Casella Waste Systems Inc (CWST) 2011 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Casella Waste Systems Inc. third quarter fiscal 2011 conference. (Operator Instructions)I would now like to turn the conference over to your host for today's, Mr. Joe Fusco. Sir, you may begin.

Thank you for joining us this morning and welcome. With us for today's discussion are John Casella, Chairman and Chief Executive Officer of Casella Waste Systems; Paul Larkin, our President and Chief Operating Officer; Ed Johnson, our Senior Vice President and Chief Financial Officer; and Ned Coletta, our Vice President of Finance and Investor Relations. Today we'll be discussing our third quarter fiscal year 2011 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'll be answering you questions as well.

But first, as you know, I must remind everyone that various remarks that we may make on 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 to record comparable GAAP measures is available in the financial tables section of our earnings release which was distributed yesterday afternoon and is also available in the investor section of our website, ir.casella.com. And now, I will turn it over to John Casella who'll begin today's discussion.

Thanks, Joe. Good morning and welcome to our fiscal third quarter conference call. Our goal today is to discuss and give you insight into the third quarter and also some of the other -- some details on some of the other events that were announced last night. I will start with a brief strategic summary. Ed will take us through the numbers and Paul will run through an operating summary. And as Joe said, we'll then be happy to take your questions.

First, let me begin -- a little over a year ago we set a strategic goal to repay debt, reduce leverage and get our leverage below 3.5 times debt to EBITDA. We set the delevering goal with two major thoughts in mind. We approached debt we (inaudible) have -- 2 debt maturities approaching late 2012 and early 2013 and we wanted to be in a position to refinance these maturities at lower interest rates. And we strongly believe that reducing leverage will help unlock shareholder value by increasing our free cash flow. The goal of 3.5 times leverage is a flag post in our strategy to shift value from our debt holders to our equity holders. We set out to achieve our delevering goal through a combination of improving operating cash flows and selling nonintegrated assets.

I am excited about the great progress that we made against these goals. Our team has done an excellent job executing this strategy aimed at improving our balance sheet and better positioning us for the future. As part of our deleveraging plan, we set an objective to sell roughly $75 million of assets. As announced yesterday afternoon, we successfully completed the sale of our nonintegrated recycling facilities for $134.1 million, an attractive valuation for this set of assets outside of our integrated Northeast franchise. We used net proceeds of approximately $120 million to permanently pay off term loan B, saving roughly $8.4 million of interest expense.

We've talked about this divestiture in detail on a conference call in late January, but I wanted to reiterate a couple of important points. After the sale of the nonintegrated recycling facilities, we've still retained all recycling assets and our solid waste footprint and the Northeast. Our team remains committed to meeting existing and emerging customer needs of our leading resource solutions through our integrated solid waste services, our zero point organic solutions and clean energy operations. The reality of what we have felt and continue to feel in the marketplace is that our perspective for the last 5 years, with regard to resource optimization, is very clear and it continues to be true that we're going to be using the waste stream as a beach dock, from a manufacturing standpoint, or for its energy value. To date, we've sold over $146 million of assets and we've taken our leverage from a high of almost 5 times in the second quarter of fiscal '10 to a pro forma of 4 times with recent divestitures. Moving forward, we will continue to opportunity -- opportunistically look at integrated -- at nonintegrated assets for additional deleveraging potential.

As I mentioned earlier, one of our major goals of our deleveraging strategy was to better position ourselves for the refinancing of indebtedness maturing in the next several years. We didn't waste any time executing against the goal. Immediately after announcing the sale of recycled assets in late January, we completed a very successful refinancing of senior sub notes. With a new 8-year note, we cut our interest rate by 2%, saving over $3.5 million of interest per year. In total, with the sale of the recycling facilities, the refinancing of our senior sub notes and the refinancing of our revolver, we expect to save over $12 million of cash interest cost per year. It's a needle mover for Casella. Further, I strongly believe that we cannot achieve our delevering goal or obtain profitability by only selling assets. We've asked out team with -- we cast our team with improving asset performance, increasing cash flows by profitably growing revenues, increasing pricing and implementing operating initiatives, harvesting landfill value, densifying our operations and the opportunity -- opportunistically acquiring selected assets. Clearly, we have asked our team to rethink every aspect of our model and we are executing very dramatically against all of the strategic initiatives that we've laid out for you for the last three or four quarters. Our customer care center now is over almost 90% of our business now is going in. We have one operation left to do. Our shared service model is continued to move forward. So, we're executing on all of those dimensions that we've laid out over the last couple quarters.

The last thing you might have expected to hear from us yesterday, after selling $134 million of assets, is that we bought another landfill, however. But as I just said, part of our strategy to delever and improve financial performance of our business is to improve operating cash flows. We made a bid on the King County landfill back in 2003. We were significantly outbid by another firm. Our Western region had continued to watch the site and recognized the great opportunity to purchase the business out of bankruptcy for $500,000. There have been, to date, in our view over $25 million invested in the facility. Our investment will be maintenance CapEx as we use the capacity on a go-forward basis. I think an important factor is in fact substantial amount of capital has been invested in this facility and it's a great value for Casella. Moving forward, we plan to add value to this site by integrating it to our network of landfills in Western New York. A great example is how we met our annual permanent limits at several key sites early in December this year. With this new capacity we can balance waste across the networks to maximize free cash flow and capacity for each of the permits.

Ed and Paul will run through the details on the quarter and update you on the important operating initiatives. However, I'd like to briefly touch on our pricing program. Putting aside the adverse weather and other nonrecurring impacts in the quarter, I believe that the operating efficiency programs, shared services and other consolidation efforts that have continued to make a big impact to offset lost revenues and maintain cash flows during the prolonged recession. However, our nominal price in the quarter is one area of underperformance that continues to lag and, frankly, overshadows some of the areas of operating success. Today, the organization has the necessary building blocks tools to successfully meet our pricing target. And as with other challenges that our senior management team has successfully met over the past 2 years, we will also meet this challenge. The senior team is shifting our focus from delivering balance sheet efforts back to core business and this area of underperformance.

Before I turn it over to Ed, I'd like to say a few brief comments about all of the folks who have made a tremendous contribution to Casella over the last decade and, in particularly, all of the folks at FCR that will be going with the re-energy divestiture from Casella. There has been a tremendous contribution from all of those folks and we wish Jim and Sean well and expect there will be opportunities in the future where we will work together. But we would certainly like to commend all of the folks at FCR, those facilities outside the franchise, but part of the Casella family for they work over the 10 years and, in particularly, Jim and Sean, and wish them well with their new venture with ReCommunity. And with that I'll turn it over to Ed who will take you through the numbers.

Thank you, John. And good morning, everyone. There is quite a bit to talk about today so try to be concise in my comments. As John said, we are very happy to have announce the closing of our divestiture of nonintegrated recycling operation yesterday.

This divestiture has provided a significant and immediate change in the risk profile of the Company, our near-term strategic focus, the availability of capital resources and, in total, our out prospects for success. We received $134.1 million in gross proceeds, using $128 million to repay our term loan and using the remainder after expenses to pay down our revolver. There will be some taxes due on the transactions so the net debt reduction is expected to end up at about $120 million, and this will reduce our debt to EBITDA leverage ratio from 4.5 to 4.0. It also puts us in a position to earn our way to our targeted ratio of 3.5 without requiring further divestitures; however, we remain receptive to rationalizing additional investments, should a reasonable opportunity arise to be leveraged further.

The anticipation of the divestiture along with a favorable debt market, allowed us to refinance $195 million in subordinated debt in early February, pushing out maturity on that piece of the capital structure to 2019 and reducing the interest rate by 2%. This will end up as a long-term fixed rate piece of financing, so we wanted to take advantage of a strong market and get this into place now and did not see an advantage to waiting for the divestiture to close. Now that the divestiture is closed and the term loan is repaid, we are moving quickly to amend and extend our secured bank financing to increase of revolver capacity, take the maturity date from December 2012 out to March 2016 and reduce the pricing by 50 basis points. In addition, the new revolver will have an accordion feature to allow us to lower -- to use lower cost secured bank financing to pay off our 11% second lien notes when they become callable on July 2012. The sum of all this activity is that we have been successful in strengthening our balance sheet, reducing our finance risk, including our exposure to floating interest rates, as well as reducing borrowing cost with the biggest piece of that coming in 2012. Based on today's interest rates, the finance plan we have put into place accumulates to a $24 million savings in annual interest costs.

Over the past 2 years, our primary strategic focus has been fixing the balance sheet. Now that the balance sheet is fixed and on a clear path to continued improvement, I cannot over emphasize the significance of the shift in management focus back to improving core operations, growing the business, and establishing a clear path to near-term profitability and free cash flow generation.

Moving to the third quarter results, the divested assets have been presented in out numbers as discontinued operations. As the transaction closed in the fourth quarter, the gain on the transaction will be reflected in disc ops in our year end announcement. We have presented historical quarterly continuing ops numbers as a supplement to the press release. The Company reported revenue from continuing ops of $111.6 million, up $1.7 million from comparative quarter last year. The recycling operation inside of our solid waste footprint were not included in the divestiture and these contributed $2.8 million of increased revenue, primarily from increased commodity pricing while revenue from collection operation declined by $1 million and disposable revenue stayed about the same.

In the second quarter, we reported that our landfill volumes were up significantly and many of our landfills were at or near permanent volume limits. Some of those landfills have quarterly volume limits while some are tested annually. We deferred some volume in September and that came back strong in October, our quarter end, and continued in November. In early December, it was clear that we again would bump up the quarterly limits on those particular landfills, as well as annual limits on others, and we started working with our special waste customers to defer loads. We expected that the amounts not taken in December would be made up in January but unusually severe weather limited our customers abilities to deliver the loads to the landfills, so we ended up with a sequentially weak quarter for landfill volumes. The good news is that we have been able to use the capacity restraints to start work -- to workout pricing and we went positive on price by 70 basis points this quarter.

The incremental volumes provide high margin contribution. So when it goes away, cost percentage get skewed. In addition, the bad weather affected operational efficiency on the collection side a lot more than the normal seasonal amount this year. The combination caused cost of ops to rise from $73.7 million, or 67.1% of revenue in the third quarter last year, to $76.9 million, or 68.9% this year. D&A stayed about the same on slightly higher revenue and depreciation and amortization declined slightly, primarily due to improved compaction rates at the landfills, lowering the amortization of air space.

Adjusted EBITDA for continuing ops declined from $24 million last year to $22.4 million this year. By segment, the adjusted EBITDA generated by our Western region was $8.7 million. Our Central region was $5.6 million. Our Easter region was $6.2 million and the retained FCR operation was nine -- $1.9 million. The discontinued ops produced revenue of $20.2 million in the quarter and adjusted EBITDA of $4.3 million. Interest expense is slightly lower than last year due to the small to divestitures completed earlier in the year. The average interest rate for the quarter was 9.9%, including amortization of financing cost net of finance cost amortization that was 8.9%. Availability on the revolver at quarter end was $86.5 million, after taking into account $49.7 million of LC's outstanding, with savings related to our refinancing of the sub notes along with the divestiture proceeds will start showing up in the fourth quarter.

Achieving our primary strategic initiative, which was to fix the balance sheet, took the efforts of a lot of people in the organization and the board recently decided to provide a pool for discretionary bonuses to be paid out operational, financial and senior management that we will accrue for in the fourth quarter. This charge, coupled with the unusual landfill volume fluctuations and weather effects on the third quarter, caused us to lower guidance for fiscal 2011. In addition, I would like to point out that there will be several anomalies in the fourth quarter below the operating line. We will be taking a non-cash charge for debt modification of about $6.5 million. We will also record a gain on the divestiture of about $65 million but that will be down in disc ops. The tax provision accounting will be a little complicated as when you have a significant tax gain and disc ops and you have evaluation allowance against your NOL, a large portion of which was generated from continuing ops historically, you end up with a big credit in your continuing ops tax provision. We don't have those numbers yet, so I just wanted to give you a heads up that Q4 EPS might be a little hard to predict right now.

We are starting our budgeting process and look forward to providing clean guidance for fiscal 2012 with the Q (inaudible) announcement. Our expectations are that 2012 guidance will reflect the results of our continuing and maturing pricing initiatives, that reduction in overhead not currently reflective with the discontinued operations and improved efficiencies from operational programs and further centralization of back-office activities. And with that, I'd like to pass the call over to Paul Larkin for his comments on operating performance of the Company.

Thanks, Ed. Good morning. Solid waste revenues were down slightly year-over-year with a decline mainly driven by the divestiture of the Cape Cod assets in Q1 and the closure of the Pine Tree landfill. Excluding these impacts, solid waste revenues were up 2.8% year-over-year.

In addition to the detail found in our press release, I'd like to run through a few comments on the components of revenue growth. Solid waste price was up slightly year-over-year and was a bit weaker than planned for the quarter. Our collection division delivered price improvement of 0.5% as a percentage of collection revenue. Our continued opportunity is to strike an artful balance between volume and yield within each of our markets. As we have grown our residential, commercial and rollout customer base year-over-year, we have improved our raw density. As our raw density has improved, we've expanded our operating margins in collection divisions. We must now strike the appropriate balance of volume and yield on these routes to ensure that we outpace inflation. We have built the right supporting infrastructure to support this goal. We've completed our systematic customer-by-customer profitability analysis to more effectively understand the volume and price tradeoff as well as the price elasticity by market. We've aligned our sales goals with our pricing objectives and it's clear, given inflationary trends, that we must execute our pricing strategy and our team is committed to getting this right.

Disposal pricing was up 0.7% as a percentage of disposable revenues, with positive MSW and beneficial use pricing offset by negative C&D pricing. Excluding the impact of the large municipal contract taken into our New York landfill last year, which deflates our average price per ton, disposable pricing would have increased by 1%. Solid waste volumes were up year-over-year, the fourth consecutive quarter of year-over-year growth, even with volumes that were negatively impacted by severe weather across the Northeast and Pennsylvania. Collection volumes were down 2.4% as a percentage of collection revenues in the third quarter, improving slightly from the second quarter. Although collection volumes were lower, customer accounts were higher across all lines of business as previously mentioned. Roll-off pulls were up 2% year-over-year in the quarter. Landfill tonnages were down 4.4% year-over-year, driven by a combination of reaching annual permit limits at several key sites in December and lower landfill volumes in late December and throughout January due to weather. Beneficial use volumes were driven by special waste streams, a category where we see continued growth opportunity.

Recycling commodity prices were higher with gross commodity price per ton up 44% year-over-year, and 19% sequentially, with strength across all classes of commodities. Recycling ship volumes for the retained FCR [MERF's] were down 6.9% year-over-year, primarily from severe weather that reduce recycling participation and lead to a marketable loads of fiber. Cost of operations for the third quarter were $76.9 million, or 68.9% of revenue, an increase of 180 basis points as a percent of revenue from last year. Solid waste cost of operation increased by 250 basis points as a percent of third party revenue as margins were compressed due to weather that negatively impacted productivity and reduced solid waste volumes. Margins were also compressed by 60 basis points by higher purchased material cost and 70 basis points by higher fuel cost. Cost of operations further retained FCR entities decreased by 550 basis points as the business gained significant operating leverage with higher commodity prices in the quarter. Decreases in direct labor, facilities cost and maintenance costs were partially offset by higher purchased material costs. Solid waste adjusted EBITDA was $21.4 million in the quarter, down $2.7 million year-over-year. As expected, lower energy prices at Main Energy, the final closure of the Pine Tree last year and the sale of the Cape Cod assets in Q1 lead to a negative $600,000 year-over-year variance. The remaining variants is attributable to bonus approval this year, higher fuel cost, the loss of volume due to weather and a corresponding drop in productivity across our operations.

Adjusted EBITDA for the retained FCR entities was $1.9 million in the quarter, up $1.1 million year-over-year, driven mainly by strong commodity pricing, operating leverage of fixed costs and improved operating efficiencies from the zero sort recycling system upgrade in Boston last year. We continue to roll out FleetMind's onboard technology and we are now operating in six locations. We've had excellent results, improving driver productivity, reducing administrative overhead and improving customer care. FleetMind also provides an improved interface to our profitability tools through the passing of near real-time customer information. In March, we'll integrate the last operating division into our customer care network. We're very pleased with our results and sales conversion rates, speed to answer and, most importantly, customer feedback. We believe the customer care center is one of the driving factors in our increased customer accounts year-over-year across all lines of business.

In summary, as a leadership team, we will continue to focus on balancing volume and yield within landfill and collection divisions to achieve our financial goals. And with that, operator, I think we'd like to open the lines for questions.

(OPERATOR INSTRUCTIONS)And our first question comes from the line of Scott Levine from JPMorgan.

Hi. Good morning, guys.

Good morning, Scott.

Touching on the pricing back trap and your expectations for acceleration there -- could you talk about the relative importance of collection versus disposal? And then also, how you would characterize the pricing backdrop within each of your markets or, maybe broadly speaking, within your solid waste footprint and how confident are that you will be able to achieve your objectives there?

Our stated goal all along has been to get to 50 basis points above CPI in the fourth quarter. We're very pleased with our performance within the landfills, as both Ed and I touched on. Thinking back a year ago in the quarter, we were minus 4% and with accelerated debt all the way up to plus 1% if you exclude that New York contract that we mentioned.

On the collection side, we've been hovering at 50 basis points for the last three quarters. Our challenge there, as we've mentioned, if you look at the trailing 12 months of EBITDA performance in our hauling Companies, we're doing a great job building route density. We're doing a great job adding customers and it is a very artful balance between volume and yield that we are imparting throughout the organization and that's where we're going to continue to spend our time.

Got it. And then shifting to the news with McKean -- you have a history here, obviously, with the landfill -- could you maybe talk about the circumstances that led up to this announcement? It sounds like it was pretty opportunistic. And then also, maybe comment on -- I wonder if this is maybe a one-off occurrence or whether there's other types of situations that might facilitate some of your growth plans that we might see over the next six to 12 months?

Well I think that most importantly, Scott, we're still focused on the plan that we set out, which is to delever the balance sheet. So, you'll continue to see us focused on delevering the balance sheet. Clearly, McKean was very opportunistic. The facility was in bankruptcy. We bid into the bankruptcy. It's a tremendous opportunity for us, as evidenced by the permanent capacity there, as well as the investment that we took to add that to our network of landfills in Western New York. It is also -- it's very clear of the value of that facility long-term and currently, permitted a thousand ton a day with the opportunity to potentially to go to five. So, it was very, very much opportunistic and I think that we don't have anything else in development from a disposal standpoint. This was simply a very opportunistic opportunity for us and we took advantage of it.

Understood. Thanks, John. One follow-up on the delevering plans. Should we expect that to center around the free cash flow generation going forward, which is improved here with the refinancing activity you've engaged in recently? And then secondly, I can't recall -- Ed, did you mention that you guys would look to provide free cash flow guidance again in 2012?

Yes. We'll definitely provide that guidance once we get through the budgeting process. And on your first question -- our forecast, even though we haven't finalized it, because we haven't been through the budget -- detailed budget process, our forecast shows us getting to the 3.5 pretty easily through internally generated cash flow. Now if there is an opportunity to accelerate the deleveraging through additional divestitures, we're certainly open to that if something that makes sense comes across our desk.

I think that it's important that from our perspective, we want to get to below 3.5 times debt to EBITDA. That was our target, but we want to get below it. Our strategic plan shows that we'll get they're fairly comfortably, but we want to get there as quickly as possible. The real challenge is, what happens from an economic perspective, as Ed said, if we have an opportunity to delever further with assets that are nonintegrated assets are in our portfolio, we're going to take advantage of that, we're going to delever as quickly as we can.

Makes sense. Thanks guys.

You're welcome.

Thank you. Our next question comes from the line of Corey Greendale from First Analysis.

Hi. Good morning.

Good morning.

Congratulations on Mckean. That sounds like a nice addition. The first question I had is on the hidden --

Thank you we appreciate that. There's a tremendous amount of hard work by the entire organization to achieve what we've achieved in the last four or five months. Very significant effort by the ops team, the legal team, and the finance team. So, we're pleased with the performance of our folks in repositioning us for the future.

No doubt. On McKean, first of all. I know it's probably a little early to give specific guidance on that, but can you just give us a little help in thinking about it -- should we be thinking about McKean as additives to annual EBITDA in a material way? Or is it more that it allows you to balance your volumes better in that market? So, it's more of an extending the disposal life as opposed to really additive in a given year?

No. I think that it's fair to say that our perspective is that it is clearly going to be additive, but keep in mind that that facility was bought at bankruptcy. So, it will take us some time to ramp up the volumes at that facility. The facility is currently permitted for 1,000 ton a day. We purchased the facility out of bankruptcy so, obviously it will take us a bit of time to ramp it up, but we believe that over a relatively short period of time it should be an additive.

And we should be thinking about it as potentially a thousand ton per day facility and not looking at that rail capacity any time in the near future?

I would say that that would be a fair perspective, yes. We'll obviously have more guidance in terms of McKean and how to think about that on the fourth quarter call after we go through the budgeting process and get that completed in the next month or so.

Okay. That's appreciated. And then more broadly on disposal, how widely did you hit your tonnage limits and is that something you expect could happen again? In the current quarter, I think you said some of the limits are monthly or quarterly or do you expect it to happen again in fiscal 2012?

No. That's really -- it's the end of the year -- an end to the year issue for us, Corey. It's not a quarterly issue, it's an end of the year issue. I think that we should be fine on a quarterly basis.

Okay. And then, I apologize, I had a couple questions below the operating line. Maybe, Ed, you can help with this. The -- I just want to make sure -- and maybe I'm the only one who has this question. So, I apologize if I am but I want to make sure I'm modeling interest correctly. I think, in the restated historical numbers, you had attributed some of the interest to the discontinued operations. So, when you're talking about interest savings, can you just give us a quarterly interest number that we should be looking at on an ongoing basis?

Yes. I don't have that at my fingertips. Maybe Ned can pull it up.

We'll try to pull that up for you, Cory.

Okay. And the other question I had is on taxes, which I imagine that the divestiture is eating some of the NOLs. What's your NOL position now and do you expect be more of a cash tax payer in fiscal '12?

Well, that's an interesting question because we are using of up the NOL in the transaction. So, going forward, we well -- on a cash basis, obviously, be around the regular effective rate, state and federal. On the GAAP basis, it's tricky on whether you get into releasing this NOL reserve. Well, I mean, we've released a whole NOL reserve in the transaction, but it's tricky whether you change your accounting which includes a strange GAAP treatment of goodwill amortization. And if we were successful in getting to a regular provision and dropping that charge we have to take on goodwill amortization, than we would -- then our effective rate would mirror our cash rate. We just don't know whether we're going to be successful in doing that next fiscal year or whether the accounting treatment will cause us to push that a year.

Okay. On a cash basis is what I was looking for primarily, so I appreciate that. If you can find the answer on interest that's great. Otherwise, I can call you back off-line on it?

Okay. Terrific. Ned will give you a call on that, Corey, and follow-up.

Great. Thanks, John.

You're welcome.

Thank you. Our next question comes from the line of Michael Hoffman from Wunderlich Securities

Hi. Good morning

Good morning, Michael.

And congratulations on this first step and the delevering.

Thank you.

So we understand better, I get three, four, five's now the next milestones -- hopefully we don't stop there either. But, what is the timeline, you think?

I think we would agree with you, Michael. We need to be -- I think that that is the next milestone we're focused on. But I think we would concur with you that we need to be below 3.5 times.

Okay. And then -- I mean -- if I look at our model based on what all the things you've done in your refinancings and where the fundamentals are of the business, it kind of looks like you dropping out somewhere between $20 million and $25 million of free cash. And to get to 3.5 from here, that's going to take you two or three years to do. If you just --

But we have numerous operating initiatives including the pricing initiatives. So, we certainly expected not just the debt to go down but the EBITDA to rise.And the cash flow numbers really start to jump in 2012 when we take that $24 million a year by then of cash interest out of the model.

Okay. So, and that leads me to a question -- one of those jumps in your EBITDA would be Southbridge. Where are we on the 180 going to 350? Because that's -- if I remember correctly approaching at a $10 million bump on based on current pricing.

We're currently -- that permit expansion is tied to the landfill gas energy that -- landfill gas to energy equipment has been ordered -- it's in route and we expect to have the landfill gas facility up and operational sometime late spring. So, I would expect that we would see that permit sometime in the spring or early summer.

Of 2011?

And that would take us, Michael, from 186 to 302.

302. Okay.

And then we operate there for one year and then we go to 402.

Okay. And so that's part of that EBITDA bump that I --

Sorry, I was corrected. It's 405,000 a year and not 402,000.

Right. Right. And then the -- so the other part then is, clearly you got to get this pricing on the disposal side at that 50 basis points, which we're not at yet -- above your cost.

That's exactly right.

Alright. So, if you think of all of those things, what's that timeline? Is a 1.5 years? I'm just trying to understand the speed at which this happens from operations.

I think that it's fair to say that it's probably another three to five quarters for us to really get to where we want to be. I think one of the things that we're most excited about is the change in the culture and the change in the operating. While it's taken us a little bit longer, I think that the moving -- what we've really done with the shared service model and bringing in all of customer care to a centralized location, is to take away from the field a lot of the back office work collections, the cash application, accounting, and really trying to get them truly focused, Michael, on their waste sheds, so that they can understand the moving parts, understand the elasticity in those markets.

And it's a big change that we've been through for the last year. We're making great progress on it but we're not there. I think we're going to be truly we'll served when we really get that fully implemented and get all of our folks executing at the level that we know they can. Our real effort is to change the culture and to empower them from a way shift perspective by taking away some of the administrative functions that really don't add value. Particularly in light of the economic reality that we're facing. Revenue is -- every opportunity from a revenue perspective is truly important, particularly with the economy that we've had over the last couple of years.

Okay. McKean -- Why did that go bankrupt? What was the driver of that?

I think that there was a tremendous amount of money invested in that site. Way more than the tonnage justified. I think they had difficulty getting tonnage to the site and they over -- there was just way to much money invested in that site, I guess is the -- and they were not able to meet their plan in terms of the tonnage they were expecting.

Okay. And do you think that site's accessible to, say, the Ontario, Canada market where a lot of volumes coming across the border there? Is that a competitive site to that market, that long haul market?

I think there maybe -- with the Western region networks of landfills, there may be opportunity there in terms of moving waste around -- waste that might go now to one of the other facilities could be moved. From a transportation efficiency perspective there may very well be opportunity there, but McKean is probably a little further away from a transportation standpoint. But when you look at it in the context of a total disposal network, could be some opportunity there, yes.

Okay. And then I know I'm jumping around here -- the bonus, is that fair enough that a lot of good things have happened. I get the board looking at this and saying it's appropriate to reward, but is it a cash bonus our will it be equity?

It's a cash bonus.

Cash bonus. Okay. And then lastly, on the industry fundamentals and around the disposal, I think it'd be fair to characterize that there was some -- call it poor quality volumes within landfill operations in the region, not just yours, and with some other activities that have been happening in the market, there's been an opportunity to displace some of that poor quality volume with better quality volume -- Where are we in that?

I think that's a very fair perspective. I think that as Paul indicated when he talked about it, we've been able to move pricing in spite of the reality of the economy, and other issues, from a negative four to a positive one. We're not where we want to be, obviously, but we've been able to move it in spite of the reality from a volume perspective in the economy. So, I think clearly, as we said before, the combination of ISI and WSI is a positive in the marketplace. And I think that we're -- we've have seen that actually and we can demonstrate that in the numbers as well.

Okay. And then last question for Ed. What is the borrowing rate that you will have available to you in July '12, if you call the second lien at 103 and use the revolver? What's that borrowing rate going to look like given this revision that you've done?

Well that depends on what interest rates do between now and then. Certainly, if interest rates -- well, let me answer it this way, if we were to finance the second lien notes with the same terms that they have now, we'd be in the 6% to 6.5% range on those same notes.

Okay. And based on the amendments that you've gotten from your bank agreement, is there any incremental savings to that level?

Yes. There is 50 basis points in saving on the revolver and obviously the term loan does not exist anymore. That added 2% Libor floor. The revolver has no floor for Libor.

Okay. Alright, great. Thank you.

You're welcome.

Thank you. Our next question comes from the line of Jonathan Ellis from Bank of America Merrill Lynch.

Thank you. The first question I wanted to ask about -- just, I'm trying to get some better understanding of landfill pricing. I was under the impression that those New York contracts had escalators that were all going to flow through by the end of your fiscal third quarter, such that there should no longer be a drag on pricing on a year-over-year basis. Can you just help us to understand where those escalators stand? If there any additional escalators that still have to float through in coming quarters on those contracts?

Michael -- Jonathan, it's Paul. There are escalators on the contracts. So we're -- as we've said before, we're very happy with it. I think what we're referring to is that for one of them, there was a lag in terms of all of the volume associated with the contract coming in to our facilities. So, that the transfer of the volume into our sites took place over six months from the start of the contract. So, we're still hurtling those last volumes coming into our sites from this time a year ago. That's the reference that I made around disposal pricing, if we had excluded that being at 1%.

Okay, but the escalator has been applied to all tonnage at this point?

That's correct. Right.

Okay. And I guess the question I have is, the move from a negative 4% to a positive 1% of the last year -- would it be possible to quantify how much of that came from the escalator at adjustments.

It's really a combination of things. It's the escalator, it's the IDSI piece that John mentioned, and it's the continued flow of some special waste streams into those sites. So, those are the three pieces that are moving within that positive movement from month minus four to one. And I suppose we could it break it out. I don't have that in front of me.

Yes. I mean I guess the essence of the question is, how much of the improvement is really market-based versus how much of it is contractual and mixed based, i.e. special waste contribution?

There may be something that Ned could take a look at for you, Jonathan. It's not something that we have right handy, but certainly something that he may be able take a look at it for you.

Okay. That would be great I appreciate that. The next question -- so just to be clear on this, because you referenced it in one of your earlier question -- but at this point, it appears unlikely that you would get to 50 basis points spread over CPI, across collection disposal by the end of 4Q or is that still potentially in your plans?

That's still our objective to be there on a run rate basis at the end of the quarter. It's been, as John said, it's been a little bit longer in coming than we would have liked, but we like where we're positioned with both of our people, in terms of the focus, and the tools that they have available to them.

Okay. And I guess -- any sense you can give us at this point as to what percentage of the customer base has actually been presented with the price increase? My understanding was that during the winter, you were starting to selectively go out with price increases. Any sense -- or can you give us any sense of what percentage of the customer base has been approached at this point and in addition to that, any notable changes in customer attrition or turnover?

I think it's fair to say that we have real opportunity from a pricing perspective. I don't think that we have gone out selectively with probably primarily on that tier of customers, Jonathan, that are underwater from a disposal perspective. And I think that the opportunity from an execution standpoint is -- it's pretty broad and as Ed said, it is a clearer focus of senior management at this point in time. I think Paul's done a terrific job putting the right tools in place and from our perspective, it's a strategy that we will execute against.

Okay. Just on the waste to energy presence in your markets, just given the issues with landfill tonnage in -- during the winter, were you seeing any more aggressive pricing by waste energy plants that were trying to maintain a certain utilization rate at their facilities?

You know, I think it's fair to say that we see that every year. I don't know if it was any worse than it's been historically, but perhaps a little bit, but I really don't think -- I think it's just really ordinary course of business. It's not uncommon for the incinerators to do what's necessary to bring the tonnage in to their facilities. So, we do see that every year and I wouldn't characterize this year as been significantly different than what it's been historical.

Okay. That is helpful. Just on the -- your fourth quarter outlook, the math that I was doing in terms of your EBITDA contribution in the fourth quarter, suggests something somewhat below the typical seasonal contribution for EBITDA in fourth quarters in past years. And I guess my question is, what are you assuming right now from a volume standpoint in the fourth quarter? And the also, you've already touched on price and solid waste, but what are you assuming in terms of commodity prices for the fourth quarter?

I think that fourth quarter we're assuming commodity prices stay pretty consistent with where they are now. I think one of the things that we did calculate in in terms of the fourth quarter was the reality of what we saw from a weather perspective in February. So, it's clear from our perspective, we saw a lot of what we saw in January and February in terms of storms. In fact, as little as a week ago we had another foot and a half of snow, which, in itself was not that significant an event; however, it's still more of the same unfortunately in February. That's why of the ranges is as wide as it is.

Okay. Only in Vermont would that kind of weather condition be considered normal in February. Right?

I think there may be some truth to that. Now to a degree, we've seen very major storms across the entire Northeast. The weather in upstate New York, Vermont, New Hampshire, and even real disruption in Boston -- in the metropolitan areas as well. And certainly the same thing in Maine. Very significant snowfalls, more so than what we would normally see.

Okay. That's helpful. Just a couple more quick questions to follow -- just to wrap up here. The reduced capital spending guidance for this year -- what bucket is that coming out of?

That's primarily timing on some of the landfill expenditures that ended up -- well, two things happened -- one is, we were able to reengineer some of the work we were doing. So, we've been able to reduced CapEx a little bit that way. And then we were able to push some out as well. So, usually when you budget landfill construction, you -- in the beginning of the year, you do it on the high end anyway and it's just the way the budget works out by the fourth quarter.

Right. So, suffice to say that we can take most of that capital spending downside relative to your previous guidance and add that into our 2011 -- 2012 assumptions?

Well, I think you're -- if you're 2012 assumptions were already based on our guidance for 2011, that would still be a good position to be. As opposed to adding any deferral in the 2011, because we certainly expect that same deferral to happen in 2012.

I see. Okay. Okay, that's helpful. And then just my last two questions -- first on -- you talked, John, earlier about the cost savings that you're still pursuing on an ongoing basis -- anything you can provide in terms of quantifiable guidance on what the net savings is going to be in '12 versus '11? So, year-over-year cost savings that haven't anniversaried?

Yes. I mean, I think we historically -- we had talked a little bit about the fleet and the shared services being approximately $2 million, but I think it's fair to say, Jon, that we'll have much better guidance for you in the fourth quarter on that issue. I think that information is a little stale. I think we will certainly execute against that $2 million, but we'll update that information in the fourth quarter after we complete the budgeting process.

Okay. That's helpful. And them my final question, and I appreciate it, if we this thing we need to take this off-line per one of the questions earlier, but if my numbers are correct on your interest expense for '12, not assuming any impact from the notes that are going to be called, but just in terms of getting the refinancing of your credit facility done, that the interest expense savings in '12 versus '11 is going to be around $12 million?

That's a pretty good estimate.

Yes. Okay, great. Alright, thanks, guys.

Thank you.

Thank you. Our next question comes from the line of Al Kaschalk from Wedbush Securities.

Good morning, guys.

Good morning, Al.

I'll see what questions are left here, given those prior. But just on clarification on weather -- are you suggesting that this is lost business versus business to be recovered? So, do we view it just as a disruption and therefore margin impact or should we expect that it will come back in Q4?

That's a great question, Al. I think that the way I would answer that is, I think that it's a mixture of both. I think that there's a portion of that string that will come back and I think there's a portion that just didn't get generated. So, I think -- I wouldn't venture a guess in terms of what the percentages are, but I think it's a combination of both. Some of that will come back. We'll see it in the -- we should see it in the fourth quarter. Some of it will not come back because it wasn't generated, because of the lack of commercial activity.

Okay. So, but just in a bigger picture going forward -- inclement weather should cause some disruption, but maybe it's dependent on commercial activity in the generation -- whether that's lost or not?

Yes. I think that -- we usually don't talk about weather. When you look at the Northeast, it's common for us to have, obviously, snowstorms. It's common for us to have that kind of activity, but the problem is, when you have that kind of storms that we've had, commercial activity basically shuts down. And it shut down for two, three, four days, where it was really difficult to -- and it happened several times. We had several storms that were over two feet. I think there were three or four storms in January that were over two feet and the same thing in February. I think there were two in February. So, it's normal for us to get six to 10 inches of snow and it's ordinary course of business. But when you're -- when you have the kind of severity that we've had this year, it does create real productivity efficiency issues, because you're constantly slower and you have more accidents, you have more issues all the way around from an efficiency productivity perspective.

Okay. And then sort of my last question -- I'll try and tie it together here with a couple of components, but the acquisition of McKean and the impact from hitting limits at the end of the year, why -- or what's happening to prevent that from occurring down the road? Or why shouldn't we start to expect the nature of your business to run to limits in Q3? And, therefore, maybe it's not the best performing marketing quarter for the business. And I -- with that, I certainly appreciate there's a lot of moving parts here and you're working on pulling some levers, but to me it would seem that we've got some churn and you're able to deselect some non-profitable work, which is underway, that running into limits and therefore maybe the margin issue, shouldn't be occurring. But if it should be, investors should start to expect that. So, a little long-winded today. I'm sorry. Just maybe if you could appreciate why we should not be concerned about running into limits, particularly as we think about the margin profile?

Well, I think that may be a long-term issue. If we were talking about in two or three years, maybe we're at -- we get to those limits again. But with the capacity that we have at McKean, I think it's a near-term, it's not likely that we're going to have the limit issue, at least in the near-term, because the facility needs to run at it's permanent capacity, which is a 1,000 tons a day. So, I think that it's not likely that we're going to have those issues. We should be able to balance the perm -- permit restrictions a little bit better with the additional capacity and we're starting out with some capacity that we need to fill there. So, I think near term that's not likely to be a problem.

Perhaps if the economy comes back, things get really good from an economic perspective, if we deal with the structural deficits in Washington and begin to take responsibility for those deficits, I think that we will begin to see the economy come back. If that happens, then it could be in two years we could be back in the same situation where we're bumping up against permits. But, keep in mind, the other aspect of what we'll do is we'll continue to expand the annual permitted capacity of those facilities to the extent that there are opportunities we'll try to move those permits out if we were in a situation where we saw the economic recovery accelerate.

Okay. Thank you very much.

You're welcome, Al.

Thank you. I'd like to turn the conference back to Mr. John Casella for closing remarks.

Thank you. In conclusion, we've done an excellent job over the past several months executing against our strategic goals to reduce debt, reduce leverage, and move out debt maturities. We've made substantial progress towards long-term leverage goals and our team continues to focus on improving asset performance and increasing cash flows. Thanks for your attention this morning. Our next earnings release and conference call will be in June, when we'll report our fourth quarter fiscal year 2011 results and we will discuss our guidance for fiscal year 2012. Thank you, everyone, and have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program.End of Transcript