Casella Waste Systems Inc (CWST) 2006 Q3 法說會逐字稿

Good day everyone and welcome to the Casella Waste Systems third quarter 2006 earnings results conference call. Today's call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to Mr. Joseph Fusco of Casella Waste Systems. Please go ahead, sir.

Thank you. And thank all of you for joining us this morning. We are joined 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 discussing our third quarter fiscal year 2006 results. These results were released yesterday afternoon, along with a brief review of our financial performance and an update on the Company's activities and business environment. We will be answering your questions as well.

But first, as you know, 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 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 measure 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.

Now I will turn it over to John Casella who will begin today's discussion.

Again thank you all for joining us, and welcome to our third quarter '06 call. As usual, we will go over the quarter. Richard will go through the financial metrics in detail, and Jim will also as usual go through the operations and development aspects. And then at the end we will go through as many questions as we possibly can.

The quarter clearly -- we continue to invest in building our characterization of an exceptional Company in all areas. Our people, our long-term disposal and processing capabilities clearly are on the top of the list.

Some headwinds in the quarter, mainly landfill delays, transportation and issues of the Wellsboro transfer station, which fundamentally clearly we're disappointed about because the results clearly do not reflect the momentum that we have in many of the operating programs that are in place.

Year-over-year revenue growth was strong at 12.5%. Gross margin deterioration was really due to the impact of higher transportation and fuel. Operating income before deferred cost was down slightly, and EBITDA was flat on a year-over-year basis.

The primary impact on an EBITDA basis during the quarter came from the later than expected startups of both the Colebrook, New Hampshire project, as well as our Worcester, Mass. project. The impact of just those two facilities in the quarter was 1 million 8. And then on a year-to-date basis the impact was 4.4 million. These facilities are both operational and are beginning to ramp up.

One positive note too that did happen during the quarter is both of these facilities were able to have -- and put in place additional disposal capacity for both sites during the quarter. Jim will go through the details in the operating presentation for you on that.

Some of the highlights, the internal growth clearly remains strong. Our internalization rate continues to grow. It is up 240 basis points. Companywide turnover improved to 11% quarter over quarter. And our workers' comp and fleet accidents are tracking on an annualized rate 10% lower than fiscal '05.

I think these metrics point to both the strength of the business and the improvements that we're making in our operations. And it gives us a greater sense of urgency to fix what all of us consider disappointing operating results that don't reflect the strength of our people or the strength of our assets.

With that I will turn it over to Richard who will take you through the details in terms of the numbers.

Good morning everyone. For the quarter ended January 31, 2006 revenue increased 14.5 million to 130.6 from 116.1 million, or 12.5%. Some 5.2% of the year-over-year increase, or $6.1 million, arose from the acquisition activity over the last year, including especially Chemung and Blue Mountain Recycling. Internal growth for the quarter reflects higher pricing across the solid waste segment.

Excluding Worcester and Chemung, which are treated as acquisitions, volumes were up in Central and Northeast, but down in Southeastern regions, mainly due to the decline of Brockton. Brockton's lower volumes again reduced the volume growth percentage for the solid waste segment by 80 basis points.

The solid waste price increase percentage includes 2.2% relating to fuel surcharges. FCR's growth was mainly from higher volumes as average prices edged slightly downwards. Revenue for the quarter breaks down as follows, solid waste, 101.1 million, FCR, 24.6 million, and other was 4.9 million for a total of 130.6 million.

Gross margins for the quarter, they were down 190 basis points year-over-year. The key factors were higher fuel prices accounting for 40 basis points and higher transportation costs 150 basis points.

Vehicle maintenance and lease rate costs were also up, but these negatives were offset by lower operating costs, especially direct labor.

Moving on to G&A, G&A as a percentage of revenue was up year-over-year 0.3%. That increase is due mainly to increases in travel expenses, which was 0.13%, legal expenses up 0.14%, because of the ongoing litigation at Merced and Northcountry, consulting was up 0.2% mainly from software upgrades, and those increases were partially offset by lower bonus accruals of 0.19%.

Moving on to EBITDA. EBITDA at 23.8 million was unchanged from the prior year, although the margin was down 230 basis points. The EBITDA breakdown is as follows, solid waste, 18.6 million, FCR, 5.2 million, and other was flat for a total of 23.8 million.

Solid waste margins decreased by 330 basis points from the previous year. As mentioned earlier relating to cost of operations, fuel and transportation costs were up, and as was G&A. In the quarter the Solid Waste Group continued to reflect lower volumes at Worcester, which had an impact of 1.2 million versus budget.

Colebrook was under target by 600,000. Worcester and Colebrook were intended to offset the headwind from Brockton, which reflected the expected year-over-year decline of 1.1 million. Wellsboro also continued to be a drag in the quarter, impacted EBITDA by 500,000.

Volumes were down at Ontario versus last year because last year we received a permit variance allowing additional volume in the last quarter of the calendar year to reach permitted capacity, and that did not reoccur this year.

FCR's EBITDA margin increased this quarter by 40 basis points to 21.2%; a very good result. Average selling prices were down slightly this quarter, but tons shipped were up 4%, excluding acquisitions. They were up 14% including BMR.

Depreciation and amortization expense was up 250,000. Depreciation was up 950,000 in the quarter, but landfill amortization decreased 700,000, principally due to Brockton as this site is at the end of its life.

Deferred costs. In the quarter we decided to write off the deferred cost associated with obtaining the contract with the town of Templeton, which are mainly legal and engineering expenses. While we intend to restart this project, we want to complete the hardware [consulting] activity first. And because of certain town decisions made during the quarter, we believe that the restart date will be further delayed.

Other income expense. This caption includes in this quarter the sale proceeds of Sterling Construction, formally Oakhurst Warrants. The sale proceeds are $1.2 million. These warrants had previously been written off.

Income taxes. The tax rate rose slightly up 50 basis points on a year-to-date basis due to higher nondeductible expenses, which disproportionately affected the quarter since the total change was booked through the quarter. Net income for the quarter after preferred stock dividends amounted to 428,000, or $0.02 per common share.

The average interest rate for the quarter remained unchanged at 7.98% including amortization of financing costs. And net of the [disposed] expenses it was 7.62%.

During the quarter we issued 25 million of tax-exempt revenue bonds in Maine, of which 8.9 million remained in escrow at quarter end. This amount will be drawn down to finance our Maine capital projects over the next few months. That draw down is targeted to be approximately 5 million in the fourth quarter.

The escrow amount is included in restricted cash in the balance sheet. Tax-exempt revenue bonds represent an opportunity to lower our borrowing cost by about 100 basis points. Availability on the revolver at January 31 was 75 million, after taking into account 57 million of LCs outstanding. The $25 million revenue bond issue is supported by an LC.

Capital expenditures for the quarter [it makes] 23.3 million. The growth component of those expenditures, 10.7 million, was largely made at the landfills, including the new MRF at Ontario.

Five small trucking and hauling acquisitions were closed during the quarter, for a total purchase price of 2.1 million. And the purchase price multiple paid was four times EBITDA.

In January we assumed the closure contract for Worcester at a cost of 4.6 million. Included in operating lease payments this quarter is 2 million for Ontario.

Effective March 2, the Compensation Committee of the Board approved the accelerated vesting of all currently outstanding unvested stock options. The amount of compensation expense to be recognized in Q4 amounts to 39,000 before tax. This decision was made to reduce non-cash compensation cost in future periods. The estimated future compensation expense associated with these options amounted to 1.1 million before taxes. And that amount would have been recorded in the income statement in future periods after the adoption of FAS 123R in our new fiscal year commencing May 1, 2006.

Free cash flow was only slightly positive for the quarter, driven again by high capital expenditures. The change in working capital was positive as is normal from the business seasonality. Accounts receivables were down from the lower revenue in the period, while DSO maintained at approximately the same level. Payroll accruals were up.

Now a few comments on the outlook. As we look ahead to the remainder of the year, we believe that EBITDA will come in the range of 108 to 110 million. The late start up of Worcester and Colebrook negatively impacted the nine-month EBITDA results versus our projection by 2.5 million and 1.9 million, respectively.

The issues at Wellsboro resulted in the nine-month under performance of 1.5 million. We expect the remaining legal issues at Wellsboro to be settled in the fourth quarter.

Capital expenditures for the year are now forecast at 110 to 112 million. The increase in guidance is mainly accounted for by the purchase of the Boston MRF, $6 billion, the ten-year renewal of the MidCon contract, 2.6 million, and conversion of the Auburn MRF to single stream, 1.5 million.

We believe that we have one more year of capital expenditures in this range before they start to trend downwards. And we will give you more details about that on the year-end conference call in June, once we have completed our budget process.

Free cash flow in the fourth quarter will be negative due to the expected high capital expenditures. We anticipate the range to be minus 7 to minus 11, giving a total for the year approximating negative 32 to 36 million.

With that I'll hand it over to you, Jim.

First let me give you an outline to my comments. I will talk about each of the regions in a little bit of (indiscernible). And then I will spend as usual time on landfill volumes and internalization. Third, a quick summary of our development status. Fourth, a discussion on FCR's performance and the U.S. Green Fiber's performance.

And then I think as appropriate to this quarter, I will spend a little time actually interrogating our operating numbers to give you a little bit more insight into what we believe is underway in our business in order to give you some additional vision of what we're doing and what we plan to do.

First, the Northeast region, we have four regions -- Northeast, Southeast, Central and Western. The Northeast region from an economy standpoint has been steady. I think the major benefit for the Northeast region has been that they have continued to be able to gather additional tonnage. And they have contributed to the overall landfill volumes which are up. And they have done a nice job even in a relatively flat market.

The Central market has been affected by low snow and high rain. So we have had weather impacts, but they are steady to their year-over-year performance. And even though they have experienced about a $500,000 leachate cost increase to deal with the additional leaches.

The Southeast market is as well, reflective of the typical seasonal market in the major Boston area. And we believe that it will follow the national trends of a slow but steady growth as the Northeast lags the rest of the country. And finally, the Western market continues to be a market where from an economic standpoint we continue to see a manufacturing base deterioration, and some additional cost, particularly in the government sector associated with Medicaid and Medicare, which is having impacts on municipal governments.

On a revenue basis you'll notice that Northeast is up 20%, Central is up 10%, Western is up nearly 10%, and Southeast is up about 3%. Overall the revenue, as Richard mentioned, is up nicely at 12%. And one would normally expect that to translate into volume -- sorry, into margin improvement.

During the quarter there were three principal issues which are impacting us. First, on a quarter over quarter basis, if you do a net of Brockton, Worcester and Colebrook -- for those of you who are not familiar, Brockton is our closure project that we have had running for 3.5 years, and the replacement for that is Worcester. On a quarter over quarter basis that represented about a $600,000 negative impact on an EBITDA basis. We also had a $600,000 negative impact on Wellsboro. And then what we call transportation, which includes the cost of gathering wood chips for our West Old Town project was a negative 800,000. So on a quarter over quarter basis we suffered about a $1.9 million negative impact due to those three events or three areas to our overall performance.

Stripping those out, we think our actual execution during the quarter, which produced even after those impacts, a flat performance, to be in line with what we expected. And as Richard indicated, had Worcester and Colebrook started as we had planned, and I think I mentioned this last quarter, that both of those were delayed to our original expectations, we would have seen the kind of performance, and you would have seen the kind of performance, that we are working hard to produce on an operating level absent these issues.

Moving on to landfill volumes, another demonstration is the ability to gather and control more waste. On this front we have done a good job. We look at our landfill volumes in terms of closure and nonclosure tons. On the nonclosure tons, which is kind of standard MSW CMD type of business, the volumes are up 120,000 tons. And that was offset by the closure projects, which were down by 98,000 tons. As I mentioned that was really a reflection of Brockton, Worcester timing and the unwind of Brockton and the late start to Worcester.

Net net, this has had an impact obviously, but one of the subtle impacts is that while we have gathered more tons, we did it during the seasonal quarter that is very weak from a pricing standpoint, and so we had to suffer transportation costs associated with gathering these tons for which we chose not to drive the market. We expect to be able to drive pricing in this market. It will be an initiative in the fourth quarter and the beginning of Q1 for '07. We expect to see some real progress from that from a margin standpoint as we drive the market and recover some of that transportation cost.

Another aspect of the transportation is our woodchip obligation to Georgia-Pacific. As you may recall, when we negotiated a thirty-year contract with the state of Maine, part of that contract included in exchange for getting access for the West Old Town facility there was an obligation to provide wood chips. The plan was to do that with wood chips derived from C&D processing, and then supplemented with green wood chips.

Unfortunately the state of Maine has not fulfilled their commitment. And are now about eight months late on delivering a permit to allow Georgia-Pacific to actually burn those wood chips, which are available from the C&D stream which we have. And the effect of that was an impact in the quarter of $800,000. That is part of our transportation quarter over quarter impact that we reported to you. And just as a mention to that, on a year-to-date nine-month basis that particular item alone has resulted in a $1.6 million EBITDA impact on a year-over-year basis.

From an internalization standpoint, the Central region remains at about 79.7%. The Northeast will remain at -- has increased to 56.8%. The Southeast is at 38%, and the Western is at 44%, for an overall internalization rate of 56.9%. And as you can see, those numbers are a slight improvement over Q3 '05, representing both the growth of landfill volume and the opportunity to internalize additional waste to those landfills, principally driven by Chemung now that came and started during the quarter.

From an overall development standpoint, we have completed all of the single stream construction and placed in operation for Ontario -- the balance of those purchase obligations that we had. We're very pleased because not only are we running to the single stream at about 30,000 on an annual runrate tons per year higher than we projected at this time, but we are in the midst of introducing the recycle bank rollout in that market, and we expect to see that facility will be significantly improved utilization than we had planned originally when we did the Ontario contract.

The facility is operating at its permit limit of 2,000 tons per day. And I think if you have a chance to talk to people who have been involved, that remains a very nice flagship project for us, demonstrating not only our economic development view of how these projects should be development, but also from an execution standpoint.

We continue to work with Southbridge toward the conversion of that facility to an MSW. We have provided them with a proposal. They are analyzing this at the time. We do not expect that proposal to be acted on prior to the June Council elections, but we expect that following that that we would be able to begin negotiations on moving in that direction.

We had previously reported Hardwick, and there is additional action there, but we have completed the outpost community agreement, and we will have to make a decision as to when we take the zoning vote for timeline approval.

Good news on West Old Town, the opposition appeal was denied there. So that -- while that was an expected result, it is always nice to see those things come in as expected.

With regards to the residual closure project, first Worcester, during the quarter we essentially had the project shut down. It was shut down because we were renegotiating the contract with the previous partner and with the city. We're now pleased to announce that the operating license from the city of Worcester has been assigned to the Company. We believe the site has 142 acres. We think that equates to about 3 to 5 million tons of capacity. At about 600,000 tons per year that is an eight year project. And so as you can see, that is a nice replacement project for Brockton. Although, as I've mentioned earlier, and as John mentioned, we expected to have that project in its condition it is in now at the beginning of the year. And so we are running late to actually doing that, mostly driven by issues associated with our negotiations with our partner and the city of Worcester.

Colebrook is also, other than timing, is a good story. We now have a 600,000 ton MSW project that will run about four years. We expect to run about 150,000 tons per year in it. All permits were issued. The project has started. As we reported last quarter, the ramp up will be a little slower than expected until we get into the spring, but we expect to put in 150,000 to 180,000 tons this year.

Lewiston remains under development. Chemung is now operating at capacity of 120,000 tons. The next phase will be to take it to 185,000 tons. Another good note on that was that the appeal was denied there as well from the opposition associated with the public/private partnership which we won this spring. Now we are on track to submit our [secret] permit and proceed to the expansion of 185, and then ultimately 256,000 tons over the next year and a half to two years.

We also have received our draft expansion permit at Highland, which is a result of the permissive referendum, which we won. And we will be expanding at that landfill over the spring and summer. The Blue Mountain Recycling initiative has worked out well. We are in the process of a recycle bank to converting the Auburn facility in Massachusetts to a single stream. And as well as Burlington and Ontario, rolling out recycle banks across those markets. We've also had very interesting conversations with the city of Charlotte, Raleigh and other cities who are very -- as well as many, many cities -- who are very interested in what they see the opportunity that recycle bank will bring to them.

At as far as the MidCon project, all final permits have been issued. We will start construction in spring. With a late fall start up we expect that we will increase captured tons of about 50,000 tons there in our recycling project, and that will continue to reflect on the business.

Relative to FCR, they had a good quarter. Their revenue was up 15%. The EBITDA was up 18%. They've had a margin improvement in this quarter over Q3 '05. As Richard mentioned, the pricing was relatively flat year-over-year. Volume is up both on an organic basis, same-store basis, as well as on a total basis. Total basis principally reflecting the additional tonnages associated with the Blue Mountain Recycling that was closed on late in calendar year '05.

Hedging continues to be somewhat of a drag in the sense that average commodity pricing for fibers have dropped. Fortunately the co-mingled container prices have risen so that the net has been relatively sticking flat, but our hedging income has been a slight drag reflecting that falling pricing. We are very pleased, as I mentioned to you, with regards to the overall performance of our recycling business and the performance of FCR.

We expect pricing to be relatively stable. We do not expect to see a change on a forward 12 month very much from where it is today. We believe that this business continues to provide both margin improvements, EBITDA year-over-year growth, and significant RONA and IRR returns on long-term invested capital.

Finally, U.S. Green Fibers had another terrific quarter. Revenue is up 22% on a year-over-year basis. Now they are on a calendar year, so for their calendar year '05 they did $160 million of revenue and $16.1 million of EBITDA. That is a year-over-year performance '05 to '04, 22% revenue and 58% EBITDA. For the quarter they continued to have a strong quarter. Their revenue is up 39%, and EBITDA is up 86%, with a very strong operating income improvement of 227%.

Within the channels we continued to see very strong growth. Contractor, retail -- 22% contractor, 67 retail, and an even 18% on the manufactured level, with an overall growth of about 38%. This is on a bag growth of about 28%, so you can see we're getting both volume and price. And we believe that this business will continue to perform at this level. For the calendar year '06 we are forecasting and expecting this business to produce about 25 to $28 million of EBITDA. And for the 12 months -- the nine months ending at this point we have realized actual about $15 million EBITDA. So we think we are nicely on track based on the acquisitions that we have accomplished and the firm orders that we've taken in this business to deliver on a calendar year basis 25 to $28 million of EBITDA.

With that I will turn it back to John.

We will just open it up for questions now. We would like to get to as many questions as we possibly can. And we would like to ask each of the participants to limit your question to one and one follow-up, so we can get through as many people as we can. Once you have asked a question and we answered it, you certainly can re-enter the queue if you would like to. Thank you.

(OPERATOR INSTRUCTIONS). Amanda Tepper from JP Morgan.

This is looking out a little bit. I am just intrigued, you say probably only one more year of accelerated or higher CapEx and then coming in. Are you looking at getting to where you want to be on the end market landfills? Are you looking at specific projects where the big high early year spend of landfill buildout is ending? Or what exactly are you thinking about when you talk about that?

I think that the additional year of buildout really relates to the four or five facilities that we put in place in '04 and '05. The predominant amount of buildout from a growth standpoint that really should have been considered from our perspective, purchase price, will be built out as of next year. We will still have some additional CapEx that will straggle out, but it begins to drop off after next year.

I will give you a little more color on that. If you take the four projects, you have Ontario, West Old Town, Southbridge, and Chemung. And Ontario will be essentially completed with capital at the end of next year. West Old Town should be in a similar condition by the end of next year and fully operational. Southbridge is an ongoing project, but we expect it to be nearly, lest we get the conversion that we're planning on in our development projects, to be built out. And Chemung is probably about a two-year window.

When you add those all together, that has been the kind of the pig to the python, going through the python over the last two years, 2.5 years. And I think we expect that last year to be next year, and then to fall back to more traditional CapEx funding for our facilities.

And then as a follow-up on the free cash flow side, you lowered your EBITDA guidance a little bit today -- a little bit below what you had said nine months ago. But you're -- comparing cash flow guidance it is much lower than what you originally said. And I'm wondering what the difference is. Is it accelerating some of the same kind of buildout? Is it on the CapEx side?

It is really the CapEx that drives it. Interest is up a little bit, but CapEx is the biggest component. Cash interest expense will be higher next quarter than in this quarter just because of our -- we make our high yield payments in the February quarter, starting February 1. But certainly the CapEx is the single biggest component.

Pieces of that are the CapEx piece related to the purchase of the Boston facility, the conversion of the Auburn facility to single stream, and the MidCon contract that we just got, those are the fundamental pieces of additional capital that are included in our CapEx.

Bill Fisher from Raymond James.

Just kind of into Colebrook and Worcester a little different, you gave a lot of detail, but if you look out to fiscal '07 versus '06, what kind of EBITDA delta would you like to see year-over-year on that?

I think that Richard actually I think highlighted that. The plan versus our actual for nine months is an indication of what we expected those two facilities to be able to do for us when they get up and running and fully operational. While Colebrook is 180 miles from the market, so there is a transportation cost associated with getting the waste from Massachusetts up there, we do expect that it is going to run at 150 to 180,000 tons. And to contribute along with Worcester that $3 million of EBITDA that is off of our forecast from a planning standpoint.

We think Worcester's going to run at $500,000 -- 500,000 tons per year roughly. There are a few closure market alternatives in the market. When the building market comes back for soils, we think that is going to be a very good asset, and most importantly, a long-term asset. As you know, we were in Woburn for two years, and then we went to Brockton for three years. And being able to develop the premier remaining soil project in that Boston marketplace in the next eight years, while on a quarter basis is disappointing because it was delayed to our plan, on a long-term basis it is very positive. And so at 500,000 tons of soil, and hopefully we will be able to convert it to residuals, I think Worcester is going to be a strong performer to the overall franchise for the next five to eight years.

It is about a 3, $4 million delta year-to-year?

Yes.

And then just the woodchip thing in Maine, is that any closer to being resolved or --?

Actually I'm glad you brought that back up. I meant to mention in my comments that the delay is in issuing of a permit by the state of Maine for the Georgia-Pacific boiler, that permit is now expected to be issued mid-March. I heard a date float around the other day of March 16. When that permit is issued we will be able to cut our purchase of green chips. We are currently purchasing on an annual basis about 80,000 tons of green chips. We will be able to supply all of that with C&D woodchips. And then when our commitment goes to 100,000 tons, we will only have to purchase 25,000 tons of woodchips.

As you know in the Maine market a funny thing, green woodchips are now up at about $35 a ton. And while it is a cold purchase with Georgia-Pacific, it has had a significant net impact. We expect when that permit is issued and we have worked hard with Georgia-Pacific that Governor Baldacci -- and we have a new Commissioner in the state as well, which is helpful -- that when that permit is issued that we will have the opportunity to recover and not have the impact that we've described here in these woodchips. That will show up in reduced transportation because that is where we carry these woodchips as part of our long-haul transportation system.

Corey Greendale from First Analysis.

First question is kind of an adjunct to what Bill was asking about the incremental EBITDA impact is. Can you give us any sense what the incremental EBITDA contribution will be from some of the other projects or what you think it will be from Old Town, Chemung, Lewiston in '07 versus '06?

I think that we, probably when we get to the end of our next quarter we would understand that would be something we can help you with. And we would like a chance to finish our budget and planning and do that as part of our year-end.

And then I was hoping you might be able to comment on given talk in the industry about Allied and Waste Management looking to get rid of some assets, comment on what you're hearing -- if you are in discussions with them about anything particular -- just generally the level of your involvement in that?

I think that clearly, both from an Allied and the Waste perspective from assets in the Northeast that would be within our franchise. We would certainly be interested in pursuing and looking at those assets. But it's got to be from our prospective we would approach that in a pretty disciplined fashion to recognize that those are assets that don't fit, that are problematic in both cases. And it obviously has to fit with us where we can create real value for our stakeholders. And clearly there may be some assets that fit that mold, because we may very well be able to internalize where they might not be able to. We certainly will be looking at those assets and trying to figure out whether we can add some real value to our franchise with any of those assets.

Do you have any sense as to what the timeframe would be we should expect to hear something or not?

I think that those discussions really are preliminary at this point in time. I know that Waste Management has been out with their data room for some time now. And I think that Allied is a little bit behind in their process. I think are really beginning to look at that now. I suspect it is probably something that will happen over the next three months or four months or so.

(OPERATOR INSTRUCTIONS). Leone Young from Citigroup.

Can you talk about this transportation issue that has really popped up -- well, not popped up, but really come up to hurt the margin? What are you doing to try to mitigate that and turn that around?

There are -- perhaps I didn't do a good job of trying -- I did try to explain that, but I will try it again for you. There are really two elements to the transportation -- three elements -- what people would normally associate with transportation. The transportation associated with our local hauling which is not, when we refer to this, a problem for us, and that is really manifest by talking about fuel surcharges. I think we're doing a good job on fuel surcharges. We are recovering our actual costs. We did get some margin deterioration because we're not driving the fuel surcharge on a margin basis over and above what our actual cost is, but from a remedy and a cost containment standpoint, we're doing fairly good job on that.

Also, when we talk about transportation, we are referring to the long-haul transportation, which is really third-party transportation. This is principally the transportation that we use, unlike almost any other market in the country because of the scarcity of landfills, most of our waste moves in excess of 150 miles one way to a landfill. And so when we're moving waste around, particularly the Southeast, Northeast and Central marketplace, we're moving waste long distances. We were very successful in gathering additional tons. As I mentioned, we're up 120,000 tons. A good portion of that is additional tons gathered in the Southeast market, which we are disposing at our facilities. But associated with that is the third-party cost to move that waste.

In this quarter, which is a seasonally challenged quarter from a pricing standpoint, we were not willing to drive that pricing. We gathered and captured the tons, but we suffered a margin deterioration because of that additional transportation cost. But we do expect -- I think the good news is we do expect forcefully to be able to address the market from a pricing standpoint as we go into the spring and into our first quarter in the summer, which is our seasonally strong quarter. We intend to try strongly and to recover those margin deteriorations.

The second piece of that transportation is we, for our own internal purposes, book our expenses associated with Georgia-Pacific woodchip contract in this grouping. And that particular element was part of our contract with the state of Maine. And where in exchange for getting the landfill, we provide woodchips that were going to be burned in a boiler that was built as part of the overall project to lower the energy cost for the paper making operations.

Obviously, if we get woodchips out of our C&D operation they are much cheaper than if we get them out of the market as green ships. But that required a permit change in the state of Maine to allow the Georgia-Pacific boiler to burn C&D woodchips. That permit was about ten months late to schedule. We are now understanding from the state that it will be issued about March 16. And when that is issued we will be allowed to shift immediately out of green woodchips to C&D woodchips, which will then eliminate that cost impact that we discussed.

Also just a housekeeping question. Any guidance on the tax rate?

I will give you guidance on that next quarter once we've got the budget done. It is a part of the budget process.

Is that tax rate question for this quarter?

We will take this quarter too if you've got that.

For the current quarter it should be consistent with the third quarter for 4Q.

[Matt Toriosa] from Goldman Sachs.

Most of my questions have been answered. I was just wondering if you could confirm the balance on that Maine revenue bond at the end of the quarter, and how much was in escrow?

About 8.9 million.

8.9 was in escrow?

Yes, it was still in escrow, yes.

And the balance on your revolver at the end of the quarter?

I just don't have that number in front of me. Can I call you?

Sure.

I think you -- didn't you have it in your notes. I thought you had it in your notes maybe.

We can do it off-line, if you don't.

I think it is about 70 million, but Richard will get back to you.

It is about 220 million at the end of the quarter. Balance on the revolver.

I'm sorry. Balance on the revolver, I thought it was availability you were looking at.

About 220 is that --?

Yes.

(OPERATOR INSTRUCTIONS). [Sammy Cohen] from Lehman Brothers.

Not to beat a dead horse, but on the transportation issues, in terms of the long-haul costs were there incremental costs that might possibly be going away in future quarters as some of these other projects come online, and so you won't have to be transporting things as far? If there are those costs, did you include them in the deltas that you gave this quarter due to the late start?

First of all, you have got to separate our landfills from the closure and nonclosure landfills. The nonclosure landfills are our traditional solid waste business. The closure landfills are the Brocktons, Wilburns and Worcesters of the world. Colebrook is another one that is a closure project although it is its accepting MSW.

When we talked about the late start we are principally talking one of Worcester and the second Colebrook. And so from a late start standpoint, the biggest impact of those two was Worcester versus Brockton. And that is a closure project. And so the tons that I mentioned that additional tons that we are gathering, 120,000 tons, those are nonclosure tons, so they would not be eligible to go there. So there would be no improvement from that, other than just the raw improvement coming off the start of the project.

The second element is that we will test the market elasticity with regards to the nonclosure material. And we expect to be able to physically challenge the market. And we will see how that plays out. Certainly, as we develop Southbridge into an MSW landfill, and as we develop Hardwick, Chemung and others, the ability to find the shortest transportation nexus to deliver that waste is always a pursuit of ours. And Charlie is launching a particularly intense effort this spring to both drive the pricing and to make sure that the shortest point is being used because of the high cost of transportation makes that very leveraged.

We do expect to see some improvements from more optimized routing of that waste to facilities as they become available to us. We're going to see improvement because we going to drive the pricing on the pricing side of the market. And then we're going to see improvement based on the start up of Worcester and Colebrook, as we then go into the season for both those projects.

Great. Then as a follow-up, I know it is early but do you have a sense of the direction for CapEx for 2007 in terms of what your outlook is going to be?

I indicated that in my comments. Basically, we expect it will be in the range similar to what you have seen this year, and to our guidance this year. We will give a lot more detail on that in June. Right now we're still going through the budget process, and once we have completed that we will be able to answer that question more specifically.

(OPERATOR INSTRUCTIONS). Corey Greendale from First Analysis.

I was just hoping you could comment a little more on Templeton. I realize it is a while out, but given on the one hand that you are writing off the deferred costs, but your commentary sounded more positive that something could actually happen there. So just looking for a little more detail on the status.

Sure. I think the issue for us is that in fact it is because of the issues that we have in terms of trying to get Hardwick and Southbridge completed. We really wanted to have those facilities completed before we really looked at any potential restart of any activity with Templeton. And because that is going to be a longer period of time than what we had thought, I think that it is prudent from a GAAP perspective to write it off.

For Richard, if I could, with the accelerated CapEx and free cash flow coming in lighter than you thought this year and the accelerated CapEx next year, can you just give me a sense of your comfort level where -- so you haven't done your '07 budget yet, but what the leverage ratios if you still think you're going to be within your comfort range, or if this could accelerate? Not to bring this up again, but modernization of U.S. Green Fiber or something else to kind of give you more room there?

I think currently we are comfortable. At the end of the quarter we had 3.97 times debt to EBITDA, is the ratio. We don't see that ticking up too much in the remainder of the year, so we are comfortable where we are. We have 75 million of availability at the end of the quarter, plus we have the 9 million that is in escrow. I think from a liquidity perspective we are in positive space. And should something significant arise, obviously, we always have the option of monetizing Green Fiber.

At this time there are no further questions. I will turn it back to Mr. Casella for any closing remarks.

Great. Thank you very much. Just in closing, I would like to clearly emphasize that the fundamentals are strong. Internal growth is up, particularly price. I think a 5.5 increase in price -- clearly the surcharge was 2.2%, but a 3.3% increase in price really bodes well from a fundamental standpoint.

Internalization rate continues to climb. Additional capacity at Colebrook and Worcester. Continued emphasis on disposal capacity and our processing capacity utilization. Clearly we're not satisfied with the current operating performance because the results really don't yet reflect the strength of our people or the strength of our assets.

Thanks very much for attending the conference, and we will look forward to talking to you in mid-June with our fiscal '06 full year numbers. Thanks again everyone. Have a great day.

That does conclude today's conference call. Thank you for your participation. You may now disconnect.