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Covanta Holding Corp (NYSE:CVA)
Q1 2021 Earnings Call
Apr 30, 2021, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, everyone, and welcome to Covanta Holding Corporation's First Quarter 2021 Financial Results Conference Call and Webcast. [Operator Instructions]

At this time for opening remarks and introductions, I'd like to turn the call over to Dan Mannes, Covanta's Vice President of Investor Relations. Please go ahead.

Dan Mannes -- Vice President-Investor Relations

Thank you, Jason, and good morning, everyone. Welcome to Covanta's First Quarter 2021 conference call.

Joining me on the call today will be Mike Ranger, our President and CEO; Derek Veenhof, our COO; and Brad Helgeson, our CFO. On today's call, Mike will provide an update on the strategic review, Derek will discuss our operating performance and Brad will provide a more detailed financial update. Afterwards, we will take your questions. During their prepared remarks, Mike, Derek, and Brad will be referencing certain slides we prepared to supplement the audio portion of this call. Those slides can be accessed now or after the call on the Investor Relations section of our website, www.covanta.com. These prepared comments should be listened to in conjunction with these slides.

Now on to the Safe Harbor and other preliminary notes. The following discussion may contain forward-looking statements and our actual results may differ materially from these expectations. Information regarding factors that could cause such differences can be found in the company's reports and registration statements filed with the SEC. The content of this conference call contains time-sensitive information that is only accurate as of the date of this live broadcast, April 30, 2021. We do not assume any obligation to update our forward-looking information, unless required by law. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Covanta is prohibited.

The information presented includes non-GAAP financial measures. Because these measures are not calculated in accordance with U.S. GAAP, they should not be considered in isolation from our financial statements, which have been prepared in accordance with GAAP. For more information regarding definitions of our non-GAAP measures and how we use them as well as limitations as to their usefulness for comparative purposes, please see our press release which was issued last night and was furnished to the SEC on Form 8-K.

With that, I'd like to now turn the call over to our President and CEO, Mike Ranger. Mike?

Michael W. Ranger -- President, Chief Executive Officer

Thanks, Dan, and good morning, everyone. Let me start with the strategic review. I know it is on your minds and it has certainly been a major focus within the company in recent months. When we talked in February, I described the scope of our initial review which aim to identify each of the fundamental elements of our business and assess how we could unlock value. We have now completed that initial review, and I'm even more confident that the underlying value is there and it is substantial. Our plan is now in motion.

While this strategic review has moved at full speed, our operating businesses have performed exceptionally well, as you can see from our first quarter results. And this highlights another observation that I have that the business platform is very solid, which allows our strategic work to proceed with full focus and with confidence that our operations will continue to perform at high levels.

In the past, we have provided a fair amount of information regarding matters that affect our results on the margins each reporting period, specifically movements in energy and metals pricing. These factors are important to your understanding of business results but are commodity market-driven. Our strategic review is focused more on the core of our businesses and what we can control to increase our profitability and enhance shareholder value.

At a macro level, the strategic review has clarified that our business has four principal components, each with different characteristics and value, and each representing a different business model. Our review has identified opportunities in cost control, capital allocation, asset rationalization and medium to long-term cash flow generation. The steps we will take will be different for each component, and I wanted to spell these out so you can understand our framework for approaching the strategic review.

So let me address these components one at a time. First, our 21 North American waste-to-energy plants. We own 100% of these plants and benefit from long-term contracted waste supply in strong local waste markets. And as a group, they represent the vast majority of the value of our business as configured today. Second, our Irish and U.K. waste-to-energy business. As you know, we own these plants in partnership with financial and waste industry participants. Both the Irish and U.K. markets are much more favorable than North America in terms of waste and energy pricing and policy support. When the U.K. plants go into operation, we will have a new fleet of waste-to-energy plants in these markets. And as a group, they will make a meaningful contribution to both our near-term results and growing future equity value.

Third, our Environmental Solutions business, which is an adjacency to our waste-to-energy business, sources high value non-hazardous waste from commercial and industrial customers. It has more of a sales and logistics focus and is less capital intensive than our core waste-to-energy business. Fourth, the 18 sites in North America where we operate waste-to-energy plants owned by the public sector. While some of these operations are profitable, as a group, they are contractually and financially challenged, and we are developing plans to improve the value they represent through renegotiations and expirations.

As we think about each of these components of our business in the context of our strategic review, we have engaged with third-parties to obtain focused value discovery for each of these business lines. These are presently ongoing and we will highlight whether opportunities -- and they will highlight whether opportunities exist relative to certain of our discrete assets when measured against our consolidated valuation. The outcome of this exercise will of course help us shape our path forward.

Another area of focus in the strategic review has been our overhead structure and our resource and capital allocation decision making. As I mentioned in February, this work is focused primarily on the overhead resource that support our North American business. Given the very different business models in each component of the business, it makes sense to adjust the resource support to serve each appropriately. We have developed a detailed plan to streamline overhead cost, and our work so far is expected to result in about $15 million to $20 million of run rate savings as we enter next year and about $30 million as we enter 2023. We have already taken certain actions, including a voluntary early retirement program and expect to recognize approximately $5 million in savings in '21. We will continue this work to yield additional savings. I consider what we've done so far as a first step.

Another area of our strategic focus, as we discussed in February, is to improve the cash flow contribution of each financially challenged operation. And if we see no clear path to dealing so, we'll close it down. We have now identified a number of sites where we intend to shutter operations over the next several years, including several public sector operating contracts where we have already notified our clients that we do not intend to extend contracts when they expire.

At the same time we are in active negotiations with other public sector clients to negotiate contract extensions on improved turns. But again, if we are unable to do so, we will extend operating agreements at these sites if in fact we can make them more profitable. However, if we cannot, we will close those plants as well. We estimate that the incremental overhead savings resulting from the planned shutdown of underperforming sites will yield $10 million to $15 million in reductions, which will offset related near-term reductions in reported adjusted EBITDA and cash flow. More fundamentally though, these efforts will resize and reshape our asset portfolio in ways that will make us leaner and better able to grow shareholder value.

Lastly, as part of our strategic review, we have taken a comprehensive look at our long-term financial outlook with a focus on the impact of factors within our control, specifically added contributions from U.K. activity as it moves to an operating business, overhead expense reductions, prioritizing capital spending and organic growth plans we intend to implement. What has become clear from this exercise is that the business is capable of generating increasingly meaningful profits and cash flow over the medium to long-term.

Through 2024, we expect cumulative free cash flow will exceed $800 million which would be available for payment of dividends, share repurchases, debt repayment or reinvesting in the base business or in new opportunities. And we expect that by 2022 adjusted EBITDA will be well in excess of $500 million. And by 2024 it will exceed $600 million with free cash flow exceeding $250 million. This is the base case against which we will compare future strategic actions.

Regarding our balance sheet leverage in the near to medium term, we are targeting to reduce our ratio of debt to adjusted EBITDA to less than five times by the end of 2022 with capacity for further reductions over the following several years toward four times, an area we believe reflects a sensible target -- capital structure target to support the business over the long-term. The pace at which we approach these longer term reductions will be a function of capital allocation decisions to maximize shareholder value.

Our long-term financial outlook is largely driven by factors within our control that we have already set in motion. And as I noted at the outset of my remarks, our review has been singularly focused on steps we can take with the core of our business to improve profitability and enhance shareholder value. Of course, our results may be affected by factors not within our control, but that is not our focus. And as I look forward, there's no question that we are solidly positioned for predictable increases in profitability and cash flow and we see a clear path to meaningful enhanced equity value.

Let me shift to an update on the U.K. Clearly, the transition of our U.K. portfolio from construction activity to an operating business is an important aspect of our profitability improvements in the near and medium term. And critical to our strategic review is ensuring that the full long-term value of our U.K. projects alongside Dublin is recognized in our share price.

Through our partnership with the Green Investment Group, we have moved our four projects into construction, totaling 1.5 million metric tons of waste processing capability. Construction has proceeded remarkably well across this portfolio, especially considering the challenges presented by both Brexit and the pandemic. This achievement now positions us to transition to a valuable operating business in the U.K., generating significant financial contribution from these four projects. We're getting that transition, and by early 2024, we will have when coupled with our Dublin project, five new assets operating in one of the best markets in the world in terms of waste pricing and policy support.

Our Rookery project will be the first to move into operations. We expect it will begin receiving waste within weeks, and we are commissioning the plant now with full commercial operations early in 2022. We expect Rookery's 2022 contribution to our adjusted EBITDA will be $25 million and an annual run rate thereafter exceeding $30 million. Beyond Rookery, our other projects now under construction will enter operations sequentially through early 2024. Specifically, we expect that Earls Gate will begin operations in Q1 '23 with an annual run rate of $8 million in adjusted EBITDA. Newhurst will begin operations in Q2 '23 with an annual run rate of $15 million. Protos will begin operations in Q1 '24 with an annual run rate of $20 million.

To highlight the sizable contributions we expect from these projects, this U.K. portfolio, together with planned improvements to our Dublin operation, will add at least $85 million in annual adjusted EBITDA by 2024, resulting in an annual run rate for this group of assets of between $105 million and $115 million in adjusted EBITDA, and we are very confident this will be realized.

Owen Michaelson, our new President in the U.K. and Ireland is laser focused on driving the successful completion of the four construction projects, building out the operating and management team, and creating additional value through development of more projects in our U.K. pipeline. And even beyond our pipeline, our strategic work has identified several areas where we can enhance value from this portfolio, reinforcing our belief that the Ireland and U.K. remain a primary growth avenue and a source of tremendous potential value for shareholders.

Turning to the first quarter. We had very strong operating and financial performance, achieving adjusted EBITDA of $106 million. These results, which Derek and Brad will discuss in more detail, were possible only with the impressive effort of our teams and conditions that remain challenging. It is a credit to the resiliency of our people and business and to the essential nature of our services.

As we look ahead several factors positions us well for strong operational performance across our North American business through the end of 2021. Notably, our really solid Q1 results in the waste-to-energy fleet even with an aggressive program of planned maintenance, very good performance from our environmental solutions business with a strong pipeline of new volume, our increased focused on cost control and strengthening waste in commodity markets as conditions improve across the broader economy. As we announced last night, with these factors and trends, we are increasing our 2021 adjusted EBITDA guidance to $460 million to $480 million and increasing our free cash flow guidance to $125 million to $155 million.

To conclude my remarks, we are committed to creating value through the strategic review process. As we execute on that commitment, I am confident that this team will remain focused on the core business and on driving improved financial results.

With that, I'd like to turn it over to Derek to discuss our operational and business highlights. Derek?

Derek W. Veenhof -- Executive Vice President, Chief Operating Officer

Thanks, Mike, and good morning, everyone. I'll be referring to our investor presentation and we'll begin my comments on Slide 4. We are off to an exceptional start in 2021. Despite the obvious obstacle of navigating an ongoing pandemic, our employees performed at the highest level in the first quarter, operating efficiently and providing superior service to our customers and our communities. From a waste market perspective, we achieved solid growth with same-store tip fees increasing by 4% on average across the fleet.

Notwithstanding adverse winter weather conditions, residential waste volumes remained robust and our pricing continues to reflect the strength in our core disposal markets where our position allows us to be very disciplined around recontracting activity. Our contracting and portfolio mix, which is weighted to residential, has helped support prices during the quarter and will pay further dividends throughout the year. As commercial volumes, including profiled waste continue to build and normalize, we will have very good opportunities to realize further price growth despite our highly contracted profile.

We are operating against the backdrop of limited and declining landfill capacity in our core markets as well as a growing demand for zero landfill options. At a macro level, we do not see these trends changing, and we view capacity scarcity as a long-term tailwind to our business that will support tip fee growth above inflation across the fleet for some time.

Our Environmental Solutions business continues to generate pricing improvements into our waste-to-energy assets as the team continues to focus on improving our mix of customers and products. While first quarter profiled waste revenue was lower year-over-year against 2020, this was a result of challenging weather and residual COVID impacts as compared to a record first quarter in 2020 that also benefited from event work. However, we were able to increase realized profiled waste prices during the quarter, and March represented both a record month of profiled waste revenue and the first month with positive volume trends in the year. With strong economic growth predicted for the U.S., our profiled waste business should be a very positive contributor to our overall tip fee mix.

Moving on to the commodity markets, one of the biggest stories of the quarter has been the strength in metals prices. With continued economic recovery in a very tight supply chain for industrial metals, prices for the scrap products we produce have strengthened. When combined with our upgrading and processing capabilities, we were able to nearly double our realized pricing. During the quarter, metal sales volumes rose by 14%, which was a function of improved recovery and some timing benefits realized from record fairs processing volume at our SEMASS plant in March.

Recovered metals are global commodities. And while we can't control the market clearing prices, we believe that our strategy of increasing metals recovery and upgrading non-ferrous material are adding meaningful value. The investments we have made over time in these areas provide leverage to pricing upside and more optionality in sales. Further, we see solid market fundamentals, and we are well positioned to continue to capture value and what is looking like an improved market going forward.

On the energy side, we saw year-over-year improvement in the first quarter given the colder weather in the Northeast. From a historical perspective, our realized energy prices remain low in absolute terms, but stable much like natural gas prices. We remain highly hedged in the near and intermediate term and we continue to seek opportunities to manage and mitigate our risk while capturing upside.

I'm extremely proud of the accomplishments of our operations team in successfully executing an ambitious first quarter maintenance program. During the quarter, we executed on a 16% increase in planned boiler outage days compared to last year in order to put us back on our preferred schedule of focusing a good quantity of major outages in Q1. This timing works well in conjunction with a seasonally lower waste volume generation and enables us to effectively coordinate our outages with the needs of our customers.

One obvious result of the amount of planned maintenance was that waste intake and energy generation was lower by about 5% versus the same quarter last year. This was to be expected and we will make up all this ground in the coming quarters. Given the substantial amount of work accomplished thus far, we have a high degree of confidence and visibility to strong plant production for the balance of the year. As you heard Mike say, we plan to continue to keep a tight rein on costs. This cost focus was visible in the quarter, a strong waste and metal revenue generated significant operating leverage.

Before we move on to the financial discussion, I wanted to remind everyone of the positive environmental aspects of Covanta's business and our commitment to sustainability. This quarter, we were able to reduce lifecycle greenhouse gas emissions by 4.2 million metric tons through our operations. This is a function of the avoidance of methane emissions, the generation of renewable electricity and the benefits of metal recovery and recycling. We expect to report our progress on this every quarter as these savings are fundamental to our value proposition.

A key component of our business relates to our locations in and among the communities and customers that we serve as a primary means of local waste treatment. We are highly attuned to the communities and our clients and believe we can engage with them and help mitigate impacts on the environment. We initiated our own environmental justice policy a decade ago, and most recently, supported landmark environmental justice legislation in New Jersey in 2020. This area of work and involvement is never complete, and we continue to have a number of environmental improvement initiatives across the fleet. Be assured we will always strive to be a leader in environmental performance.

With that, I'll turn it over to Brad to discuss the financial results.

Brad Helgeson -- Executive Vice President, Chief Financial Officer

Thanks, Derek. I'll begin my review of our financial results on Slide 5. Total revenue for the quarter was $498 million, up $30 million from prior year, driven primarily by a 4% increase in waste-to-energy tip fees, a $10 million increase in market index prices for ferrous and non-ferrous metals, a $5 million increase in energy prices including electricity, capacity and racks and $7 million from new wholesale load serving contracts that we won last year.

Other contributors to higher revenue included service fee escalation, sales growth in the Environmental Solutions business and higher realized metals prices relative to the underlying indices due to improved processing. These were partially offset by the greater amount of scheduled plant downtime in the quarter, which impacted waste, energy and metals production by $8 million compared to last year.

Now moving on to Slide 6. Adjusted EBITDA was $106 million in the quarter, up $9 million over Q1 2020. The $15 million increase in revenue from higher commodity market prices fell directly to the EBITDA line. In addition, we saw strong net organic growth in adjusted EBITDA across most of the business as revenue growth in tip fees, service fees, Environmental Solutions and metals processing generated substantial operating leverage. To the negative, the higher planned maintenance schedule in the quarter resulted in a $14 million increase in maintenance expense and a $6 million net impact from related planned outage downtime.

As Mike discussed, we are revising our full year 2021 adjusted EBITDA guidance range to $460 million to $480 million, representing a $20 million increase at the midpoint and tightening of the range. Building from strong Q1 results, our outlook has improved significantly relative to our original range. Execution of the Q1 and early Q2 outage plan has positioned the fleet for strong production for the balance of the year with increased visibility to plant uptime as much of the year's planned maintenance scope is now behind us.

Metals prices, and to a lesser extent energy prices, have improved further from original guidance. I'll note that our forecast assumes a degree of mean reversion in metals prices over the coming months. So our outlook would continue moving higher to the extent that the current market holds all else being equal. We also expect to begin to realize some benefit from our announced overhead cost plan as we move through the year.

Looking out over the next few years, there are two key drivers that bridge to our outlook for 2024 that are under our control. As our U.K. projects come online and we execute on growth opportunities in Dublin, the U.K. and Ireland business will contribute $80 million to $90 million of new proportional adjusted EBITDA and approximately $50 million of incremental free cash flow. This will begin with the Rookery projects transitioning to full time commercial operations in less than a year, contributing approximately $25 million to adjusted EBITDA in 2022.

The second driver for which we have clear visibility and control is our overhead rationalization plan which will target $30 million in run rate cost reductions as we exit 2022 with $15 million to $20 million to be implemented as we exit this year. As Mike described, we've developed a detailed plan to achieve these reductions. The plan is broad-based and will address all areas of our overhead spends to varying degrees, with specific opportunities including reorganizing and consolidating certain corporate functions, improving business processes, better leveraging technology and reducing spend as we've refocused priorities.

From a cash perspective, there will be costs to implement the plan over the next two years, including severance and outside expertise. We'll get more specific on these one-time costs as we move forward, but in any event, they will be excluded from adjusted EBITDA. Between the U.K. and Ireland and the cost plan, these two items comprise the substantial majority of the bridge. Beyond that, we will continue to grow our core business organically, most notably through waste prices and expanding sales in Environmental Solutions.

In addition, as cash flow grows and we de-lever the balance sheet, the cumulative effect of capital allocated to reinvest in growth and/or reduce interest expense will increasingly become a driver as well. Commodities will remain a variable around our underlying growth trajectory. The 2024 outlook assumes energy prices at today's market forward curves and metals prices at approximately 10-year averages, which would effectively represent a modest pull back from where we are this year.

None of this reflects any potential transactions coming out of the strategic review. If for example, we choose to sell a particular part of the business, it would obviously impact this outlook. We would do so in order to advance our overall objective of fully recognizing the component values of the company and growing shareholder value. The key takeaway here is that the baseline outlook for the company as currently constituted is already highly compelling.

Now please turn to Slide 7. Free cash flow is $19 million in the quarter, essentially flat compared to the first quarter of 2020. However, excluding movements in working capital where we saw a strong inflow last year, free cash increased by $14 million driven by higher adjusted EBITDA and lower maintenance capex. We're also revising our full year 2021 guidance for free cash flow to $125 million to $155 million, representing a $20 million increases at the midpoint and tightening of the range in line with the increase in adjusted EBITDA guidance as the drivers of both metrics are largely the same.

Now please turn to Slide 8 where I'll touch on capital allocation. As I discussed last quarter, we remain well positioned to generate free cash flow in excess of our planned growth capital spend and dividend with the excess available to reduce debt. As our outlook for growth investment this year remains unchanged, our revised expectation for free cash generation will increase the amount of excess cash available to allocate to debt reduction this year all else being equal.

Now please turn to Slide 9 where I will conclude our prepared remarks with a brief update on the balance sheet. At March 31, net debt was approximately $2.5 billion, a $21 million increase from year end 2020. Our total leverage ratio was 6.1 times and the senior credit facility covenant ratio was two times. Available liquidity under our revolving credit facility was $422 million at quarter end. As Mike noted, we expect our leverage ratio to fall below six times this year and below five times by year end 2022, both without any potential further actions in connection with a strategic review that might accelerate this improvement.

With that operator, we'd like to move on to Q&A.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Noah Kaye from Oppenheimer. Please go ahead.

Noah Kaye -- Oppenheimer -- Analyst

Good morning. Thanks for taking the questions and for all the color on the strategic review and the very helpful walk on the U.K. projects. Mike, the 18 waste-to-energy operated sites, ones you're operating for the public, it sounds like that's going to go down. But I wonder if we could sort of level set here, it would be helpful to have some color. Can you help us understand what the actual contribution of that line of business is to the profitability of the company today? And then as you think about some of the actions that could be taken over the next couple of years, what can be done to increase that profitability and by how much?

Michael W. Ranger -- President, Chief Executive Officer

Sure. So on a baseline basis, if you think about it, there's $110 million of plant level gross profit from the 18 plants in North America. If you took a pro rata share of overhead against that, there's about $50 million of overhead expense and then there's about $35 million to $40 million of plant level capex that is recorded. So those are all within $5 million or so of refinement.

So you can see that there's probably $40 million of recorded EBITDA and there's probably $15 million of free cash flow on a net basis. So if you just -- if you put that through a filter, that's what would come out. And what would improve that would be reduce our obligations or responsibility for actual capex at facilities. That would be a first line of improvement that we are negotiating for which Derek and his team is on point. The other would be to change base fees for the services that we provide. We have been negatively impacted by low inflation which are the basis for our escalators over time which may not be in line with what our increased costs have been.

So it really comes down to we want each individual facilities to be able to stand on its own two feet from a contractual perspective so that each is positively contributing incrementally to the overall value of the company. We have, as you know, expiration dates coming up now over the next five to seven years that affect about 35% of our portfolio to 40%. And we're going to make sure that each plant in our determination about whether or not to let the contract expire or extend would be based upon that level set of profitability from both an EBITDA fully loaded basis with overhead included plus contribution to free cash flow. And if those hurdles aren't met then expiration would be the logical conclusion. So that's the framework in which we're operating as Derek is negotiating with those public sector clients.

Noah Kaye -- Oppenheimer -- Analyst

That's extremely helpful. Next question -- again, appreciate the walk on the growth in the EU portfolio. Can you just give us a little bit of color on how you plan to boost the profitability of Dublin because I see they are taking a step up in the coming years?

Michael W. Ranger -- President, Chief Executive Officer

So let me just -- there's a permitting process that's presently going on right now to expand the throughput of that plant. It was designed to handle about 10% to 15% more throughput than what the original permit calls for. And so we're going to try to capture that because it should logically be that for very little increased incremental costs that the throughput, which there is demand for in that marketplace, could be pushed through with the permit increase without any other meaningful expenses associated with it. So that's in the process of working its way through that -- the legal requirements to expand that permit.

Noah Kaye -- Oppenheimer -- Analyst

Okay, thanks. And just the last...

Michael W. Ranger -- President, Chief Executive Officer

60 million tons a year.

Noah Kaye -- Oppenheimer -- Analyst

Okay. That's very helpful. And I guess just the last one, and I think just kind of echoing a little bit what Brad said at the end here. But if you execute to this outlook from a deleveraging perspective, you don't necessarily really need to do anything in terms of asset divestiture. And obviously, this cost reduction program is helping enable that. I just wonder if you kind of benchmark your thinking now to where you were at when you started this review, Mike, do you feel any sort of less urgency now to divest certain assets just given the improved outlook? And can you talk a little bit about, I would say, the interest levels that you're seeing for some of the assets out there in the market at this point?

Michael W. Ranger -- President, Chief Executive Officer

Yeah. That's a pretty clear question. So I'll answer the first part and let Brad address the leverage question. Our view has always been that the hurdle for an asset sale determination had to be based upon that -- the execution of that would result in an uplift in the overall consolidated value of the remaining company. And so a near-term objective of reducing leverage is one component in that mix, right, because you'd be eliminating certain interest expense and you'd be gaining greater flexibility. But if in the end you weren't able to capture the uplift in the contribution from the value of the sale and the reduction of the cost of the leverage in the overall valuation of that sale relative to the overall company then you wouldn't do it.

That's not -- that objective isn't worth -- I mean, the way I think about it is, you don't take the shingles off the house and burn them in the fireplace to keep the house warm. So it can't be short sighted and it can solve a near-term problem. And I don't think that the problem of our leverage is acute enough to have to take actions like that. So that's how we've approached this. And there's a fair amount of interest in the discrete assets of the company and we need to fashion that against what the value indications are and what the contribution then is to the resultant overall consolidated remaining entity.

Brad Helgeson -- Executive Vice President, Chief Financial Officer

Yeah. And in terms of -- hey, Noah, it's Brad. In terms of the leverage, following on Mike's comment, and we've always said this that we have a view on what is, all things considered, probably the right level of leverage for us to work toward over time and that's never been a function of any immediate discreet pressure from a Covenant perspective or ratings or any other near-term driver. I think the takeaway and it sounds like you're taking the right message away is the underlying business plan is going to give us some really nice optionality over the next few years. I think we have pretty clear visibility to at least through 2022 getting leverage down below five times. That's sort of step one.

And then as we continue to move lower over time, the speed at which we do it will be a function of what the other alternatives are in front of us at the time for allocating capital. But the takeaway is, and Mike mentioned in his prepared remarks, our outlook has us generating cumulatively about $800 million of free cash. If you take away the dividend at its current rate and our planned investments in the U.K., that's $400 million to $500 million of excess cash that we can either deploy to accelerate deleveraging or potentially deploy in another way to generate a higher return on capital, all of which would be along that long-term path toward four times.

Noah Kaye -- Oppenheimer -- Analyst

Great. Thank you so much.

Operator

The next question comes from Michael Hoffman from Stifel. Please go ahead.

Michael Hoffman -- Stifel -- Analyst

Thank you for taking my question. The two points I want to sort of get at the long-term view are you've shared some insights on incremental EBITDA contributions. So I'd like to come back to that. But if I take the $600 million and the $250 million, can you give us some high level basic assumptions that are there? Like, are you -- is it the existing business and anything you do around improvements or is it chunk? What are the pieces? Because let me give you some math on done quickly. At midpoint of your guidance at $470 million this year, if I pulled out $20 million for metals upsides because they normalized, so call it $450 million, I get out $105 million between cost savings in U.K., Ireland. That puts me in a force, call it, a $545 million and then I just need organic growth off the domestic portfolio to make up the difference, but that's a path, and you do the similar thing to the cash. So what's in your assumptions?

Brad Helgeson -- Executive Vice President, Chief Financial Officer

Yeah. Michael, it's Brad. Let me kind of walk through the same bridge and maybe adjust the numbers a little bit and kind of get to it a different way. So midpoint of guidance for this year is on EBITDA is $470 million. We talked about U.K. and Dublin, obviously, primarily U.K. projects moving into operations. That's $80 million to $90 million and then $30 million from the cost plan. And then what that then leaves us with, just to get to $600 million, and certainly our plan and our expectation all else being equal would be that we would exceed $600 million, is $15 million of organic growth.

What's implied in this is, at least for metals prices, a bit of a headwind from a mean reversion to 10-year average on metals prices. So that's another, I think you said $20 million. By my math, it's $10 million to $15 million of EBITDA. So that would then imply an organic growth piece just to get to $600 million of about $25 million, $25 million to $30 million, which is a 2% CAGR. So in my mind, that's kind of the high level of the bridge components. Then the bridge for free cash essentially works the same way with the added kicker that as we deliver the balance sheet, we're going to reduce our interest expense.

Michael Hoffman -- Stifel -- Analyst

And underlying all that is it's the existing portfolio that is currently here. So you haven't walked away from any of the 18 or sold anything. It's everything you own today is all part of that assumption?

Brad Helgeson -- Executive Vice President, Chief Financial Officer

Generally, yeah. So to put a finer point on that and without getting into specifics because it's not appropriate at this point for us to do so. There is an implicit assumption in there that we will be exiting certain of our operations over this timeframe. But as you can probably tell because I didn't note it in the bridge, we don't expect that to frankly have a material impact on EBITDA and cash flow, particularly when you factor in additional overhead reductions that would come in connection with that. But it certainly doesn't assume anything materially from a transaction standpoint, from the strategic review whether it be a sale or an acquisition.

Michael Hoffman -- Stifel -- Analyst

Terrific. So my second question, and I have to ask it since you cracked the door open. If we have $40 million of EBITDA from the 18 service fees, would you share what the EBITDA breakdown is for the 21 own electricity and metals to get to the $470 million?

Michael W. Ranger -- President, Chief Executive Officer

Well, it's everything other than what -- the $20 million in EBITDA is from an Environmental Solutions and then the contribution from Dublin presently, otherwise it's everything else comes directly from those 21 plants.

Brad Helgeson -- Executive Vice President, Chief Financial Officer

Yeah, net of the remaining overhead.

Michael W. Ranger -- President, Chief Executive Officer

Net of the remaining overhead.

Michael Hoffman -- Stifel -- Analyst

Okay. All right.

Michael W. Ranger -- President, Chief Executive Officer

I mean, just to put a pin on it, that's $400 million of generation of net EBITDA from that portfolio.

Michael Hoffman -- Stifel -- Analyst

From the 21? Just that's the way to think about it. And it's the right way sometimes people try to disaggregate electricity and metals, but they're all interrelated because the plants have to be operating period. So you got to generate a waste fee, you get electricity from it to produce metals, it's all integrated. And that's $400 million on 21?

Brad Helgeson -- Executive Vice President, Chief Financial Officer

That's right. Correct.

Michael Hoffman -- Stifel -- Analyst

All right. Terrific. Thank you for a lot of clarity. The transparency helps. So appreciate that you gave it.

Operator

The next question comes from Mario Cortellacci from Jefferies. Please go ahead.

Mario Cortellacci -- Jefferies -- Analyst

Hi. Thanks for the time. I just want to touch on the negotiation process that you guys have under way. And just, I guess, I wanted to understand how those conversations are going. And I think is there any potential or how much potential is there for some of those contract negotiations to be expedited? I feel like, obviously, you already have a few in mind for some that you're already going to close and then the ones that you still have hope for you. Do have to wait for those contracts to come up for expiration or be closer? Can you go to them today? And how much of leverage do you have over them to be able to get what you want in a good timeline?

Derek W. Veenhof -- Executive Vice President, Chief Operating Officer

Hi, Mario, this is Derek. I'll attempt to answer your question as best as I can. So in terms of where are we in the negotiation, we are in negotiation with several of these clients today. We have been in dialogue with all of them obviously through this strategic review process and keeping them abreast as appropriate. So we are in dialogue. We feel pretty good about the clients we are in dialogue with at this point in time in terms of their understanding of where we need to go as a company and why we need to change these service agreements.

So I think generally speaking, there can be a pretty good outcome for both our client or our clients and Covanta. There are wins within that negotiation. And then on the other side, there are going to be some that may not be successful. And as already pointed out by Brad and Mike, the contribution around some of those contracts hasn't been great and we're just going to exit at that point in time. So be it.

In terms of leverage, we don't really look at it that way. I suppose that's appropriate. But these clients have been with us a long time, we respect that. And this has always been about trying to formulate win-wins and move the business forward. So productive conversations. Each side has its own degree of leverage. Each side uses that as we go about. So I expect over the next few years we're going to have a very clear picture of what remains in terms of our client business.

Michael W. Ranger -- President, Chief Executive Officer

And just to follow up on that. One thing -- one question you did ask that Derek didn't address, but is part of the overall thought process is one of the levers is in exchange for extending the contract into a timeframe where this doesn't have to be front of mind constantly for the client is to address ones that are not at their expiration yet, but you can find a longer dated relationship that works for both sides. So Derek has already started down that path. There's the near-term and the mid-term at this juncture and then some longer term ones that he's also looking at. But it's clearly to come up with a more sustainable relationship with the clients for a longest period of time possible.

Mario Cortellacci -- Jefferies -- Analyst

Great. Thank you. And then just one follow-up. And I think you've already talked about this in the past and I think you've kind of made it clear that you're not really interested in collections and doing deals. And I know you have a strategic review going on and that's not really in the cards right now. But maybe you can help us understand why buying collection businesses even longer term just doesn't make sense for Covanta or in the coming years as you de-lever could there be a philosophy change and maybe you go and do deals like that?

Derek W. Veenhof -- Executive Vice President, Chief Operating Officer

Mario, you're back to Derek again. So historically, we've not been in that space. And with the distribution of our assets and their locations, we've never really had a fundamental problem of sourcing waste into the plants. And I suppose if we did have a problem that would be a route that we could revisit and look at and see if it was accretive to our model. That hasn't been the case today. We are focused on the intermediate hubs, transfer stations and the security of long-term deals with large municipalities has provided us plenty of coverage.

The second aspect to that is there are other people in the collections business, and that's quite obvious. And they're quite skilled at what they do. We respect that. We view ourselves as an independent player in the marketplace for disposal. And it would be very difficult for us to catch up to their levels of sophistication on collection. That's put your money where you're really good at.

Brad Helgeson -- Executive Vice President, Chief Financial Officer

And just adding on to that, it's Brad. I mean, there are two reasons for stepping back. There are two reasons why we would consider vertically integrating. One would be to address an issue around waste supply. And that's an issue we don't have and I've never seen the need given our other infrastructure and our contractual profile and market position. We've never seen the need to go down that road in order to address an issue on waste supply.

The other reason would be is there an opportunity to leverage our disposal assets in certain markets to grow the company in that direction. As Derek said, that is a very competitive market with competitors who already do a very good job. That would be an entirely new business for us. And then also, it's been a matter of capital allocation. Certainly, we've had other priorities, including most notably, building the business in the U.K. and Ireland and the Environmental Solutions business as well. We've had other priorities for our capital beyond getting into what is a competitive business.

Michael W. Ranger -- President, Chief Executive Officer

And just one last piece on that is, when you think about, the question was asked by another analyst, is when you think about the value of the company-owned plants and their locations to have a mix of -- and the plants are always full and they're always managed for profitability on the margins in terms of finding the highest value waste available beyond the long-term contractual ones. Being agnostic in a market like that is got to be helpful because then municipalities and then vertically integrated waste companies view you as a partner and a resource as opposed to a competitor, and I think we do benefit from that.

Mario Cortellacci -- Jefferies -- Analyst

Thank you so much.

Operator

The next question comes from Brian Lee from Goldman Sachs. Please go ahead.

Brian Lee -- Goldman Sachs -- Analyst

Hey, guys. Good morning. Thanks for taking the questions. So I think you kind of answered this, but just to be specific on the asset sales and shutting down of select assets and some of the renegotiations. Are these actions we should see more clarity around moving through the next several quarters in 2021? I know it sounds like it's going to be a multi-year effort, but just how are you thinking about the timeline? Are we going to see some updates around that?

And then if you kind of force rank the priority and timing potential of each set of these actions, I suppose it's going to be assets specific, but just in general, what's easier to get done? Is it the contract renegotiations? Is it just waiting for certain contracts to expire and then moving away from those assets? How should we be thinking about that?

Brad Helgeson -- Executive Vice President, Chief Financial Officer

Yeah. Hey, Brian, it's Brad. So I would divide potential changes to the portfolio into two categories. The one category is where we're working through underperforming operations. And the next steps for those will be specific to the situation. Some of those are assets that we own where we would shut it down. Some of them are operating contracts where upon expiration potentially we no longer operate that asset for the client.

As far as timeline, I would say that's going to play out over a number of years as opposed to quarters. I probably wouldn't put it in terms of quarters. It's a focus area. We're having conversations today for contracts that have explorations over the next several years. So there is a long lead time there. But I wouldn't expect -- you shouldn't expect a flurry of announcements in that area in the coming quarters. I draw a distinction between those and other transactions that might potentially come out of the strategic review that I would characterize as transactions to better realize value of discrete assets. Those are potential transactions that we're focused on right now. And we would anticipate having more announcements in that area over the balance of the year.

Brian Lee -- Goldman Sachs -- Analyst

Okay. Fair enough. That's helpful. And then I don't know if you've covered this, I might have missed it. But I think you mentioned $15 million to $20 million of savings here on some of the cost actions through this year and then getting to the full $30 million in 2023. It sounds like the $30 million is going to flow dollar-for-dollar through to EBITDA. Are there any offsets in the near to medium term on the sort of $15 million to $20 million? Are we going to see that also just flow through to the EBITDA line? And then specific to the kind of modeling I suppose, it sounds like it's a lot of different items, but where specifically should we be expecting to see those cost savings materialize when we think about the modeling of it?

Brad Helgeson -- Executive Vice President, Chief Financial Officer

Yeah. Hey, Brian, its Brad. So the $15 million to $20 million and then ultimately the $30 million, the right way to think about that is that it will flow directly to the adjusted EBITDA line. We would -- as necessary in the period, we would adjust for any one-time costs to implement. I mentioned this in the prepared remarks. Two that come to mind would be potential severance costs, and to the extent that we are engaging with third-party expertise to help execute certain aspects of the plan. So those are things that would be cash in the period. And so therefore, would be reflected in our free cash flow because we don't adjust free cash flow, but we would adjust them for adjusted EBITDA.

So just to make sure there's total clarity, the $15 million to $20 million as we exit this year on a run rate basis another way to say that is we would expect a $15 million to $20 million reduction to overhead, and I'll get back to what exactly that means in a second, in 2022. And the $30 million of run rate, as we exit 2022, would be seen on a full year calendar basis in 2023. So you've heard us talk about overhead.

The addressable -- just to put a little more detail on this. The addressable overhead that we're focused on that primarily supports the North American business is approximately $190 million. Last year, we reported $120 million of SG&A. So the balance of that overhead actually flows through the operating expense line. And the way just for financial statement presentation purposes, the way we allocate that is based on the nature of the function. So for example, Derek's team flows through cost of operations. My team flows through SG&A. It's kind of a simple way to think about it. So in terms of the income statement, you'll see the impact in those two lines as the plan is implemented.

Brian Lee -- Goldman Sachs -- Analyst

All right. Thanks a lot. I appreciate the color. Passing on.

Operator

The next question comes from Scott Levine from Bloomberg. Please go ahead.

Scott Levine -- Bloomberg -- Analyst

Hi, good morning, guys. Can you hear me?

Michael W. Ranger -- President, Chief Executive Officer

Yeah, we can hear you.

Scott Levine -- Bloomberg -- Analyst

Great. I'm not sure if you mentioned this. I don't know if this is a question for Brad. I know you guys have talked in the past about four times kind of being a target range for leverage, and I'm guessing that's under review as part of this broader strategic review. But I was just wondering if you can comment on your thoughts on what you see is a comfortable or a target leverage range for the company? And if so, elaborate maybe a little bit more on when you reach that, is the philosophy at this point maybe more growth-oriented or capital returns-oriented? And are we getting ahead of ourselves there given the fact that I think you're saying you expect to be below five times by the end of next year. Just trying to get a sense of whether growth and capital returns maybe reenter the picture in a more meaningful way in 2023 or whether it takes four times leverage to kind of get to that level?

Brad Helgeson -- Executive Vice President, Chief Financial Officer

Yeah. Hey, Scott, it's Brad. Long time, no speak. So nothing has come out of the strategic review that has changed our view on four times plus or minus as an appropriate level of leverage for the business. That doesn't mean that we're not comfortable if the opportunity warranted to run the business at a higher level, and it doesn't mean that once we get four times we won't continue to de-lever. But I think in terms of a North Star for where we're going to be heading over time, four times is still the number.

I think what we might do and how we might prioritize capital return versus investing whether it be in the existing business or inorganic growth, I think it is a little too early to start to handicap those. We will see what the opportunity set is in front of us, where we are as a company and make those decisions as appropriate at the time.

I think compared to where we've been in the past, because four times is not a new number. We've talked about four times for a long period of time now. I think the real difference now is we see a clear path over a relatively short timeframe. So between now and 2024 to where the business with the U.K. projects coming online primarily will begin to generate cash at a level that makes that a very real option and reality for us as opposed to something that's a little further out over the horizon, which is really how we -- more how we've talked about it in the past.

Scott Levine -- Bloomberg -- Analyst

Got you. Thank you. One quick follow-up, I guess, maybe you want to know his questions at the outset. I guess, I'd asked you if you have any options -- I know at the beginning of the strategic review, the mantra is always everything is on the table. Have any options been taken off the table as you guys have progressed through this review or maybe any changes in philosophy regarding the business since you initiated this process I think last October?

Michael W. Ranger -- President, Chief Executive Officer

Scott, the answer is no. Nothing's been eliminated at this point. And we're in the phase of having more facts in front of us to evaluate, whereas before in our discussion at the end of October was more instinctual. And yet we've gotten lots of confirmation on some of our original thoughts and some other eye opening alternatives. So in that regard, we're going to work through that once again. Everything that you do is a lost opportunity, but it also is a big game if you do it the right way.

So that's how we're looking at it. Everything's got to be measured against what the current expectations are and this current valuation of the company is. And if we can enhance that and change that trajectory then those alternatives are still available to us and we will act on them accordingly at the right time. And as Brad mentioned, just to underscore, that category was the second that he talked about, and we would see actions taking place through the remainder of this calendar year.

Scott Levine -- Bloomberg -- Analyst

Got it. Understood. Thanks, guys.

Operator

[Operator Closing Remarks]

Duration: 61 minutes

Call participants:

Dan Mannes -- Vice President-Investor Relations

Michael W. Ranger -- President, Chief Executive Officer

Derek W. Veenhof -- Executive Vice President, Chief Operating Officer

Brad Helgeson -- Executive Vice President, Chief Financial Officer

Noah Kaye -- Oppenheimer -- Analyst

Michael Hoffman -- Stifel -- Analyst

Mario Cortellacci -- Jefferies -- Analyst

Brian Lee -- Goldman Sachs -- Analyst

Scott Levine -- Bloomberg -- Analyst

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