton facility a little later in the call. He will go through the metrics in terms of purchase price, EBITDA contribution, CAPEX, and all of the information that you have been looking for on those completed transactions. So with that, I will turn it over to Richard, who will give you a summary of the numbers.

Thank you, John. For the quarter ended October 31, 2003, although we had internal growth of 4.1 percent, the revenue decreased 2.6 million to 112 million from 114.6 million. This was largely due to the sale of the two brokerage businesses. Prior-year revenues included 10.3 million related to those businesses, which decreases were partially offset by higher revenues at both solid waste and FCR.

Internal growth for the quarter was comprised as follows. Growth of the solid waste business, 2.8 percent; FCR price decrease, 0.3 percent; FCR volume, 1.6 percent positive; for a total of 4.1 percent. The solid waste breakdown is as follows. Price was 1 percent; volume, 1.4 percent; and core commodity price and volume, 0.4 percent; for a total of 2.8 percent. Offsetting the 4.1 percent internal growth were divestitures of a -9.7 percent and the rollover of effective acquisitions, which was a positive 3.3 percent, for a net of 6.4 percent. If you take 6.4 from 4.1, you get a negative change in total of 2.3 percent. Revenue for the quarter breaks down as follows. Solid waste, 89.6 million; FCR, 18 million; other, 4.4 million; for total of 112 million.

Moving to EBITDA, EBITDA decreased 0.7 million to 25.2 million from 25.9 million. The breakdown in EBITDA is as follows. Solid waste, 22.7 million; FCR, 2.6 million; and other, -244,000; for a total of 25.2 million. After backing out the effect of FAS 143, which the gain was 1.2 million in the quarter, solid waste EBITDA was down about 900,000 year-over-year.

There were some specific items in this regard that I would like to mention. John referenced in his comments the economic situation, and certainly we saw that in our bad debt expense this quarter, which increased 600,000 year-over-year. We had a number of bankruptcies and companies going out of business as quarter. We have four or five of them that amounted to 100,000 each, and so that negatively impacted that area. We may get some recovery from the entity which went out of business, but that is (indiscernible) uncertain. We also incurred approximately 200,000 in development expenses, which was mainly related to the new landfill transactions. In addition, two of our landfills, Hakes and Hyland, suffered from lower volumes this quarter as a result of coming up against their annual permit caps. We did see the benefit of higher volumes in the earlier quarters, but in Q2, EBITDA declined by some 300,000 from this factor. Finally, MERC's shutdown was brought forward by a month, and so into this quarter. The impact year-over-year was minimal at 150,000. The sum of those items is 1.2 million, which was partially offset by lower legal expenses.

FCR suffered from lower commodity prices in the quarter, as well as some cost adjustments of $0.5 million. Legal costs associated with successfully fighting a unionization attempt at our Boston MRF accounted for 200,000 and we also incurred 400,000 of costs associated with R&D. U.S. GreenFiber reported operating income in the quarter of 1.7 million, and we recorded our 50 percent share. Cash flow from operations amounted to 1.1 million in the quarter, and adding back net working capital changes of some 1.9 million, U.S. GreenFiber reported EBITDA of 3 million for our second quarter. It should be noted that in the prior year, U.S. GreenFiber recorded a $2 million gain arising from the eminent domain taking of a piece of property in Tampa, and we recorded our 50 percent share of that gain.

Depreciation and amortization. This expense was up 2.7 million year-over-year. This arose mainly from the FAS 143 $1.2 million change, but also from Hardwick, which was $0.5 million, and from higher volumes into our other landfills, especially Brockton and Waste USA.

Next, income taxes. I had mentioned last quarter that we might see some volatility in the tax rate, and as you have noticed, that certainly happened this quarter. The effective tax rate moved down to 5 percent year-to-date because of the reversal of an additional 2.9 million of valuation allowances against prior NOLs. The decrease from 20 percent last quarter meant that there was a credit going through this quarter. The swing of the effective rate results from the landfill acquisitions, since they will provide higher earnings in future. That means the utilization of our tax losses becomes more certain and we are required to reverse more of the valuation allowance than at last quarter end. However, at this point, we have reversed all of the federal valuation allowances that will go through income.

And we did mention in the press release that this rate change includes a benefit of 6 cents. I would like to make it clear that that benefit is calculated versus the 20 percent rate that we had previously announced in our annual guidance. Had that rate been applied, the income tax charge in the quarter would have amounted to 1,061,000. That compares with the credit of 389 that we actually recorded. The sum of those two amounts is 1,450,000, which when divided by the undiluted number of shares outstanding equates to 6 cents.

We do not typically give guidance on a quarterly basis, but you should be aware that the effective tax rate is estimated in the 44, 45 percent range for each of the next two quarters, because we have now reversed all of the valuation allowances. That will give us a nine-month year-to-date rate in the 10 percent range -- in other words, at the end of the third quarter, and then somewhere between 15 and 20 percent for the fiscal year, depending on our level of profitability.

Net income after preferred stock dividends, I mentioned a 4.9 million (ph) or 20 cents per share, which includes 6 cents and the change in the tax rate, as I mentioned previously. You will note that the higher level of income meant that the preferred shares are dilutive in the quarter, so the number shares used in the EPS calculation increased. The calculation also excludes the preferred dividends. In other words, EPS is computed on net income of 5 million 694, not the 4 million 886 after preferred dividends. The preferred shares were not diluted for the six months.

Moving on to the balance sheet, I will just give you some balance sheet statistics. Total debt was 308.6 million. Total equity, 197.9 million, giving us a total capitalization, including preferred shares, of 506.4 million, or a total debt-to-cap ratio at October 31 of 0.61. This ratio is down slightly from last quarter. The average interest rate for the quarter moved down to 7.77 percent including amortization of financing costs. Net of these expenses, it was 7.2 percent. The 38 basis point decline from Q1 is mainly due to the 50 basis point decrease in the Term B loan effective August 26.

Total cash and cash equivalents on hand at October 31 amounted to 3.6 million. Cash balances were down due to MERC and capital needs. Restricted cash was 12.5 million. So total debt less unencumbered cash is at 304.9 million, which was up from last quarter end, due mainly to the lower cash balances at the end of the quarter. Availability on the revolver was 145 million, after taking into account 30 million of LCs (ph) outstanding. Capital expenditures for the quarter remained at 210.9 million, and no falling acquisitions were closed in the quarter.

Moving on to free cash flow, as you would have seen, free cash flow in the quarter was flat. Capital expenditures were again somewhat lower than budgeted due to timing and good management, but working capital was again the use of funds. Accounts Receivable showed improvement and DSO remained unchanged at 38 days. But that decrease was more than offset by lower payables, mainly due to lower construction records at the end of this quarter.

Now a word on our capital expenditure outlook. You will recall that our capital expenditure guidance for the fiscal 2004 was 43 to 46 million. As we closed the landfill acquisitions and begin (indiscernible) construction over the next two quarters, none of which was included in our budget, those expenditures will be incremental to that amount, and we expect that that total incremental expenditure will be in the 12 to $14 million range, depending on timing and weather conditions and so forth.

Finally, I just wanted to make a few comments about landfill accounting and how we will be bookkeeping the new landfills as we close them. Jim will give more details, but I will just cover off the bookkeeping piece of it. After discussion and consultation with our auditors, we have jointly reached the conclusion that we should account for these transactions as (ph) operating leases. FAS 13 contains specific criteria relating to leases of real estate. Since these landfills will never be owned by us, the contracts do not include a purchase option, it is clear that they should be accounted for as operating leases.

This means that the associated lease payments will be expensed. They will be recorded in cost of operations on a units of consumption basis -- in other words, on a per-ton basis as trash is taken into the site. This approach is also true of any upfront economic incentives or inducements to the owner to enter into the contract. The sum of all these items over the life of the site will be divided by the permitted airspace to arrive at a rate per ton to provide proper matching of revenue and expense. However, the liability associated with any these payments will only be recorded as incurred -- in other words, as the payments become due. And with that, I'll hand you over to Jim.

Thanks, Richard. Good morning. Just a little bit of color on the economy comments that Richard and John gave. It is amazing the lag time between gross domestic product numbers that are issued in the press and what goes on in the northeast. One would listen or seem from the recent releases that the economy is inflating, and I am sure it is, but we are still seeing essentially a very flat economy in all three regions, with no real uptick apparent in any of our markets. As you know, our budgets generally look for a 3 to 5 percent price increase over the course of the year, and, as Richard indicated, we are generally realizing about a 1 percent price increase, which is an indication of kind of the softness of the market. And while volume of tonnage is up, it is albeit at the cost of slightly lower cost in order to attract that volume. So I think the market stays -- is firming, but we are not certainly seeing any new robustness that is reporting on a national level basis. And as mentioned earlier, volumes at third party sites is also up.

From an internalization standpoint, we're seeing some interesting shifts there. Our internalization for the quarter overall is 52.9 percent. Year-over-year on a quarter basis, that is slightly down, reflecting the capacity limits at our existing landfills, but we are actually seeing an increase, particularly in the eastern markets, as a direct result of the Hardwick facility, and as we bring the (indiscernible) with (ph) Southbridge and Templeton along, you will continue to see internalization in the Eastern region, and with Ontario and McKean County, a Western region increase. Overall for the quarter, the Eastern was 50.6 percent. Central was 80.9 percent, which is flat from the previous quarter; and Western was 32.7 percent, for an overall internalization of 52.9.

A few comments on free cash flow. We are in targets (ph) managing our free cash flow for our budgeted capital expenditures of about $35 (ph) million, and as Richard indicated, we will in this fiscal year add additional capital expenditures of about 12 to $14 million to cover the incremental costs at the landfills that we're bringing on. And I will go in more details on that. When you do your modeling, you'll have to careful because you'll have to ask yourself whether you're talking about the fiscal year or the first 12 months of operation of the landfills, because we do have fiscal year kind of ends in the middle of that.

From a landfill permitting standpoint, North Country lawsuit remains at the Supreme Court. We expect to have oral arguments sometime in January and to have a decision out of that court in early March. We did receive additional permitted capacity for the existing 51-acre footprint during the quarter, which will add some short-term life to the facility, but clearly the major material issue at North Country will be the results of the Supreme Court decision, which we expect in March. Hardwick, we are working on and expect to be able to convert to an MSW landfill and expect to be able to discuss that in the next 30 days or so. And similarly, we have successfully shifted and removed the permit allocation limits at the Hakes landfill, so that we can now run that landfill from a more flexible permitting standpoint quarter to quarter, and not have to deal with some of the issues that showed up in the first quarter.

With regards to McKean, we remained committed to this opportunity in McKean County, Pennsylvania. It is in the northwest corner of Pennsylvania. We are working slowly, but I think surely, toward an agreement with the County and the authority, and hope, as John said, to have that done within the next 30 to 60 days and to take over operation sometime in the early spring, if not earlier, of '04.

With regards to Old Town, Georgia-Pacific and the state has executed an agreement for Georgia-Pacific to sell their landfill to the state and we are in the final stages of finalizing an agreement and expect have that finalized before the end of this month. Permit has been applied for to the state and has been deemed complete, and we are awaiting a determination by the main DEP with regards to a permit issuance. There is a forecast currently of about mid-February for that permit to be issued, and upon that permit being issued, the contracts and the sale will take place and we will take over operation. And so at that time, when those realities become more material, we will provide information associated with that.

Templeton, we have completed all of our initial permitting effort and have filed the ENF (ph) associated with Templeton landfill. That went out mid-November. Final comment (ph) period I think toward the end of December, and we will take it from there, but we feel very confident that we're moving forward on that. And assuming that things go forward on the schedule, we would expect to begin construction early in the late spring and then be in operation as early as midsummer of '04.

With regards to Southbridge, this is a new facility. It was not publicly on the radar screen in our previous discussions. Southbridge is located in Southbridge, Massachusetts. It is a combination private/public facility in the sense that Wood Recycling, who we purchased, owns at the site on an abutting piece of property, a C&D processing facility of about 1000 tons per day. And then adjacent to this facility is a publicly-owned Town of Southbridge landfill, which they entered into in 1996 a long-term contract to operate it on behalf of the town, both for accepting the town's MSW as well as the residuals coming off the C&D processing facility.

As you may or may not know, Massachusetts is pushing hard to develop C&D processing facilities as a way to unburden their landfills, to generate and take wood out of the C&D waste stream and other recyclables, and this certainly is one of the premier facilities within the Massachusetts master plan for accomplishing that goal. Southbridge, as we now know it today, Wood Recycling has been in operation, as I said, since about 1997. And we had previously attempted to indicate our interest in the facility, but were not until quite recently given that opportunity. I think the great aspect of this is from the time that it first popped up on our radar screen to the time we executed and signed an agreement to purchase it as a stock purchase was about 35 days, and we closed on it last week. We are finalizing with the state DEP a consent order associated with previous non-compliance issues by the previous owners. They are quite significant and reflected their working capital shortfalls that they had to properly run this site, and I think we have done a great job of demonstrating working with DEP and they have been very helpful. As I think they really are interested in having the sites be an important aspect of the Massachusetts disposal scene.

We will expect to have the landfill in operation as soon as the authorization to operate is issued. We completed the construction of the constructible cell, during the last month, filed the development papers associated with DEP and will place the processing facility online, as well, in January.

The facility has an application in to increase the processing capacity to 1500 tons, and we would expect to have that permit and be operating at that capacity as early as July of '04. And so we will provide you more details on that when I get to that section.

Finally, Ontario County, as John mentioned, continues to go very, very well. We built a very nice relationship, a high degree of trust between the parties. A contract was negotiated and signed about two weeks ago. Closing will take place on the issuance of the permit, which is expected to be early in January, the secret permit, and then upon the actual solid waste permit the effective date. So we will actually take over operations of Ontario early in January.

From a modeling standpoint, I guess what I would like to do is try to give you the benchmark proxy numbers for each of those landfills so that you can build your models, and I'll start first with Templeton and then I will go to Southbridge, and then finally Ontario. Templeton, as I indicated, is a brand-new landfill. We expect to be in operation in July of '04. The numbers I am giving you are for the first 12 months of full operations, so I am not trying to guess exactly how the ramp up is. I'm trying to give you a twelve-month full running number so that you can build your model, and then there would have to be some fudge factors based on when the permit is actually issued and how we ramp up.

We expect revenue to be about $9.6 million and first-year EBITDA to be on the order of about $5.3 million. We are using for budgeting purposes actually 42 million to be conservative. The purchase price of the facility, it is a long-term lease, as you know, to operate the site. The purchase price, I think, from an accounting standpoint would be looked at all the construction and acquisition costs associated with getting the cells constructed in an operation, and based on that, which would be about $7.6 million, the purchase price is below 2. Long-term on a CAPEX standpoint, as I said, we will spend about $7.6 million in getting this facility into operation, and it should be a very pivotal facility for us in the Massachusetts market in significantly allowing us to raise our internalization rate.

Southbridge facility, located in Southbridge, Massachusetts, revenue first 12 months when it's in operation, $11.6 million. First-year EBITDA $4.0 million. We believe that the purchase price was $26.3 million. That includes the assumed debt, (technical difficulty) debt that we assumed associated with this. And based on per-share EBITDA, the purchase price now (indiscernible) 6.5, but on year two, we actually expect EBITDA to significantly increase, and our projections are for it to be at $6.8 million, which yields a purchase price of about slightly less than 4.

Ontario County, take over operation in January. It is an operating landfill. We believe it will ramp up quickly to the 2300 tons that it is permitted for. When it does, it will operate at $16.8 million of revenue; it will yield an EBITDA of about 7.2. But again, using our conservatism, we are using a 5.7 number for purposes of what we think it is going to produce. The overall purchase price is $29 million and that has a purchase price all told of about $5 million -- about five times. So those are the principal data points for the landfill. With regards to CAPEX, we would expect in the first 12 months of those three landfills, some of which, as Richard mentioned, we would spend in this fiscal year, to spend about 25 or $28 million of capital developing those landfills and pushing them out.

So moving out of solid waste and quickly into FCR, the residual business actually was up to budget, but off year-over-year, as mentioned by Richard, because of the commodity pricing. Hard volumes up 2 percent from our budget, prices up 10 percent from our budget, but again, as a result of a quarter-over-quarter comparison to last year, FCR was down. We actually saw a continued reduction in variable costs of 1.6 percent, and our hedging activity continues to add positive contributions to our EBITDA. We did have quarter-over-quarter from last year some one-time issues in addition to commodity pricing having to do with Cape May and the Goodman acquisition, and we have also a written off R&D associated with glass recycling, which we have conducted over the last quarter.

And finally, U.S. GreenFiber, the overall revenues are up 9 percent. Volume is also up as well. Contractor channel was up 13 percent; retail channel was up actually 19 percent; manufactured homes down 14 percent, for an overall increase of about 10 percent. Interesting news about the manufactured channels home (ph), I think, business is the entry of Berkshire and their purchase of Clayton and recently last week their announcement of purchase out of bankruptcy of Oakwood. We think that is going to stimulate manufactured home and consolidate it, and as a major provider of insulation for that business, we're pleased to have them enter into this market. Year-over-year, net of the eminent domain settlement that Richard mentioned, EBITDA was up 36 percent. With that, I'll turn it back to John.

Actually at this point in time, we would like to open it up for questions.

Thank you. (CALLER INSTRUCTIONS) Raymond Chang with Lehman Brothers.

This is Raymond Chang calling on behalf of Tom Ford. Just a couple questions in terms of the weekly cycle at Wrenfield (ph). Can you comment about the current daily intake in terms of C&D and MSW and also the allowed daily tonnage?

You have to be careful when you ask about this facility because there are really two separate facilities side-by-side. One is a CD processing facility and then there is a landfill which accepts residuals from that CD processing. So you have to be careful when you talk about this, to know which part of the thing you're talking about. The site accepts currently on its permits about 900 tons per day of C&D into the facility. After it extracts the wood and other recyclables that can be taken out from the processing, there is what's left, what we call C&D residuals. And those residuals, along with other difficult to manage materials, are then allowed to be put into the landfill.

The landfill is permitted for about 400 tons a day of residuals and 100 tons of local MSW waste from the town of Southbridge. Part of the long-term service contract for operating the town's landfill is to take all of their MSW and to provide MSW reimbursement for the MSW collection at the curb of their solid waste. And so this facility is principally a C&D residual landfill operating at about 400 tons per day, a C&D processing facility operating at 900 tons per day. There is a permit application into the DEP to operate the facility and to expand the C&D facility to about 1500 tons per day, and there will be a corresponding increase into the landfill to accept the additional residuals coming from that processing facility, but we do not expect those permits to be issued until the early summer.

The landfill has about 4.6 million yards of permitted capacity, or permittable capacity, and we expect, based on our analysis, to be able to develop some additional capacity, maybe as much as another 2 or 3 million yards. And so in concert with that, we will continue to work to match the processing facility with the landfill and to enhance the overall long-term life of the site.

And in terms of the ramp-up of your EBITDA estimate, starting year two of your operation, did you build in the expected completion of this expansion, and how much of a ramp-up in terms of revenue are you expecting starting year two?

I think that what we try to do is to not give you any forecasts with regards to fiscal year '04. What we said is, assuming 12 months' full operation, here's what the numbers would be. So if I was you building a model, I would look at those forward full 12 months as the inputs for fiscal year '05 budgeting.

Okay.

So I can go over those numbers again if you need me to, if you did not get those, but that's what we were trying to do, is give you a proxy so that you could look at next year's contribution, next year's 12 months' full contribution, assuming all of those facilities were running at full operation by June or by May of '04.

Okay, so in other words, by assuming your year to EBITDA up to $6.8 million from $4 million in the first 12 months --

Let me go over that again for you. When we say year two, year two is the second full 12 months of operating; so that is not fiscal year '05. That would probably be fiscal year '06. Southbridge was $11.6 million of revenue and $4 million of EBITDA. This is year one. Ontario was $16.8 million and $5.7 million of EBITDA. Templeton was $9.6 million of revenue and $4.3 million of EBITDA.

Okay, and --

And based on those first full year EBITDA, we gave you purchase price multiples, which, as you can see, are well below -- taken together, well below 5. And we actually think that in the second full year that operations may even exceed the numbers we just gave you, and therefore we will manage the purchase price multiple down lower than even what I just suggested.

Okay. Just another question in terms of landfill tonnage. How does the sequential landfill tonnage volume change from Q1 to Q2 in your fiscal year? And is there any impact in terms of the limited volume intake into your North Country (indiscernible) site?

We have always usually a fairly robust first quarter, and we had more tons that we were handling than in Q1, which then caused (ph) our internalization rate to be actually lower. Because if our existing sites are all at capacity, we then have to take that material to third-party sites. That is, I think, the point John is trying to make -- we have been aware of that and have been working and are delivering on this total capacity expansion, and as these additional facilities come on board, we are going to be able to absorb and cause internalization to go up.

Okay, and for your G&A line, the increase might have something to do with the fact that provision. And aside from that, are there any items that we should be aware of in terms of -- for adjusting the (indiscernible) number?

The SG&A was increased by the bad debt, of course, and the 200,000 in development costs -- I'm sorry -- my mind went blank. And that is offset by lower legal costs. So it was 600 plus 200 less 350 on the net basis for legal cost decrease.

Bill Fisher with Raymond James.

First, on the Ontario --

How my people from Raymond James get on this call? Was the last one from Raymond James or no? Oh, I see. It was from Lehman's. Go ahead.

The 2300 tons a day, if you get to the Ontario, you have a rough idea of how much of that waste could be from your own operations?

There is about 1400 tons a day coming into the facility. I would expect that probably about 4 or 500 tons a day could come from our own facilities.

Okay. And just using Templeton as an example, you gave some EBITDA figures. Would that assume a full year of say 750 tons a day, or is that kind of an out year type of thing?

No, we are actually using 500 tons a day. The permit will be for 750, but we have agreed the first year to operate 500 tons a day, and so there is a consultation with the town that will be necessary for us to go above the 500. So the numbers I gave you are based on 500 tons a day.

Great. And last thing, just to clarify on the CAPEX and purchase price, on Templeton for instance, the 7.6 million purchase price, is the CAPEX on top of that for construction?

No, that is principally the costs associated with that.

Okay. So that does include the CAPEX?

Yes.

When you're talking that 25 to 28 million of CAPEX, those are implicit in the purchase prices of those three different assets, for the most part?

Well, each one gets treated slightly differently. On Southbridge and Ontario, which are operating facilities and have cash payments associated for assumption of debt associated with the operations, that kind of describes or defines the purchase price. There are CAPEX for an operating facility as you go forward. Templeton, though, is no other than basically a down payment. There was no initial cash distribution because it is a greenfield site that is being developed. So we just threw in the per-share CAPEX in order -- as a proxy for the purchase price.

Okay. And Southbridge, the 26 million, is that debt assumed plus some CAPEX or would that be the CAPEX would be on top of Southbridge?

There is probably another 2.5 or $3 million of CAPEX that we will spend on Southbridge in addition to the $26.3 million purchase price.

But some of the assumed debt on that is capacity that is in place, so some of the -- there is built capacity there, Bill. So in the assumed debt, we are getting assumed capacity that is currently built that we're completing right now.

They had a cell that was fully constructed except for perhaps the last 15 percent and they ran out of money. We have completed that and are waiting for authorization to operate it. But there is a fully-constructed cell with about 0.5 million yards of capacity in it --.

And just Ontario, the 29, that is upfront money plus some other additional first-year payments?

Yes, that is correct.

Thank you.

One other thing, too, Bill. We also -- I don't think Jim mentioned it, but in the quarter we actually increased the permit at Hakes from 740 to 1000 ton a day. We received that permit increase at the Hakes facility in New York, as well, during the quarter.

Okay, thank you.

Brad Coltman with Deutsche Bank.

A couple clarifications. With regard to the Southbridge facility, the press release said you're assuming a 20-year operating agreement. What is the remaining life of that operating that you're going to be taking over?

The operating agreement actually lasts through the life of the existing capacity of the site. And so, as I said, the (technical difficulty) 4.6 (ph) million yards, and at the current consumption rate, we would expect it to have about 16 years of life. We believe very solidly that there is on the existing site assigned property additional permitted airspace, perhaps as much as -- I think I said 3 million yards. And if we are successful in recovering that, and we've already had conversations with the DEP and the town of Southbridge toward that, the contract would allow us -- the operating services contract with the town of Southbridge would allow us automatically to extend the operating services agreement for that capacity, and that would add probably an additional 8 or 10 years of life. So I think it is fair to say that this is a long-term facility for the Company and should be a long-term facility for the overall waste shed of Massachusetts.

Okay, good. Just a follow-up. With McKean and Old Town, I guess they kind of thought they were going to be closing a little bit earlier this month. Sounds like they've been delayed a couple weeks. Not a big deal. But is there anything that further delayed that or is it pretty much -- you're pretty confident they will be at the end of December and early January?

I do not think we have ever -- we have always been very cautious as we have talked about all of these development projects, because we recognize that there is always a long journey from contract award to contract operation. And I don't think we have ever pointed to any of these facilities coming online by any date. The Old Town facility is actually tracking, I think, exactly according to our expectations. We will have -- as I mentioned, GP has signed and executed a contract with the state of Maine. We have finalized our discussions with the state of Maine and are in the final stages of getting it documented, and we would expect probably to execute it within a week or so.

The actual permit for the expansion of the landfill has been filed by us at the end of October, and we are awaiting deliberation of it by the DEP, and they have indicated an early delivery or early indication of the permit issuance sometime in February. Of course, there is no guarantee to that. So I would actually say that I think Old Town is proceeding essentially on plan. Clearly, there were people who would like to have gotten that done by the end of December, but I think those of us who work in the regulatory structure and understand their normal need for deliberation and the time that they take, we actually think that their performance is quite good, and I don't think any of us should be disappointed by that.

McKean County is a much more deliberate and careful negotiation on the part of the authority, and they are moving very, very deliberately. And we have been signaling, I think, for some time that that would probably be a spring facility. So I am not discouraged by that either, and I don't think other people from the outside should be. But having said that, a deal is not a deal until it's done and signed, and so, I don't think people should count McKean until it's done. But I think we're making great progress on all the other ones.

Okay.

I think it is really fair to say that we're pretty pleased with the progress and it is always an issue in terms of moving as quickly as you can. But yet, at the same time, we continue to build trust in that process, particularly with the public sector. But every one of those transactions, from our standpoint, we are really pleased with where we are, because all of the transactions that we previously announced, as I said earlier, are continuing to move forward with no major issues on any of them. And that is from our standpoint, really a tribute to the work that all of our people have done and Jim's leadership in terms of trying to drive those processes forward. So it is a really great story that all of those projects are where they are right now. So we are very pleased about the results of the last three months in particular.

And just one quick follow-up other question. With regard to the capacity limits, I think you mentioned you found something to kind of address that going forward. I just missed that part. Could you explain that?

I think, if I am recollecting your recollection, I think the point that we were trying to make is that we have recognized strategically that within our franchise, we had major disposal facilities but they were all at capacity. So our ability, as we grew and picked up additional waste, had us effectively losing some internalization as the waste had to go to third-party sites, and the lower margins --

Which also puts pressure on margins, as well.

Puts pressure on margins. So I think John was trying to make, very appropriately, the comment and observation that we have known and seen that for several years and have taken deliberate steps to change that. And we have delivered on that in the last three, four, five months, but those are actually reflections on working on something for a lot longer than three or four months. And we expect shortly to be able to relieve that capacity limitation by having increased internalization benefits to our franchise.

I understand that. I thought there was something with regard to --?

There was. I'm sorry. The Hakes facility, we received a permit modification in the quarter. Went from approximately 700 ton a day to 1000 ton a day. That permit application has been in and ongoing for a number of months, and we actually received the increase permit capacity at the Hakes C&D facility this past quarter.

Michael Hoffman with Freedman Billings Ramsey.

I want to make sure I got these numbers all right, because it sounded like some of them changed. You gave Ontario first -- you talked about 2300 tons per day, sales of 16.8, EBITDA of 7.2 and a purchase price of 29.

Actually I gave 16.8 and I suggested that you should use $5.7 million for EBITDA, which is what we are going to use for that facility.

I (indiscernible) your transcript, but I think you did say 7.2.

Well, I said 7.2 is the first full year, but we are suggesting that we're going to use a 20 percent clip on each of those numbers to be conservative. A 20 percent clip on that is 5.7 million.

A question later talked about Ontario -- 1400 tons per day with 4 to 500 coming from your operations. So at what time or what (technical difficulty) get to the full 2300?

I would hope that we'd be at 2300 by the summer of '04.

Summer of '04. So how much of that 2300 is being internalized that currently is not internalized?

I was trying to capture that with that question that was asked, and I thought maybe about 400 tons that we'd be able to put in there that were now going to third-party sites.

The other clarification on Ontario County is that it's 2000 ton a day MSW and 300 of bud (ph) material, Michael.

And the 4 to 500 will be all MSW?

It is an MSW site, so it's whatever -- it is the basket of acceptable waste which principally is in the (indiscernible).

You haven't actually talked about tons per day at McKean and what could be internalized there? Can you share that with us?

I don't think we're prepared to do that at this point. We would like to get the contract signed and when we get it signed, we will give you the information as we've given you for these three.

On Southbridge, do I interpret your comments as 100 tons per day of MSW, it never gets any bigger than that?

No, I just said that the current permit -- that piece of data was more important to reflect on the fact that the site is permitted and designed to except MSW, so it is accepting MSW today.

Have you filed application to increase the capacity?

We just took over the site and closed ten days ago, so we have not done that.

Can you tell us what your FY '05 estimated internalization for Eastern, Central and Western would be based on all these landfill numbers you have just shared with us?

I think that that is something we would probably do as we developed our budgets for next year, but we probably don't have that information today.

Thank you.

Corey Greendale from First Analysis.

I was just wondering if you could update sort of excluding (ph) everything we've been talking about -- excluding all these new landfills, if you are still comfortable with the guidance you had given initially before the fiscal year, with, I think it was revenue 395 to 415, EBITDA 90 to 95?

No, we're not making any changes to the guidance at this point in time, so the guidance that we had given early in the year is the same. There is really no update in terms of the guidance at this point.

Just one other quick one. Sorry I missed this among everything else, but did you talk about Hardwick at all and an update on the plan to increase the tonnage there?

We would hope within a month or two to be able to announce, after the appeal period passes. We have applied for a permit. The permit has been processed. We are very confident that we're going to be able to convert it to MSW and have a slight increase in tonnage. But when it passes the appeal period, we will release it.

Thank you very much.

Unfortunately, that is all the time we have for questions today. Mr. Casella, I will turn the call back over to you for any closing or additional remarks.

Thank you. I would like to in closing just emphasize a few important topics. The business is stable. We believe that the economic deterioration that we have seen has really bottomed out, and I think that what we will see on a go-forward basis, at least at this point in time, is the business being flat. But we certainly have seen the bottoming out of the deterioration, and hopefully we will begin to see a reality of a better economic environment.

We continue to push forward with regard to the disposal capacity from a strategic standpoint. It is clear as to the value that will be created by that additional disposal capacity being added to the franchise. And I think that the benefit of that we will begin to see as we move out into the next few quarters. The other aspect that is equally important in terms of the strategic planning and the plan that we put in place two years ago is that we have two other ingredients of the strategic plan that we continue to execute against. First is continuous improvement of the assets that we already own. And there is no question that we continue to drive the quality and the value of the existing assets, including really looking at our people, as well, in terms of how we can better train and move our people forward. Charlie continues to drive the continuous improvement process, and we're very confident that we will create significant long-term value with that.

Focusing on safety, focusing on turnover, focusing on selection, focusing on really helping our managers become leaders in terms of their waste sheds in their market areas is, in our view, an equal part of the overall value creation that we're going to create over the next three to five years. Those aspects of the business, in our view, coupled with the additional disposal capacity is what is truly going to drive real value creation over time. With that, I would like thank you all for your attention this morning and we look forward to the March conference call, when we release our third quarter numbers. Thank you very much.

That concludes today's conference call. Thank you for your participation. You may disconnect at this time.