Covanta Holding Corporation (CVA) on Q1 2022 Results - Earnings Call Transcript
Operator: Good morning and welcome to the Covanta Holding Corporation’s First Quarter 2022 Conference Call. This call is being recorded and an archived recording will be available after the end of the conference call and can be accessed through the Debt Investor Information section of Covanta's Investor Relations website. At this time, I'd like to turn the call Jim Reilly, Covanta’s Treasurer. Please go ahead.
Jim Reilly: Thank you, and good morning. Welcome to Covanta's first quarter 2022 financial results conference call. Joining me on the call today will be Brad Helgeson, our CFO. Afterwards our prepared comments, we will take your questions. During the prepared remarks, we will be referencing certain slides that we prepared to supplement the call. Those slides can be accessed now or after the call on the Investor Relations section of our website, www.covanta.com. These prepared remarks should be listened to in conjunction with these slides. Call participations should also see the earnings release for a discussion of our usage of forward-looking statements and non-GAAP financial measures. Before I hand the call off to Brad, I'd like to note that Covanta finalized an amendment to its credit agreement effective yesterday and increased the commitment on the revolving credit facility from $440 million to $600 million. The increase was supported by 100% of our existing revolving lenders who each committed to their pro rata share of the increase and we want to thank our relationship banks for their continued support. The increase in commitment represents a significant step in our efforts to proactively and prudently maintain adequate liquidity to support the business and our energy risk management activities. With that, I'd now like to turn the call over to Brad.
Brad Helgeson : Thanks, Jim. Good morning, everyone. I'll begin with a review of some key performance indicators for the business on Slide 3. In the waste-to-energy business, the story for the quarter is straightforward. Production volumes were a bit lower than the first quarter of 2021, which I'll explain, while pricing was up strongly across the board, continuing the well-established trend in waste tip fee growth and reflecting very favorable commodity end markets. Regarding waste-to-energy production volume, there were a few factors to point out. First, this quarter reflected a heavier plant maintenance outage schedule as compared to Q1 last year, with approximately 35% of anticipated maintenance expense this year already incurred through March versus a little over 30% at that point last year. This resulted in nearly 10% more scheduled down days year-over-year. We also experienced additional unplanned downtime at a few plants heading into their maintenance outages, where we addressed some specific known issues. Keep in mind the modest variability in production on a quarter-to-quarter basis, both positive and negative, is typical for this business; but as you've seen in our consistent operating results over many years, these even out over time. This year should be no different as we expect waste-to-energy plant production to be consistent, again, overall for 2022. On the revenue pricing side, waste-to-energy tip fees were up over 5% again year-over-year, reflecting inflation-linked escalators under long-term contracts, higher pricing on new contracts, and favorable waste mix including higher profiled waste volume. An offsetting benefit of lower production volume in a given period which may not be intuitively obvious is better price mix on waste as we prioritize higher price tons when utilizing available plant capacity. Strong waste disposal pricing power with our unique and irreplaceable asset base in the Northeast market with shrinking landfill capacity and increasing costs for long haul waste transportation remains a meaningful long-term secular tailwind for the company's value and credit. Energy prices looking at the overall average of market, hedged and contracted output, were up over 30% year-over-year. This reflects stronger prices across the generation portfolio including contracts where output is priced and avoided cost, higher hedged prices as we locked in at a strengthening forward curve over time, and of course higher market prices, which more than doubled year-over-year. Bottom line, it's a great time to be a power generator. But Covanta is especially well-positioned in this environment because we don't face higher prices for our feedstock. Instead, our fuel is a sustainable waste solution and our biggest revenue source. We also have continued to see a very strong recycled metals market with average realized sales prices for ferrous scrap up over 10% and non-ferrous up over 15% year-over-year. I will now discuss the drivers of revenue more specifically, please refer to Slide 4. Revenue was $551 million in the first quarter, up 11% compared to Q1 2021 with strength across the board. Higher energy prices, including , contributed $25 million to revenue growth, while higher market prices for recycled metal, both ferrous and non-ferrous, added $6 million. As previously noted, tip fee prices increased by over 5% year-over-year or $8 million in revenue terms. In addition, contractual escalators drove over $5 million increase in service fee revenue. Our environmental solutions platform continues to grow rapidly, offering a menu of sustainable options for commercial and industrial customers who are increasingly looking for non-landfill alternatives for their waste. Revenue at our material processing facilities grew by $7 million in the quarter or nearly 20% year-over-year. Turning to adjusted EBITDA, I will refer to Slide 5. Adjusted EBITDA was $98 million in the first quarter, which was flat on a year-over-year basis. Essentially strong price growth was offset by lower waste-to-energy production volume on a comparable basis, which I discussed earlier, and higher maintenance expense related to the heavier plant outage schedule compared to last year. We also experienced higher cost inflation for items such as wages, transportation, and consumables. But as I've said before, this business performs very well in an inflationary environment overall. And the inflation that we see on the cost side is offset by multiples on the top line, across waste, energy and recycled metal revenue. As operating variability normalizes across the balance of the year, the underlying trends point to solid growth in adjusted EBITDA on a full year basis. Now please turn to Slide 6, where I'll walk through free cash flow on a year-over-year basis. Adjusted free cash flow was negative $6 million in the first quarter, down $16 million on a year-over-year basis with heavier plant maintenance CapEx compared to Q1 2021, and higher interest expense associated with the new EQT acquisition capital structure. As a reminder, the first quarter typically represents the seasonal low point for cash generation in this business, as it is always the heaviest maintenance outage period. And this year was particularly heavy. Turning to the balance sheet on Slide 7. We ended the first quarter with $3.4 billion in total debt. On a pro forma LTM basis, the leverage ratio as defined in the indenture to the 2029 notes and consistent with the corresponding measure in our credit agreement was 5.88x at March 31, up slightly compared to year end, but down from September as presented during the November debt syndication. As a reminder, both pro forma adjusted EBITDA and net debt in this calculation as presented, exclude the unrestricted subsidiaries. We had $154 million in availability under our revolving credit facility at quarter end. As Jim discussed, we recently expanded our revolving credit facility from $440 million to $600 million in order to bolster our liquidity position. In addition to greater flexibility to make investments opportunistically, this increase will provide additional support for our energy hedge book. Stepping back, higher energy prices are great for Covanta, as you've seen in recent financial results. In a world of structurally higher energy prices, the value of this business is greater and the credit is stronger. However, we have a disciplined energy risk management program under which we fix prices for up to 80% of our output on a rolling 36 month basis. And as market prices continue to rise, these hedges reflect non-cash mark-to-market losses. The mark-to-market liability on these hedges was $183 million at March 31 as you can see in our quarterly report released this morning and has moved higher since then as energy prices have continued to rise. Depending on the security arrangements in place with our counterparties, we often need to post liquid collateral against these liabilities above agreed-upon credit thresholds in the form of letters of credit or cash. Of course, our hedges are always settled in conjunction with physical generation, so they never represent naked cash liabilities in any scenario, but they can require collateral nonetheless. With the revolver upsize, we now have over $300 million of available excess liquidity, and we're actively pursuing means of reducing the collateral requirements of the hedge book and further increasing liquidity in this very positive but volatile price environment. In conclusion, business conditions overall are highly supportive of the Covanta model, and we’re focused on delivering strong growth in adjusted EBITDA on a year-over-year basis in 2022. With that, we'll move to the Q&A portion of the call. Operator, would you please open the line for questions?
Operator: We will now begin the question-and-answer session. Our first question comes from Brian DiRubbio with Baird.
Brian DiRubbio : Just a few questions for me. I guess starting off, with the new expanded credit facility, have the terms fundamentally changed in terms of interest rates or just fees?
Jim Reilly: This is Jim. No, Brian. No changes in material terms to the credit agreement. It's really just an increase in commitment. The only thing I'd note is, on the revolving portion of the credit agreement, we did convert that to SOFR from LIBOR, but the spread is the same. So I wouldn't see that as material.
Brian DiRubbio : Got it. And then the $137 million you have in funds restricted LP trust, what did those represent? I know, last quarter, we talked about this, you had some because of some cash collateralization of LPs, but then you moved that over to the new revolver. Just wanted to get a sense of what that $137 million is, because you are using that as part of your net debt calculation?
Jim Reilly: Right. So $100 million of that $137 million Brian is the cash from the Term Loan C, right? So it's a direct offset to the Term Loan C on the balance sheet. The remaining $37 million is candidly spread across both the domestic projects at restricted accounts, as well as other short-term restricted accounts supporting different activities.
Brian DiRubbio : Just going to the financial statements. Obviously, these were cut on 3/31. The decision to move the European assets occurred after that. But there was -- going through the cash flow statement, there was $77 million that was invested and it was investment in equity affiliates. I'm assuming that represented the cash investments made into the assets that are no longer part of the credit group?
Jim Reilly: Brian, that's correct.
Brian DiRubbio : So just to be clear, so that cash went out to those investments, and then the investments were removed per the LP capacity, but there's no reimbursement for that $77 million, correct?
Jim Reilly: That's correct.
Brian DiRubbio : And then just finally, on pricing, you had mentioned that there was a benefit that you got from mix, because you had the plant outages. Can you quantify what that benefit was on pricing?
Brad Helgeson: This is Brad Helgeson. It's difficult to specifically quantify how much of it was related to mix. And then the reason is just there's so many moving parts are on the different waste streams at each of the plants. But clearly, that was a theme. I would, though, sort of caveat it with the comments that it was a factor, but it was very much on the edges if you look at overall waste tip fee growth on average across the portfolio of north of 5%. The biggest drivers of that were contractual escalation, which is tied to inflation indices. And of course, that's been running hotter than it has for us really at any time in memory. And as we're resetting contracts, we're doing so at higher prices in a very favorable environment for waste disposal assets. So, I just -- I wanted to highlight the mix, because it is in there as a factor but really isn't the main driver.
Brian DiRubbio : And actually I do have one last one. Just on the tons sold of ferrous and non-ferrous, down a lot more sharply than the amount of volumes that you process. Anything to take away from there?
Brad Helgeson: Yes. So there's -- and this is exactly why actually we report both what's recovered and what’s sold. The recovered is what would correlate pretty closely, of course, with how much waste we process in a given period. The amount sold can move up or down with increases or decreases in inventory. So it's basically when the -- because the metal is recovered and shipped from the waste-to-energy facility more or less real time and then the timing at which that is then sold, because a lot of it comes to our centralized processing facility in Pennsylvania, where we process and upgrade the facility and then sell it, often you have you have timing lags, and inventory builds associated with that material. So long story short, it just introduces a kind of normal fluctuation period-to-period around that number.
Operator: Our next question comes from Mike Turgel with Morgan Stanley.
Michael Turgel: Hi, guys, thanks for holding the call and for taking the question. Appreciate the time. A couple of questions I guess. On the past call, it sounded like there would be some margin pressures, it sounded like, I thought, from fuel labor, et cetera. But looking at the reconciliation on Slide 5, maybe that's all wrapped up in the 10 and the 5 in maintenance and other. Is that fair to say or were there -- did those pressures not really materialize in the quarter? How would you characterize I guess that 10 and 5 decrement from the previous Q1?
Brad Helgeson: Yes, it's Brad. So we absolutely did feel that pressure, as I noted briefly in the prepared remarks. It is essentially reflected and netted with some other factors in the 5, in that reconciliation. So essentially, if I unpack the 5 a little bit, we had higher medical benefit -- let me unpack the part that -- first pull up the part that isn't what we're about to talk about. So, we had higher medical benefit experience in the first quarter compared to the first quarter last year. We're self-insured on medical. So as people are increasingly getting out and seeing their doctors and having elective procedures, some of that expense is now coming back to us. We saw a significant decline in that expense during the COVID period. So that's part of it on a negative from an EBITDA perspective. And the other is, we -- the other that I would pull out is, we typically will have construction revenue and expense, that we’ll enter into construction agreements for construction projects with municipal clients that own the waste energy plant that we operate for them. It's not a big overall profit driver, but we do sometimes make a margin on that business. And that was just, again, based purely on the timing of some of these projects coming on and rolling off, that was a negative in the quarter as well. You pull those out and that other number is essentially flat, which means that the waste price growth and the -- in summary, the waste price growth, so tip fees and service fees, essentially were offset by cost inflation, just the regular escalation of our ongoing costs, which of course now are running hotter than they have in the past. Now the waste price growth is running hotter as well. So just the way the numbers fell out in the quarter, those essentially offset. Of course, what isn't in that math is the 30 plus million of higher commodity based revenue growth from price that we have elsewhere in the reconciliation. So, in total across the revenue line items, again, as I mentioned in the prepared remarks, we made up for multiples of what we saw on the cost side. But it was there and depending on how you want to line up these line items, it was in this presentation offset by waste price growth.
Michael Turgel: Got it. Okay. That's helpful. And that waste price growth I assume is based on the contract renewals. And as they continue, that will roll through the rest of the year. Is that fair to say?
Brad Helgeson: Yes. That will continue to roll through. And there is a bit of a lag where obviously, as we've all seen, we're seeing much higher inflation prints in recent months. It typically will take a full year for all of those inflation prints to reset in the contracts where we'll typically have annual resets. And those based on the -- really the fiscal calendars of our municipal clients, those tend to be heaviest actually midyear and later in the year. So we saw some of that last year, that's rolled through, but there's much more to come as we move through the year.
Michael Turgel: Helpful. Got it. And then I think I've had this issue in the past, but having trouble reconciling cash flow for the quarter, the $77 million that went out, that the previous caller had a question about, I don't -- I presume that's not in the EBITDA calc, and yet cash on the balance sheet was up by $24 million. The revolver balance was down by $46 million. So that would imply a lot of cash flow. I’m something -- I'm missing something in there. I'm just curious what the difference is?
Brad Helgeson: Yes. For that one, maybe I'll suggest if you could follow up with Jim. And we'll go through the cash flow statement line by line. It's just probably a difficult exercise right now on the fly on the call.
Operator: Our next question comes from Nikhil Jain with Genworth Financial. Please go ahead with your question.
Nikhil Jain : So just have a few questions on the business, and I just also actually wanted to clarify the cash flow line items. So maybe I'll just follow up on that or hold off on that. So just one on the recent kind of Moody’s action on the unsecured note, can you -- I mean, what sort of conversations you have with Moody’s? I'm just curious in the sense that obviously the business is growing, and I think you just made a comment that you are evaluating options on the collateral posting, in the sense, maybe you can give some more color on what are you evaluating? So I'm just trying to get my arms around kind of what happened with Moody's and then what actions you're taking around the collateral?
Jim Reilly : Hi, Nikhil. This is Jim. So we are in regular contact with both agencies, have been since the transaction closed, and have been for many years, right, as a public company. To cover the second piece, first, perhaps, right? So we increased the revolver as we noted. The other primary initiative that we've been working on is transitioning some of our existing energy risk hedge book from traditional, is the CSAs that require cash and/or letters of credit to lean-based structures where the counterparty would rely on sharing the security package with the banks. All right. So that's our primary focus right now with different counterparties, and it's an ongoing process, but we're engaged on it, as well as a handful of other initiatives just to maintain adequate liquidity, right, to support the business and risk management. As far as the Moody's action, I'm not sure we can really comment on it beyond what I would probably say is that when the deal was structured, I think it was a capital structure that had already to some degree tried to optimize and maximize secured capacity, such that an increase in that secured debt could hit a tipping point, right? And I just provide that as context, I obviously can't speak for them. But I think that's the context I would put in it.
Brad Helgeson: Yes, I will -- this is Brad. I'll add on a little bit. So, our -- and not commenting on the Moody's opinion specifically. But certainly our view is there are really two points here. The first point, which I alluded to in the prepared remarks, is the fact that unambiguously higher power prices are good for this business. It's good for the credit, it's good for everything. The second point is a notching point, the unsecured versus the secured. And the reality is -- and this is, obviously, what Moody's was responding to in terms of the notching of the unsecured, a lot of our solution to supporting the hedge book has required us to tap further into our secured debt capacity with additional revolver and indirectly with having hedged counterparty share in the collateral pool. So, that -- sort of not to dismiss it, but it is what it is.
Nikhil Jain : Okay. So, if you, as you kind of move forward with like the new -- with kind of moving towards structuring it on a lean base, what does that -- does that like basically free up your revolver more? Like I am just maybe trying to understand like what would be the changes that we would see once that happens? So, conceivably, your cash would free up, because you're basically providing them a mean on that you shared, that they're going to share with the bank. Is that how I should think about it?
Brad Helgeson: Yes. It's pretty simple. So to the extent that we have cash and/or letters of credit posted with a counterparty today, if we're able to transition that counterparty to instead rely on the collateral package under the credit agreement, then we'll get that cash and LCs back, and that then dollar-for-dollar would increase our liquidity and reduce our reliance on the revolver. I think I would also just sort of overall make the comment just around the logic of that structure. And there's the conversation we have with our counterparties and I think our counterparties understand. But we are not a trading operation, right? We're not taking positions that would ever result in a cash liability for us. We own the physical generating assets that run 24/7. And we limit our hedging activity to a level where we always have excess physical generation, every hour, every day that we have hedged. So that as we deliver the electricity, that's when we settle the hedges. So I think it's just important to kind of restate what it is we're talking about. So I think that the collateral that we have posted, in many ways, represents belt and suspenders for the exposure that the counterparty really does face. But nonetheless, it's the way that these arrangements have been structured in the past, and it's where we are, and we're just trying to deal with it.
Nikhil Jain : So, is there a -- I mean, prices have gone up this quarter too, so on the energy side. Should we expect that essentially, you will need to post some more collateral, so that means the liquidity you have right now, that can get squeezed further to the point where unless you're able to move them to the collateral sharing agreement? And just on that point, do you still need -- do the banks need to approve that? So where do you kind of stand with that on the negotiation?
Brad Helgeson: Yes. Well, let me quickly, just so I don't forget, let me answer that last question first. And then I'll come back to the first part. So we have the ability in the covenant package in the credit agreement to essentially have energy hedged counterparties as secured parties under the credit agreement. So the lenders have already agreed to it in the original agreement, and so we're seeking to avail ourselves of that flexibility which I think is the benefit of everybody. As far as the potential for additional collateral, so we've had to post additional collateral since the end of the quarter, as I mentioned -- I mentioned we have available liquidity at this moment of north of $300 million. The collateral that we've already posted is based on forward prices, as they are right now. And so to the extent that we see further increases in forward prices out the curve, that could potentially require posting of additional collateral. Of course, EBITDA goes up, cash flow goes up, everything is moving in the right direction in that scenario for the company, but that could potentially require additional collateral. And that's exactly why we wanted to and continue to seek additional ways to increase our liquidity position is to give ourselves more than adequate cushion and underscore more than adequate cushion against potential calls for additional collateral.
Nikhil Jain : Okay, that's all very helpful. Thank you. So you expect to wrap that up in Q2, essentially, all of the -- or it's going to take longer than that?
Brad Helgeson: Well, I think it's an ongoing process. So the revolver, as Jim mentioned, we completed that yesterday. So we have that additional availability now. The other initiatives, including restructuring the security of the hedge agreements, there are different counterparties in different stages of the discussions. We would like to make significant progress across all those fronts in the second quarter, yes. But then as I said, this is going to be, I think, an ongoing focus. And we're always going to look to put ourselves in a better liquidity position beyond the second quarter.
Nikhil Jain : Great, thank you. And just one question, and I'll get back into queue on -- just clarification on the European subsidiaries kind of moving out now of the restricted group. So should we with that -- that's already been concluded now, right, post first quarter. Should we now kind of see where like you saw a project debt listed and the restricted cash that’s tied to maybe project debt P&I? How should we be thinking about that? Should that kind of -- those line items kind of change now?
Brad Helgeson: No. So actually those line items already -- so those balances on the balance sheet actually relate to domestic project debt, and then domestic assets. So the European non-recourse project debt was actually always deconsolidated or has been for several years. Yes, so the separation from a credit perspective has already happened. So we've already designated those subsidiaries as unrestricted. So they're out of the pro forma credit ratio, for example. We're actually looking to close the separation legally over the next month.
Operator: Our next question comes from Kevin Ma with Nationwide Mutual.
Kevin Ma: Thanks so much for hosting the call and taking questions. I appreciate your time. Just to follow-up the prior caller’s question on rating. Are there any kind of like a longer term rating targets or leverage target you guys are trying to manage to?
Brad Helgeson: It's Brad. No, not specifically. I think what we've very clearly certainly communicated to the rating agencies and broadly and I'll do so again, we will look to delever the company over time, and this is a business that over time generates a lot of free cash flow. EQT has been very explicit with their intention to never take a cash dividend out of the business. So all the cash that we generate will stay in the business. That will then delever the company either by investing for growth, which would certainly be our first priority, and then delever the company, that way or in the absence of those opportunities during any particular period, go to reduce debt. We haven't put any sort of artificial targets or constraints on the capital allocation decisions that we're going to be making over the next few years. But all of them will result in a company that has a stronger credit profile over time. And as far as the ratings, same thing. We don't have a specific ratings goal. Our expectation would be that as the company and its credit profile strengthens over time, that the ratings will reflect that.
Kevin Ma: Got it. No, I appreciate it. And then just kind of one last question. With the Moody’s still on negative outlook, are you guys expecting kind of further rating action down the road? Or just kind of like trying to get more color regarding your conversation with Moody’s and other rating agencies.
Jim Reilly: Kevin, this is Jim. I think the short answer to that is no. But listen, we maintain steady dialogue with them, and we'll continue to do so. As Brad noted, right, our intent is to improve the credit over time. So there's nothing I'd point to now, right?
Brad Helgeson: Yes. As you know, when the rating agencies have an outlook that then becomes something that they need to resolve specifically one way or the other in a relatively short period of time. So they'll be looking to do that.
Operator: Our next question comes from Omar Jama with Guardian. Please go ahead with your question.
Omar Jama: My question is -- was on the $77 million equity affiliate payment. Should we expect to see any additional payments in this line item over the next several quarters?
Jim Reilly : Omar, this is Jim. The answer to that is no. The separation of the European business, in step means Covanta is no longer required to fund the continued equity investments in that platform. So I'd expect that $77 million that went out in Q1, which was earmarked almost entirely for the Rookery project that came into operation, we shouldn't see any more of that going forward.
Omar Jama: Okay. And then the restricted funds held in trust balance declined from $235 million to $137 million. What are those funds for?
Jim Reilly : Yes. So the biggest step there was, it's a -- when the transaction closed last year, we had legacy letters of credit outstanding with our former agent bank that we cash collateralized at close as a first step to then transitioning those letters of credit onto the revolver or under the Term Loan C. So we posted a certain amount of cash with that counterparty that shows up on the Q4 balance sheet and about $110 million of that represented -- representing that collateral backstop. Over the course of the first quarter, we did transition those letters of credit to the revolver and/or the Term Loan C. So that cash was returned to us and was unrestricted cash on our balance sheet and used in the operations, right?
Omar Jama: Okay. And then the seasonality in the business, obviously, power prices are a lot higher now than they were even a month or two ago, but you're largely hedged. How -- do you typically have better quarters in 2Q and 3Q just due to seasonality?
Brad Helgeson : This is Brad. Yes, we do. I think the -- and I mentioned this. The first quarter is far and away, the low -- from a seasonality perspective, the low point of the year, again, driven primarily by the maintenance outage schedule. It used to be that power prices were highest in the summer and lower in the winter. In recent years, it's -- you've sort of had really two peak periods. The summer still is good time for power, but the winter has become the high season for power prices with the all of the demands on gas. So we saw some of that, of course, in the first quarter but the maintenance outage schedule really is the driving factor of cash generation in the quarter. And then over the balance of the year, we'll see much, much stronger results, EBITDA and cash on a seasonal basis in Qs 2, 3 and 4. The specific rank ordering of which is the best quarter, it does move around a little bit from year-to-year. But generally the second half is overwhelmingly stronger. Because in the second quarter, you're moving into the more of a shoulder period for power prices. And in the second quarter, we're actually finishing up the early -- late winter, early spring outage schedule. So you still have a little bit of that to kind of work through in the second quarter. So really the long story short is, the business is very second half weighted, without necessarily predicting Q3 versus Q4 on an EBITDA and cash basis.
Omar Jama: And then last thing I would say is the -- the lot of questions around the $77 million payment. On the last call, you said there would be no payments, I understand that maybe these payments occurred before or were scheduled before you made those comments are kind of grandfathered in. But I think that's one potential issue going forward. That continue to be the case that you don't make a lot of equity payments. That's kind of what you said you would do even though you of course had the flexibility to do so under all your RP baskets, which are quite generous. So it's more of a comment. Thank you very much for your time.
Operator: Our next question comes from Kareem Mansur with Whitebox Advisors.
Kareem Mansur: This relates, again, to your operating costs. I know that one of your contracts have inflation-based escalators. Was inflation simply so much stronger than the escalators that essentially drove your operating costs? Or did you guys -- like you alluded to earlier, the higher medical insurance during the period drove that line items ultimately kind of see the margin progression shown through the quarter?
Brad Helgeson: Yes. The -- this is Brad. Essentially, the inflation -- just the way the numbers ended up in the quarter, the inflation benefit that we saw in the waste revenue line items more or less offset on a same-store basis. And so this is where there's - it isn't necessarily as simple as looking at the P&L. But I am -- so I'm talking same-store basis. Inflation on the top-line for waste revenue, tip fees and service fees essentially offset same-store escalation in our costs. And in the EBITDA reconciliation bridge, on Slide 5 of the call deck, that's largely offsetting one another in the -- that last other category. So that's what we saw. As I mentioned earlier, I think as we continue to get resets in our contracts with these higher inflation indices, that will certainly help move energy prices forward and get back some of that margin compression.
Operator: Our next question comes from Yana Manoukian with Vibrant Capital Partners.
Yana Manoukian: My questions have actually already been answered. Thank you.
Operator: Our next question comes from Eric Goto with PineBridge.
Eric Goto : I just have a few more questions on your hedges. How much, I guess, lean capacity do you have that you can use as collateral for your hedges as we look at cash and LPs?
Brad Helgeson: So if you could -- because we are just dealing with a technical issue. Could you repeat your question?
Eric Goto : Yes, sure. I was just wondering how much lean capacity do you actually have that you can use to pose collateral for your hedges in lieu of cash and letters of credit?
Brad Helgeson: Sorry. Yes. It's uncapped.
Eric Goto : Oh, it is uncapped. Okay.
Brad Helgeson: Yes, it's uncapped in the credit agreement. Correct, right.
Eric Goto : Got it. Okay. And so, I guess if forward curves continue to move up here, would that change your strategy with entering into new hedges to preserve some of that liquidity or could you possibly issue more secured debt instead to capitalize on that opportunity?
Brad Helgeson: I think we'll have to -- you make those decisions as the facts evolve. You bring up a good question about our desire to enter into new hedges. I'll take a little bit of a step back. So we have an energy risk management program that has for many years served us very well, and continues to serve as well. You have to take the good with the bad. When prices are going up or down, you're deciding to take risk off the table. But the way we've typically operated under that program is we roll hedges in on a rolling basis over a 36-month time horizon to where -- we're typically entering a year, so first 12 months, about 80% hedged. And then significantly less hedged in years two and three, and we'll leg into those over time. We actually deviated from that strategy for the first time late last year as the forward curves continued moving higher. With the upcoming EQT ownership transition, we decided to go ahead and take more risk off the table from an energy price perspective. Prices at that time on a forward basis were much higher than anyone had ever anticipated. So we went ahead and we locked those in. And that left us in a position where, again, as I mentioned, we're essentially 80% hedged now out over three years. I suspect what we'll do over time is revert back to what we've always done, which is take more of a gradual average into it, approach and then deal with it that way. So -- but the reality is, we have a hedge book that's larger than it ever would have been. And so that's what we're dealing with now. And as forward prices for those time periods continue to move forward, those are potential -- create potential collateral calls that we're going to need to deal with, and we're dealing with right now in terms of, as I said before, trying to establish excess liquidity, far in excess of what we would ever expect to need under those hedges.
Eric Goto : And should we expect, I guess, a good amount of this restricted cash to be released next year after the summer and winter seasons?
Brad Helgeson: The -- so two things. The -- just to clarify. The restricted cash that's on the balance sheet, that primarily underpins the Term Loan C, the synthetic LC facility. So that'll always be there. And that nets against the Term Loan C on the balance sheet. As far as cash that we have posted with counterparties, yes, I mean the way this naturally works, is, of course, as we move forward, and the hedges are settled, they're settled in conjunction with physical generation, and then so that as they're settled, the collateral gets returned. So in the normal course, that collateral winds down over time. What that doesn't contemplate, of course, is additional collateral needs to the extent that forward prices move up beyond where they are today. And that's what we're preparing for, or have prepared for.
Operator: Our next question comes from Oscar Olivas with Allspring Global Investments.
Oscar Olivas: Good morning. Just some more additional questions on your hedging agreements. Can you disclose how many counterparties you have? And then how many of those are crossover lenders on your deal?
Brad Helgeson: Yes, I'll look at -- this is Brad, I’ll look at Jim, it's about 15 counterparties and a small handful are also lenders under our credit agreement or our banks that are used to operating in a similar way.
Oscar Olivas: Okay. And then in terms of the higher markets that you're experiencing, maybe the higher forward markets, PJM, NYISO, then you have Other segment as well. Can you maybe touch on which one of those is driving the increased hedging demand or is that collateral demand?
Brad Helgeson: Sure. Yes, it's PJM and New England.
Oscar Olivas: And you're just selling the power, right? You're not taking like other types of hedging exposure?
Brad Helgeson: No, exactly. This is very vanilla in the scheme of things. We're selling power. As I mentioned, we're not buying fuel. Our fuel is our biggest revenue source. So we're just selling power. We're then entering into floating to fixed swaps with counterparties, which we then settle when we deliver physical generation to the grid.
Oscar Olivas: Got it. Maybe switching over to your metals business. I know other operators in different businesses have experienced issues with shipping times. Was there any kind of timing that impacted that business, where maybe you would’ve had higher revenues that you might experience or might benefit from in the second quarter?
Brad Helgeson: Not materially.
Oscar Olivas: Okay. And final question in terms of just overall growth opportunities, that would be fund free cash flow, but is there anything that maybe on the books that wasn't on the books from first quarter? Or earlier when you had your call for fourth quarter?
Brad Helgeson: I'm not sure exactly what you mean by on the book.
Oscar Olivas: Like new projects -- well, something that you signed on to construct or to add in one of your segments that maybe you didn't have as a growth project when you had your fourth quarter call earlier this year?
Brad Helgeson: Okay. No, nothing material.
Operator: Next question is a follow up question with Nikhil Jain with Genworth Financial.
Nikhil Jain : Yes. Hi, thank you. So just a question on the tipping fee. What typically drives the growth in the tipping fee? Is it just the escalation clauses in the contract, or is there something else in the market that we should be thinking about?
Brad Helgeson : So for a contract that's existing, of course, it's the escalation that's built into the contract typically tied to an inflation escalator. For Covanta, the overwhelming driver of higher tip fees, now as a trend over many years, is shifting supply and demand dynamics in the waste disposal market, in our case specifically in the Northeast. Essentially, we have our assets which provide a unique sustainable solution. We have our assets located very uniquely relative to the competition in and around the areas where the waste is generated, in and around the major metropolitan areas. Our biggest customers as a company, you just run down the Amtrak line from Boston to Washington. So City of Boston, City of New York, City of Philadelphia, City of Washington D.C., New Jersey, Connecticut, Long Island, that's our bread and butter from a municipal solid waste perspective. And in those markets you have less and less landfill capacity, and not only have you had less and less landfill capacity, it is almost inconceivable that you would ever have anything but less and less landfill capacity. So our competition is a landfill that increasingly is out of state which imposes transportation costs obviously, and those transportation costs are only getting more expensive. So you think about that as a competitive and pricing wedge for us. And as we're negotiating with our customers on long term contracts, we're doing that against the backdrop of the reality of the market, which is we have significant disposal capacity. That's increasingly scarce in these markets. And that drives the economic fundamentals of disposal contracts. So that's really been the driver for us.
Nikhil Jain : Got it. Thank you. And just one clarification. The muni waste, how has that impacted in a recession? Is there I mean -- is the components in there which are tied to like industrial kind of manufacturing or production that may get impacted in a recession?
Brad Helgeson: So what you see in -- I mean, it's hard to remember the last time we had a recession. But what you see in those time periods is waste generation does go down a little bit. It goes and then as you'd expect, it goes down in -- primarily in the commercial and industrial sectors, but also to a degree, residential. But it goes down very modestly. If you look at the chart of waste generation, generally through the global financial crisis, it was a blip in waste generation. But I think the more important point for us is, I'm talking overall waste generation, our capacity is a small fraction of overall waste in the market. And our capacity is positioned where we’re the first priority outlet for that waste with our customers and in our markets. So even through a recession, we're -- we may see particular customers on an individual basis may bring less waste than they otherwise would have. But overall, our plants are full. Our plants have never been anything but full with multiples of our waste capacity available in the market that we can't take, because we have fixed capacity. And that's the waste that ends up getting on a truck and traveling hundreds of miles to a landfill.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Brad for any closing remarks.
Brad Helgeson: Thanks, operator, and thanks to everyone for joining us on the call. We appreciate all the interest and all the questions. And to the extent that we weren't clear about anything or other questions arise, please reach out directly to Jim is the most efficient. And everyone, please have a healthy and safe long weekend. Thank you.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
