Casella Waste Systems Inc (CWST) 2009 Q2 法說會逐字稿

Please stand by, we are about to begin. Good day, and welcome everyone, to the Casella Waste Systems second-quarter, fiscal year 2009 financial results conference call. (OPERATOR INSTRUCTIONS). Today's conference is being recorded.

At this time, I would like to turn the call over to the Vice President, Mr. Joe Fusco.

Thank you for joining us this morning, and welcome. We are joined by John Casella, Chairman and Chief Executive Officer of Casella Waste Systems, Paul Larkin, our Chief Operating Officer, Jim Bohlig, our Chief Development Officer, and Richard Norris, our retired Chief Financial Officer and trusted advisor.

Today we will be discussing our fiscal year 2009 second-quarter results. These results were released yesterday afternoon. Along with a brief review of these results, and an update on the Company's activities and business environment, we will answer 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's Safe Harbor Provisions. 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 tables section of our earnings release, which was distributed yesterday afternoon, and is available in the Investors section of our website at Casella.com.

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

Thanks, Joe. Good morning, everyone. And welcome to our fiscal year '09 second quarter conference call. Richard will go through the numbers as usual.

As Joe said, Richard has continued in his consulting role, as we continue to search for his replacement. With regard to the search, we have made great progress, and we expect to have the search completed by the end of December, by the end of the current calendar year. After Richard's summary, Paul Larkin will run through the operating summary, and as usual, Jim will give an update on the development activity.

But a little bit of an overview relative to the quarter. First, we continue to execute well against the factors that we control in a challenging economic environment. I think a real tribute to our people -- a very tough economic environment. And against those factors that we control, we have executed very well. Since the Northeast economy began to slow in July '06, we have taken steps to better position our business, to perform well in this uncertain economic environment.

Paul and his team are building on the successful operating initiatives from the past 18 months, with programs that further enhance productivity and asset utilization. These efforts are offsetting economic pressures in our solid waste group, and demonstrate the inherent operating strength and recession-resistant qualities of our integrated business.

Our operating performance has remained stable with EBITDA for the quarter up $600,000 year-over-year excluding the negative variance created by the completion of the Colebrook closure project in early August. While the Northeast markets have remained stable, it is difficult to fully assess the potential economic impacts from the financial market meltdown.

From my experience, the Northeast economy is typically stable, a very stable environment, albeit slow growth. We have never experienced the high growth over the past ten years that happened in other parts of the country, especially not in residential and commercial construction.

Also, we believe that the recent steep declines in energy prices are helping to offset some of the economic pressures in the region, and as all of you know, obviously that is much more important in the Northeast than in other areas of the country. However, until the financial markets have stabilized, we expect economic conditions to remain uncertain, with continued volatility in commodity pricing. The commodity market dislocation that we experienced from October to Mid-November is unprecedented in its speed and severity. From September to November, fiber prices dropped 67%, and co-mingled container prices dropped 54%.

It is important for everyone to recognize that we did not build a recycling business model that tried to capture the top side of the commodity markets. Our goal has always been to build long-term stability. Over the past 20 years, we have forged long-term relationships with municipal partners, and many commodities buyers. In addition we sell 10% of our commodities to the export global markets, which has really helped us to maintain shipments of commodities to domestic mills throughout this market downturn.

Our commodity risk mitigation programs are successfully dampening price exposure, through the use of hedging agreements, floor price contracts, revenue share agreements, index purchases and sales, and long-term supply contracts with customers. I would like to point out that not all players in the market use the same strategy. We did not lose recycling operating income dollar-for-dollar to price as you might expect.

The Risk Management programs do dampen price movements, both to the upside, as well as the downside. A little bit of an example on that. Based on the weighted average prices in volumes for the second quarter, if commodity prices were to drop an additional 20%, the Company's revenues for the quarter would drop $3.1 million, while operating income would drop only $1.6 million. This is about a 50% dampening to commodity price volatility. And that is the benefit of the risk mitigation strategy that we have put in place.

Despite the economic downturn, we continue to execute well against our fiscal year '09 strategy, with the focus on improving the performance of our base operations, and selectively pursuing growth opportunities and resource optimization or transformation. Our core focus remains the same, maximizing shareholder returns by improving our return on net assets, and generating free cash flow.

Free cash flow for the quarter was up $8.2 million over last year, and as we laid out in the press release, we are maintaining our free cash flow guidance of $8 million to $14 million for the fiscal year. We are actively flexing our cap spending to better match the volume activity at the facilities.

Our investments in high-return projects that create sustainable solutions are also moving forward very well. As you know, we already announced the Hyland and Clinton landfill gas-to-energy plants both came online ahead of plan in October, bringing the Company's total landfill gas-to-energy power generation to roughly 25 megawatts per hour.

The Hartford Zero-Sort $3 million conversion was completed in late August, with the CRRA investing the capital in that facility. We began recycling operations in Detroit on October 1st. The Philadelphia Zero-Sort conversion was completed in November, and we expect to complete the Boston Zero-Sort conversion late this month, before the end of the current calendar year.

With that, I will turn it over to Richard, who will take you through the numbers.

Thank you, John. For the quarter ended October 31st, 2008, revenue increased $7.1 million to $157.5 million, or 4.7%. Internal growth for the quarter continued to reflect higher energy pricing across hauling and transfer operations in the solid waste segment.

However, Landfill prices again showed a net year-over-year decrease. Western region is experiencing the most difficulty with the landfill pricing, both for MSW and C&D, although C&D prices on average improved marginally from last year. MSW prices held firm, or were up at the other landfills.

Hauling and transfer volumes were down in the quarter, while landfill volumes were up in total. MSW volumes were up 3% this quarter, while C&D was down, but more than offset by some BUD projects especially in Ontario. Our closure projects of Worcester and Colebrook, which are not included in our landfill statistics, benefited from another large volume increase at Worcester at a better price, but Colebrook closed during the quarter which negatively impacted volumes.

At FCR, average commodity prices continued to reflect year-over-year increases, and volumes were also up. Commodity prices continued to move up within August and September. The downturn in prices began in October, but revenue and earnings were depressed as a result only by about $350,000. Surcharges for a gain-up in the quarter amounting to 1.5% as a percentage of total company revenue, 2.1% of expenditures (technical difficulty) revenue.

Revenues for the quarter break down as follows, and since we have revised the prior period amounts to reflect the discontinued operations, I will give you both the current and prior year quarters. Firstly for the quarter ending October 31, 2007, solid waste $111.4 million, FCR $31.5 million, and Other $7.6 million, for a total of $150.5 million. Now for the quarter ending October 31, 2008. Solid waste $112.8 million, FCR $35.9 million, and Other $8.8 million, for a total of $157.5 million.

Gross margins for the quarter were down year-over-year 230 basis points. Since transfer and hauling volumes were down, direct labor, third-party disposal and maintenance expenses, were all lower as a percentage of revenues. The main factors offsetting these favorable variances were purchased materials and facility costs. The higher value of commodities year-over-year, and consequently the higher payments to municipalities, again drove purchased materials at FCR higher. As a percentage of revenue, these costs were up 150 basis points. Purchased material prices were up 24% year-over-year.

The higher facility costs year-over-year, arose from the property tax settlement at [North] Country last year which did not reoccur. The higher volume of major accounts also drove higher transportation costs, and fuel costs were also up.

General and Administration expense was down 100 basis points as a percentage of revenue in the quarter, and the dollar amount decreased. Most categories of expenses were down as a percentage of revenue. The only significant increase being in compensation, arising from the equity component. Bad debt expense benefited from a recovery in the quarter.

EBITDA $35.5 million was down $450,000 from the prior year, and breaks down as follows, for the quarter ending October 31, 2007, solid waste was $28.5 million, FCR $6.8 million, and Other $700,000, for a total of $36 million. For the quarter ending October 31, 2008, solid waste was $29.1 million, FCR $6.4 million, and Other $26,000, for a total of $35.5 million.

As you can see, solid waste EBITDA was up $600,000 from the prior year as were margins. This result was in spite of the closure of Colebrook, and the loss of $1.1 million in EBITDA. Our original guidance indicated that we would have a headwind of some $2 million from the closure of Colebrook for the fiscal year. Our expectation is we will be just slightly higher than that.

For FCR, EBITDA was down by $400,000, and margins were down also. Average selling prices (technical difficulty) up this quarter, as were volumes and total tons shipped, including intercompany tons were up 3.7%. Average commodity prices increased 12.4%, a matter of revenue share.

As mentioned above, the commodity price decline which began in October, depressed results by about $350,000, but labor costs were also up mainly due to the diversion of material, while the plant upgrades at Boston and Philadelphia are under way. Those projects are expected to be completed during the third quarter. FCR's margins were also adversely impacted by the higher prices paid for purchased materials as mentioned previously. That expense was up 4% as a percentage of FCR's revenue.

In addition, in the Other segment, the restated amounts for last year include income from assets under contractual obligation amounting to $629,000, which did not reoccur this year. And in the second quarter last year, we reclassified that item from Other income to cost of operations, so part of the cost of operations margins deterioration arises from this factor. Appreciation and amortization expense was down $600,000 year-over-year. The main factor was a continued decrease in landfill amortization, arising mainly from the closure of Colebrook, partially offset by the higher volumes at Worcester. Depreciation was up slightly.

Moving on to income taxes. The effective tax rate increased on a year-to-date basis to 54%, as a result of our changed forecast for the year. Lower pretax income means a higher tax rate because of the adding back of nondeductible items. Since that rate is higher than last quarter's rate, the cash up takes place through the quarterly provision pushing that rate up to 57%. The rate for the fiscal year-to-date is expected to be in that 54% range, but the rate may prove volatile, if commodity prices fluctuate outside of our guidance range, and pretax income changes.

For the quarter, net income amounted to $2.1 million, or $0.08 per common share. The average interest rate for the quarter remained largely unchanged at 7.3%, including amortization of financing costs. Net of these expenses it was 7.06%. Availability on the revolver October 31 was $146.5 million, after taking into account $38.7 million of LCs outstanding. And at the end of the quarter, our debt-to-EBITDA ratio calculated for the bank covenants was 4.49 times.

Free cash flow showed an $8.2 million improvement from last year, due mainly to lower capital expenditures and to lower use of working capital. The lower capital expenditures result simply from timing. While capital outlays have been reduced in order to achieve our free cash flow guidance, we are still behind where we expected to be at the end of October from an expenditure perspective. However capital expenditure guidance of $65 million to $69 million has been reduced $8 million, and we have reconfirmed our free cash flow guidance at $8 million to $14 million for the year.

Finally, you will have seen our updated guidance, a steep decline in commodity prices in November. That is to lower EBIT targets slightly from our October press release, and we expect EBITDA for the third quarter to come in lower than last year, while the fourth quarter we expect to be flat with last year. Free cash flow for the year, however, will not be affected, and will be unchanged.

And with that, pass it over to you, Paul.

Thank you, Richard. We are pleased with our performance again in the quarter. We continued to deliver on a number of sales and operating initiatives that are driving top-line growth, improving our operation efficiencies, and our asset utilization. As Richard mentioned, total company revenue grew 4.7% quarter-over-quarter.

Highlights for the quarter include solid waste price, excluding surcharges increased 1.3% and now has improved for three consecutive quarters. Growth in solid waste pricing reflects 1.4% higher pricing in the hauling and transfer businesses, with slight weakness at the landfill. Overall landfill pricing was up in our Southeast and Northeast regions. Landfill pricing was flat in our Central region, while pricing declined in our Western market.

MSW pricing improved in all regions except for the West. Landfill pricing in the West was negatively impacted by a mix shift, and higher diesel fuel costs. With the recent drop in fuel prices, our sales team continues to work to source volumes to the Hakes and Ontario landfills at the appropriate returns, and we are maintaining our conservative strategy, to fill this expanded annual volume. Despite slight weakening in third-party pricing, the Western region had strong operating performance in the quarter with revenues up 5.6%, and operating income up 23.7%. In total, landfill volumes at our active sites increased 3%, with MSW volume up 3%.

Highlights for the quarter within our hauling division include our standardized pricing programs at the hauling companies continued to yield positive results, as our average revenue per new account was up 1.2% over prior year. Our roll-off net revenue per pull improved 8.3% year-over-year despite continued softness in the market, with total roll-off pulls down 6.6%, primarily centered in the Southeast and in the Western markets.

Solid waste operating margins improved 85 basis points to 10.3% quarter-over-quarter, while FCR operating margins declined 310 basis points to 13.3%, driven by weaker commodity prices in October, and higher purchased material costs. The solid waste year-over-year operating margin improvements were made in the following areas, direct labor cost for the quarter were down 145 basis points as a percent of revenue. We are doing a very good job of flexing our business, while also driving profitable new customer growth that simultaneously improves our operating efficiencies. We began to realize a number of transportation savings in the quarter, including the optimization of certain long haul transportation routes, the renegotiation of several contracts that have increased our asset utilization and reduced our capital expenditures in the quarter.

We expect to realize additional operating gains for the remainder of the year, through these route optimizations, as well as rear load to front load conversions, and container upsizing. Our vehicle and container maintenance costs for the quarter down 15 basis points as a percent of revenue, despite continued inflationary pressure in a number of key areas, notably steel and oil-based supplies.

We continue to realize improvements from the implementation of our [fleet] maintenance software, which has streamlined our operations, improved our inventory productivity, and increased our warranty recovery rates. As one example, our maintenance team has been able to reduce our fleet size by approximately 13% this fiscal year, while our operations team has maintained our very high customer service expectations.

We also had another excellent quarter for our safety programs, and the resultant risk management costs, including workers comp, fleet, and facilities insurance. These savings offset increased health insurance costs in the quarter. Workers' comp incidents are down 10.8% year-to-date and fleet accidents are down 15.4% year-to-date.

In the second quarter, we completed an extensive evaluation of a new fleet routing software application within our Burlington and Montpelier markets, and we have been extremely pleased with the results. In addition to the hourly labor savings that we realized, we also reduced a number our routed trucks. As a result, we have made plans to deploy this tool across our hauling operations over the next 12 months. We are focusing on markets that deliver the most value first to maximize our returns.

In the second quarter we added approximately $600,000 of annualized savings, bringing our year-to-date savings to $1.2 million, and we are tracking well to the $2 million guidance. We delivered this savings again, mainly through our work on optimizing long haul transportation routes, increasing trailer load factors, and renegotiation of several contracts. This work again also increased our asset utilization, and eliminated the need for CapEx going forward.

In summary, we are very pleased with our operational performance in the quarter. Our team is doing a great job using the sales and operating platforms that we have put in place, to drive our performance in this uncertain economic environment.

And with that, I will turn it over to Jim.

Thank you, Paul. Good morning. I will first discuss our principle development activities, and then provide some additional background on FCR and US GreenFiber's operations.

As reported in Q1 '09 we received Board of Health affirmative determination to expand the Southbridge landfill operation in stages to 405,000 tons. While we did receive an appeal, which is under way, we have received permission to source the landfill to the initial stage of 180,000 tons from outside waste, and we are operating at capacity, while waiting the final permitting appeal process to work through its course. The two subsequent distinct stages are at 300,000, and then to 405,000, and they are tied to successful landfill gas energy operations and a new C&D processing facility, which is built and awaiting completion of the access road.

The bid for that access road was issued about a month ago, and I believe the bid openings are this morning, and we expect that bid for the road to be awarded within the month, and for construction to be completed mid-2009, which will enable access both to the second stage, as well as allowing us to access our new C&D processing operations at that facility. We have for the winter shut down, the old facility shut down, and that's entirely appropriate with the economic volumes that we are seeing in that marketplace.

During the quarter, we completed construction, synchronized and placed into operation both the Hyland and Clinton County landfill gas facilities, employing our proprietary low emission landfill technology, which basically is aimed at providing a zero emission, fugitive emission from these landfills, maximizing gas generation capabilities, and incorporating leachate recirculation. All of this has produced excellent returns, relative to excess gas generation, and early completion of these projects are welcomed at all levels, both from a financial standpoint, but as well as the greenhouse gas standpoint.

In the quarter we also received final Clinton County Phase 5 permits, extending the landfill permitted capacity to the end of our lease and beyond. This a major permit expansion covering the developments that have been under way at this landfill for four or five years, and gives us permitted capacity past 2020. Balance of the landfill permitting activity is unchanged from that reported in Q1 '09.

The balance of the development activity has been focused on converting and upgrading recycling infrastructure in response to strong market demand. Volume at the Camden Q1 Zero-Sort conversion, we during the quarter upgraded the [Philadelphia set] container line, and also completed the Mid-Con CRA Zero-Sort conversion. Both Camden and Mid-Con have seen dramatic flow of material increase, as a result of converting to Zero-Sort, and the convenience that comes from that, and we have seen that across our lines that where we have made recycling more convenient, the volume of materials dramatically increased, and we are preparing for that as we are continuing to convert our infrastructure to state-of-the-art technology.

We have initiated Zero-Sort conversions in the Charlestown, Boston facility. And we expect that to be completed January of '09. This is a 45-ton-per-hour facility with nine optical sort stations. And we expect to be able to access considerable more recyclables within this market as a result of this upgrade.

We also commenced in the quarter operation of the Southwest Oakland County facility near Detroit. This was an important win for us which we announced this summer, and is an important opportunity for us to strike into a new market. We believe that there will be a single stream conversion there in the near term. As I mentioned these conversions upgrades are a response to market demands, particularly related to volume growth driven by Zero-Sort conversions.

I think this is a good segue into the FCR operations. For the quarter, FY '09 versus FY '08, the volume grew by 7%, with commodity pricing and net revenue share up 12.4%. Purchase price increase was 23%. However quarter-over-quarter performance impacted by the Boston conversion -- by the Philadelphia conversions and the late October commodity price swings, as Richard reported in his section.

As everyone is aware, I think we have reached a point now where commodity pricing is linked to global economic activity, and an early confirmation of these global resource constraints linked to economic activity, resulted in an unprecedented fall of greater than 80% within 45 days to commodity pricing during November. We have seen a continued stagnation around those numbers during the month, and a slight improvement as the markets adjust to this.

Many competitors have been unable to move during this period of time their products, and I would like to compliment, and report that I think FCR has done an excellent job in moving commodities, particularly through their strategy of being linked to the domestic market, as John reported, more than 90% of our product is tied to domestic mills.

Although the export market has dampened the domestic pricing and made those contracts obviously more challenging, we have done a very -- and I think distinguished ourself in doing a very good job in moving product, and not only moving product, but where appropriate, we have been able to take additional flow material in markets where we had outlets to ship and we could do it at an incremental free cash flow improvement, and thus work our way up our capacity utilization curve at our facilities.

Relative to hedging, as we have reported before, we have used hedging to dampen, or help us with fiber, aluminum and PET, and the effects of those will be quite dramatically, as it has helped to dampen the negative pricing impacts that are occurring in the market. However, we remain exposed to HDPE, metal and some unprotected fiber commodities that we chose not to hedge, and we are taking immediate steps to mitigate those things as we go forward through this quarter, some in improving markets early in December, but we believe it will remain extremely difficult to forecast exactly, until we have clear vision of where the economic activity will go, although I do suspect that early in the year, the stimulus package that everyone is talking about will begin to raise market expectations, and we will begin to see some firming as a result of that.

The immediate steps that I reported earlier I think are important just to quickly review. We have shut off all spot tons where appropriate tip fees did not cover our processing fees. We have negotiated an increased take from our domestic mills, in exchange for basically the long-term relationship that we've had with them, and the ability to maintain that long-term relationship.

We have established upstream floor options with existing long-term customers, initiated new upstream take agreements, and we have most importantly communicated to our key customer the market movements, and if they remain persistent, the requirements to get additional support related to diversion savings, and related to the ACR cost as it tracks through each month. And we have also initiated discussions long term with some partners, on plastic mitigation plan creating floors and ceilings.

And where possible, we have added new tons as I mentioned before, where incremental tons have added to the free cash floor. Over the next 8 to 12 months, we will receive a significant benefit from the hedging programs in place, but we remain not entirely protected on our commodity positions, and we will enjoy a free cash flow positive position, but we will not be able to access the returns until obviously the global economic activity clarifies, and has an impact on commodity positions worldwide.

Moving on to US GreenFiber, not surprisingly, their performance is actually improved in this quarter, and we are seeing improvement in November as well. They are benefiting from lower ONP pricing, a major cost element to their business, and they are also benefiting from a very strong energy pull demand, particularly in the retail channels.

ONP pricing peaked during October, and has materially reduced since then, and as part of a program initiated over a year ago, US GreenFiber has shifted their fiber supply to over 40% to local bin programs, and we expect that within four or five months over 60% of the materials will be acquired through programs that do not require brokerage, traditional brokerage and related pricing.

Retail business is up 26%, reflecting the high energy awareness. Not surprisingly in manufacturing, housing and contractor business, which is tied to the housing business overall, is down 35% and 24% respectively.

US GreenFiber has done an excellent job responding to the housing correction underway. Over a year ago, they initiated two headcount reductions that now total 23%. They have maintained free cash flow positive. Refinanced their capital structure late summer 2008. And they continue to do a very good job to be connected to their external markets. As I reported early in November, we have seen substantial improvements in their performance, both due to demand through the retail channel, as well as the effects of reduced paper pricing, and we expect to see the effects of that to continue through Q3 and into Q4.

With that, I will turn it back to John.

That is great. We would like to open it up for questions.

(OPERATOR INSTRUCTIONS). And we will go first to Ben Kallo with Stanford Group.

Good morning.

Good morning, Ben.

Could you guys walk us through the different options you have for refinancing the debt, and then also deleveraging, how you are looking at that? And then maybe how you rank those options and timing it, on any timing you can give us on that?

Yes, sure, I will be happy to. I think there's a -- first of all, there's a couple of different factors that come into play. We've previously discussed our effort in terms of delevering with the sale of Maine Energy. Second, I think that there is, we currently have $140 million of availability. In terms of refinancing I think it is fair to say that we can reduce that pretty easily. So those two factors need to be incorporated into the beginning part of the discussion.

The discussions that we have had is fundamentally over the next six months we'll be in the marketplace looking to refinance. The discussions that we have had currently -- obviously the current market has been fundamentally closed, and so I think the real challenge is going to be whether or not the financial markets begin to thaw out and we begin to see fundamental change. But the two things that we're working, two factors -- one, obviously the delevering with the potential sale of Maine Energy. Second, a potential reduction in the facility.

And then I think there is a number of different things we can look at from a capital structure standpoint, to the extent that the markets do not get better, in terms of how we might approach that. We are working closely with Bank of America. We have put together our package. We are getting prepared, so that we are able to access the markets, in terms of having the work done. I think that is predominantly how we are looking at it at this point in time.

Obviously it makes no sense to try to access the market, or to have tried to access the market over the last month or two, because effectively the market is effectively closed. I think that the sense would be that you -- I think obviously you have certainly seen some deals that have gotten done, but the price paid is very, very significant, in terms of the actual cost.

Okay, great, thank you so much.

You are welcome.

We will go next to Corey Greendale with First Analysis.

Good morning.

Good morning, Corey. How are you?

Fine. How are you, John.

Good.

A question about the waste energy project, or two questions about it actually. First of all, do you have some sort of a back of the envelope number for the EBITDA contribution in the quarter, from the new plants starting up this year? And secondly, given energy prices coming down, does that change your appetite for doing these plants, or how does it affect the economics of the plants that you are building?

In the quarter the impact for the gas-to-energies plants was not that material, Corey, or we would have mentioned it as one of the factors. These plants are still in start-up mode, so the revenue in the quarter is about a million bucks, and the EBITDA was about 200.

Yes, I think in terms of the go-forward, Corey, no, it wouldn't dampen our view, because there are two issues that are associated with the landfill gas-to-energy programs. One of which is the greenhouse gas climate change issues that are affecting the low emission landfill model as I think you have heard us talk about development of the low emission landfill model, which I think is important as we go out into the future, because we do believe that the facilities are going to face more regulatory pressure, in terms of the climate issues as we move out into the future. So the issues that we see in terms of the model I think is still going to work, even in a market where we may see a bit of a decline from an energy standpoint.

Let me just give you some specifics there. The revenue is really coming from two components, one is the power sales, and the other one is renewable energy credit. The power sales a year ago were -- and we're doing day-ahead sales. The power sales were $0.07 to $0.09. They have fallen to $0.04 to $0.05, so you have probably seen about a $0.03 decline there. But if anything, the renewable energy credits have increased, because there is less available renewable energy credits to meet the statutory demands.

And we actually expect that Congress, one of the first areas that they will actually move in the new session, will to be push forward the 15% requirement on all the utilities to have renewable energy, which will continue to support that $0.05. So $0.05 -- on top of the $0.04 to $0.05 is a $0.10 total revenue stream, and we still get a very substantial and acceptable return model on that, albeit it's not as good as the 13% model that we had six months ago, but well above our threshold for return on capital.

So I just wanted to add that, because I thought that was to the heart of your question.

Thank you.

Next to Eric Prouty with Canaccord.

Great. Thank you. First a question on the commodity pricing. Are you seeing any impact on actual volumes because of lower commodity prices that you are taking in? And then second, are you seeing any change in municipalities' plans to move toward single-stream recycling, again because of lower commodity prices?

Really haven't seen any real change from a public policy. If anything, an understanding of where the markets are in terms of the conversations that we have had, Eric, and an understanding that in -- as long as you are developing programs, which we are and which we have, where you share the upside, and that we are not keeping all of the upside, there's a real understanding of where we are in terms of supporting the infrastructure to implement public policy.

So I think the feedback that we have gotten has been somewhat positive from a municipal standpoint. We don't think that we are going to see volume declines, or a significant amount of material going into the landfill, but keep in mind, the vast, a large majority of that is in markets where we have pretty high disposal fees. So as it relates to the Northeastern United States, I think that is very clear, the alternatives are a fairly significantly high-cost disposal alternative.

Great. Then just maybe a question for Jim on --

One other thing, one other issue related to that. I think there is always a double-edged on these kinds of market discourse. The other interesting thing that we are seeing happen is a lot of folks who have existing agreements that have failed, we're starting to get a lot of activity from people who we may have lost business to, because of the structure we were trying to get them in, to reach out and look for additional processing capability, because existing programs are not working the way they thought they would.

So there's two edges to this issue. And we are seeing a little bit of an opportunity, in terms of some of the markets that we operate in, where in fact municipalities that we may have lost business, are reaching out for us to provide service.

Great. Thank you. And maybe a follow-up for Jim on GreenFiber. You gave some good detail, but maybe just to drill a little bit deeper. Obviously with the low fiber prices, I mean, is that enough to get GreenFiber with a little increased volume here back to profitability? Or do you think they will still be operating at a loss?

I hesitate to say anything here, because as soon as I say anything positive, others might take that as a segue into some kind of moving the model up for the next quarter, and I don't think we want to do that yet, but clearly US GreenFiber is seeing a market change in their business model, both because of energy demand, and the dramatic fall in their material costs, and that will, if it is sustained over the period of time, will eventually have that result. I think we want to be more cautionary and careful, and not have people jump to conclusions on that until we report it.

Again, this is a lot of detail, and maybe too much, but again, on GreenFiber, given extremely low prices we are seeing here in this market, is there any way for them to hedge maybe future fiber pricing increases by locking in forward volumes here? Is that something they are pursuing? Or are they primarily just buying in the spot markets?

No, no, of course this is a wonderful opportunity for them to do forward hedging, and to protect themself. They are doing that.

But one of the things that I tried to articulate is that we were forced -- because we had and long-term markets had very high numbers, we weren't able to access those previous hedging things -- to go in another direction, which has proved to be very, very successful, which was to add the grinding and shredding operations at each facility, so that we could locate or access the local fiber market without going through brokers.

And we believe that we are going to have well in excess of our 60% of our entire material sourced from that, which will dramatically lower our overall ONP costs, well below probably anything that we could sensibly put together from a hedging standpoint. So a combination of that plus hedging will I think position this business for both the future and when the housing corrects, to having a very stable supply of paper.

Fantastic. Thank you.

We will go next to Bill Fisher with Raymond James.

Good morning.

Good morning Bill, how are you?

Just fine, thanks. On the CapEx side I think you are talking $65 million to $69 million this year. Is the growth CapEx about $10 million or $11 million of that? And then segueing into the next fiscal year just conceptionally, do you see that growth CapEx coming down as you look at the single streams, and maybe ease off on that with the pricing? And then on the maintenance side of the CapEx, it sounds like your fleet size is down. Can you see yourself pulling that maintenance CapEx down as well in the next fiscal year?

I think that it is fair to say that that is certainly something that we are looking at right now. We really haven't talked about that to-date, but clearly, Bill, on the basis of where we are right now, where the economic activity is, it certainly is something that we will in all likelihood take a very serious look at in terms of pulling capital down to levels lower than where we have been historically. Certainly from a development standpoint we will look very hard at that on a go forward basis.

On the recycling commodities capital, we are clearly not going to invest any additional recycling capital unless the ACR returns support it.

Right.

So very much so, we are going to be linked to the external markets, relative to only where those returns are supported, and if that means that we kind of retard our development in this way for a while until the markets recover, I think that is the strategic and appropriate direction.

Okay. And then on strategy as well, and next fiscal year on Southbridge. Jim, on the 180,000 tons, did you get the conversion to MSW? Or is that going to be tied to the further expansions down the road next year?

No, the actual MSW conversion is tied to, actually DES -- DEP permit approval which is under way, but that probably won't issue until we get this appeal resolved. So what we received was the ability to reach out beyond the local market and take material in, and we are operating the facility at that level. And then as soon as we get the landfill gas energy and the road and those done, then we will be able to go to the next increment. But all of that obviously will require final resolution of the appeal, which we hope to kind of be in the mid-stages of that, and expect that to be resolved in the first quarter of '09 calendar year.

Okay. Great. Last thing maybe for Richard. On the $120 million, $124 million, the EBITDA guidance. If I conceptually think like if FCR did around $13 million or so in EBITDA in the first half, just kind of a midpoint-ish range there, if you hit the midpoint, like $5 million or so in the second half? Or how should I think about that?

Yes, I think that is reasonable, Bill.

Okay, perfect, thank you.

Next to Scott Levine with JPMorgan.

Hi. It is actually Rodney Clayton. Good morning. First question. You alluded a little bit to some of the risk mitigation activities, you are looking at taking on some of your unhedged commodity exposure, specifically looking at plastics. What have you done there, and maybe what are your plans there going forward?

Well, I think some of the things that we are doing there is working with different manufacturers who are utilizing PET and HDPE in their manufacturing process -- directly with those manufacturers, to establish with them the life cycle costs. Establish a floor and ceiling that would be really beneficial, in terms of establishing more predictability and stability in the market, specifically from a PET standpoint, as well as from an HDPE perspective. We are working with very large companies that are utilizing that material in their manufacturing process.

Hopefully we will have some opportunity over the next quarter or so, to be able to talk specifically about what we have been able to get done there. This is not something new for us. It is something that actually we have been working on for over a year, and unfortunately, we have not been able to get that completed, but I do think that we will have success, in terms of being able to put those floors in place, particularly with where the markets are right now.

And if I can just add, if there ever was a environmental cultural condition that would have both the buyers and sellers thinking about stability, it is what has occurred in the last six months. Because it was only five months ago that we were at unprecedented high plastic pipe pricing. Some might say it is obviously tied to oil, but I think we will come back to that. And I think people are aware that being in a long-term business model with short-term spot market contracts, is not a very healthy place to be for either of the buy or sell side.

And we are already seeing that. I think what John is actually referring to is the kind of relatively healthy discussions under way now with a whole number of parties, saying, okay, we have got to move to a new paradigm, and the new paradigm has got to involve floors and ceilings and a little bit of win/win for everybody, not win/lose (technical difficulty) at the top or the bottom, and we hope to make great progress in this environment because of that.

Okay. That is helpful. And then secondly, on the deleveraging front. You spoke a little bit about Maine Energy, but speaking more generally, can you just give us a general update on the timing of that and when you think you might be able to have something announced?

Well, it is really difficult. If you could give me a sense as to what your perspective is in terms of when the financial markets are likely to move in a different direction, probably be able to give you a more indicative answer to the question.

I think our sense was that we would have had it done by now, not withstanding what has happened in the financial markets. So I think the difficulty, we have several folks that we are working with right now. We have a fairly significant amount of interest in the facility, but it is really difficult to pinpoint. Obviously, from our perspective it is a high priority, and something that we would like to get done as soon as possible.

All right, understood. Thanks a lot.

We will go next to Jonathan Ellis with Merrill Lynch.

Thanks. I wanted to ask just briefly first on the solid waste business. You had mentioned the roll-off pulls declining I think at a percentage, if I marked this down correctly, that was somewhat worse than last quarter. Can you tell us a little bit (multiple speakers)

About 6%, Jonathan.

Okay. Thank you. Can you talk a little bit about solid waste volume trends in your other markets, residential and commercial?

On the roll-off pulls, as John said it was 6%, and the weakness that we primarily saw across the board in roll-offs was in the Southeast and in the West. On MSW volumes in total, our challenge continues to be as we have said, in the Western market, primarily tied over the last couple of quarters to the transportation cost, and we are very focused on that as I said in my remarks. That is probably -- that is our biggest challenge at the moment.

I think it also, Jonathan, offers the biggest opportunity -- or one of the biggest opportunities on a go-forward basis. Because as those transportation costs come down, I think that there is an opportunity for us to share in some of that value, with some of the folks who are no longer experiencing the additional transportation costs to get the materials to our facilities. So I think there is an opportunity there. On the downside, as energy prices come off, there should be an opportunity for us to look at that from a pricing opportunity.

And maybe one other highlight, again. In that market, the operating income improved 24% (multiple speakers) compared to last year.

Yes, I think the notion of just simply looking at price without the balance of the metrics that move the business model from an operating income standpoint -- certainly price is a big metric, it's an important one for sure, but it is not the only one.

Okay, great. You talked a little bit about the protection you have in place in the recycling business, with respect to hedges and floor prices. Can you talk a little bit about how far out those hedges and floor price contracts extend, and when you would have to re-up them?

Yes, the portfolio goes out for another 24 to 36 months. Some of the material comes off, as an example, our hedges on aluminum are tied to our year end this year, in April. But the balance of it is a portfolio that goes out over 24 to 36 months. So we are fairly well protected for a fairly significant period of time.

Okay. Great. And just my final question, in terms of the decline in fuel costs which you spoke about earlier, and recognizing that surcharge programs in the waste industry tend to lag despite the spot price of fuel a little bit. So I'm wondering just in the quarter can you quantify how much of a revenue, or more importantly an EBITDA benefit, came from this lag between surcharges and the spot price of fuel?

(multiple speakers) I think that the surcharge is 1%?

1.5% of total company revenue. But that is not just the fuel surcharge. Sorry, that was the increase. Quarter-over-quarter is 1.5%. That surcharge includes also the landfill and environmental charges, as well as the fuel, oil and lubricants.

Okay. But do you have a sense though, just given the inherent lag in the fuel surcharge programs how much of a (multiple speakers)

I don't know off the top of my head.

Okay.

-- what the specifics were in terms of the lag for this quarter.

Okay.

We can get that offline for you, Jonathan.

Okay, great. Thanks, guys.

(OPERATOR INSTRUCTIONS). We will take a follow-up from Corey Greendale.

Hey, Corey.

Corey, check your mute button.

I had my mute on. Sorry about that.

That is okay.

So as I am looking at the guidance, if I am looking at this correctly, it looks like the high end of the revenue guidance would assume that revenue is up year-over-year in the second half of the year, and given the dramatic decrease in commodity prices, and given that the revenue growth in aggregate in the solid waste business was being driven by fuel surcharges, which I assume that is not going to be a contributor the next couple of quarters, what would have to happen to get to the high end of the revenue guidance range?

Well, I think some of the things we are doing proactively is the sales and marketing program, both from the landfill perspective, as well as the programs that Bill has put in place on the entire revenue stream.

So I think we are going to see some revenue growth from those programs, but I think clearly the challenge that we are going to have is what really happens from an overall economic perspective, and do we see more softness, or do things continue to stabilize on a go-forward basis.

Okay. And can you just say a little bit more. I think Paul in your comments, you were mentioning increased sales efforts, but one would think that given the pretty dramatic decreases in fuel prices, there is just a wider range of volumes you might be able to attract to some of the landfills. Can you in some way quantify that, how much of that you are seeing already, and how much of a ramp you might see at some of the more outlying sites with fuel costs coming down?

We have really done a couple of things. We also brought on a Director of Transportation into our business, that is aligned with [Bill's sales team]. So that we -- that's our go-to-market with a much more concerted approach towards attracting new volumes and opening new markets. So our primary focus over the last couple of quarters and going forward, would be to densify our sales in the markets that we are already in, and then through a combination of transportation, synergy coming from the lower diesel prices, the focus that we have on that team, plus the marketing and sales efforts coming from Bill to attract new ways.

We have seen a nice increase into the Worcester landfill through that effort. We have seen a nice increase into Pine Tree through that effort. And we think that now that we will divert over to the West, we will realize that, and those are all in tonnage, so far in the quarter.

Yes. I think that the increase at Worcester alone was something in the order of 80,000 tons.

That helps. Thank you.

We have no further questions at this time. I would like to turn the conference over to Mr. John Casella for any additional or closing remarks.

Thank you. In conclusion, I would just like to emphasize that it is our belief that we are executing very well against the factors that we can control. Our people are working hard to offset the negative impact from the economic pressures. And our operating programs are improving productivity and asset utilization. In light of the uncertainty in the economic financial markets, our people have performed very well, and I am confident that we will continue to improve performance in spite of the economic conditions.

Thanks for your attention this morning. Our next earnings release and conference call will be in early March, when we will report our third quarter fiscal '09 results. Thank you very much everyone, and have a great day.

Ladies and gentlemen, that does conclude today's conference. We appreciate your participation, and you may disconnect at this time.