Q1 2022 Covanta Holding Corp Earnings Call
Speaker 1: Good morning and welcome to the Covanta Holding Corporations 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 over to Jim Riley, Covanta's Treasurer. Please go ahead.
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 Covance is invest.
Our relations website.
At this time I'd like to turn the call over to Jim Riley Covance as Treasurer. Please go ahead.
Thank you and good morning, welcome to <unk> first quarter 2022 financial results Conference call. Joining me on the call today will be Brad Helgeson, our CFO .
Speaker 2: 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 .
Speaker 2: After our prepared comments, we will take your questions.
After our prepared comments, we will take your questions.
Speaker 2: 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.
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.
Speaker 2: These prepared remarks should be listened to in conjunction with these.
These prepared remarks should be listened to in conjunction with these slides.
Speaker 2: Call participants should also see the earnings release for a discussion of our usage of forward-looking statements and non-GAAP financial measures.
Call participants should also see the earnings release for a discussion of our usage of forward looking statements and non-GAAP financial measures.
Speaker 2: Before I hand the call off to Brad, I'd like to note that Covanta finalized an amendment to its credit agreement effective yesterday that 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.
Before I hand, the call off to Brad I'd like to note that Covance are finalized an amendment to its credit agreement effective yesterday.
That increased the commitment on the revolving credit facility from 440 million to $600 million.
The increase was supported by a 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.
Speaker 2: 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.
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.
Thanks, Jim Good morning, everyone I'll begin with a review of some key performance indicators for the business on slide three.
Speaker 3: Thanks, Jim. Good morning, everyone. I'll begin with a review of some key performance indicators for the business on slide three.
And the waste to energy business the story for the quarter 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.
Speaker 3: In the waste 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 feed growth and reflecting very favorable commodity and...
Renewing the well established trend and 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.
Speaker 3: Regarding waste energy production volume, there were a few factors to point out.
Speaker 3: First, this quarter reflected a heavier planned 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.
First this quarter reflected a heavier planned maintenance outage schedule as compared to Q1 last year was approximately 35% of anticipated maintenance or maintenance expense. This year already incurred through March versus a little over 30% at that point last year.
Speaker 3: This resulted in nearly 10% more scheduled down days year-over-year.
This resulted in nearly 10% more scheduled down days year over year.
Speaker 3: We also experienced additional unplanned downtime at a few plants heading into their maintenance outages, where we addressed some specific known issues.
We also experienced additional unplanned downtime at a few plants heading into their maintenance outages, where we address some specific known issues.
Speaker 3: Keep in mind that modest variability in production on a quarter to quarter basis, both positive and negative, is difficult for this business, but as you've seen in our consistent operating results over many years, these even out over time.
Keep in mind that 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.
Speaker 3: This year should be no different as we expect waste to energy plant production to be consistent again overall for 2020.
This year should be no different as we expect waste to energy plant production to be consistent again overall for 2022.
Speaker 3: On the revenue pricing side, waste to energy tip fees were up over 5%. Again, the year over...
On the revenue pricing side waste to energy tip fees were up were up over 5% again year over year, reflecting inflation linked escalators under long term contracts.
Speaker 3: reflecting inflation-linked escalators under long-term contracts, higher pricing on new contracts, and favorable waste mix, including higher profile waste.
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 or may not be intuitively obvious.
Speaker 3: An offsetting benefit of lower production volume in a given period, which may not be intuitively obvious...
Speaker 3: better price mix on waste as we prioritize higher price tons when utilizing available plant...
As better price mix on waste as we prioritize higher priced 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.
Speaker 3: 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.
Speaker 3: Energy prices, looking at the overall average of market hedged and contracted output, were up over 30% year over year. This reflects stronger prices.
This reflects stronger prices across the generation portfolio, including contracts, where output is priced at avoided cost higher hedged prices as we locked in at a strengthening forward curve over time.
Speaker 3: including contracts where output is priced and avoided cost, higher hedge prices as we've locked in at a strengthening forward curve over time, and of course higher market prices.
And of course higher market prices, which more than doubled year over year.
Speaker 3: Bottom line, it's a great time to be a power generator. But Covanna is especially well positioned in this environment because we don't face higher prices for our feeds.
Bottom line, it's a great time to be a power generator, but cabana is especially well positioned in this environment, because we don't face higher prices for our feedstock instead.
Speaker 3: Instead, our fuel is a sustainable waste solution and our biggest revenue.
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 nonferrous up over 15% year over year.
Speaker 3: 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.
Speaker 3: I'll now discuss the drivers of revenue more specifically. Please refer to slide four.
I'll now discuss the drivers of revenue more specifically please refer to slide four.
Speaker 3: Revenue was $551 million in the first quarter, up 11% compared to Q1 2021. With strength,
Revenue was $551 million in the first quarter up 11% compared to Q1 2021 with strength across the board.
Speaker 3: Higher energy prices, including RECs, contributed $25 million to revenue.
Energy prices, including Rex contributed $25 million to revenue growth, while higher market prices for recycled metal, both ferrous and nonferrous added $6 million.
Speaker 3: While higher market prices for recycled metal, both ferrous and non-ferrous, added six percent.
As previously noted tip fee prices increased by over 5% year over year or $8 million in revenue terms.
Speaker 3: previously noted, PIP fee prices increased by over 5% year over year or $8 million in revenue.
Speaker 3: In addition, contractual escalators drove a $5 million increase in service fear.
In addition, contractual escalators drove a $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.
Speaker 3: 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-land-fill alternatives for their waste.
Speaker 3: Revenue at our material processing facilities grew by $7 million in the quarter, or nearly 20%.
Revenue at our material processing facilities grew by $7 million in the quarter were nearly 20% year over year.
Speaker 3: Turning to adjusted EBITDA, I'll refer to slide five.
Turning to adjusted EBITDA I'll refer to slide five.
Adjusted EBITDA was $98 million in the first quarter, which was flat on a year over year basis.
Speaker 3: But just as he was $98 million in the first quarter, which was flat on a year over yearaunt hearing back from his nickname, charges against 21.
Speaker 3: 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 planned outage schedule compared to last.
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 planned outage schedule compared to last year.
Speaker 3: We also experience higher cost inflation for items such as wages, transportation and consumer.
We also experienced higher cost inflation for items, such as wages transportation and consumables.
Speaker 3: But as I've said before, this business performs very well in an inflationary environment overall.
But as I've said before this business performs very well in an inflationary environment overall.
Speaker 3: Any inflation that we see on the cost side is offset by multiples on the top line across waste, energy and recycled metal
And the inflation that we see on the cost side is offset by multiples on the topline 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.
Speaker 3: As operating variability normalizes across the balance of the year, the underlying trends point to solid growth in adjusted EBITDA out of full-year
Now please turn to slide six where I'll walk through free cash flow on a year over year basis.
Speaker 3: Now please turn to slide six where I'll walk through free cash flow on the year of year.
Adjusted free cash flow was negative $6 million in the first quarter down $16 million on a year over year basis with heavier planned maintenance capex compared to Q1, 2021 and higher interest expense associated with the new EQT acquisition capital structure.
Speaker 3: For Justin free cash flow is negative $6 million in the first quarter, down 16 million on a year over your basis, with heavier plans and maintenance cap-ex compared to Q1 2021, and higher interest expense associated with the new EQT acquisition capital.
Speaker 3: 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...
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 seven.
We ended the first quarter was $3 4 billion and total debt.
Speaker 3: We ended the first quarter with $3.4 billion in total debt.
Speaker 3: On a pro forma LTM basis, the leverage ratio is defined in the indenture to the 2029 notes and consistent with the corresponding measure in our credit agreement.
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 five eight times at March 31 up slightly compared to year end, but down from September as presented during the November debts indication.
Speaker 3: 5.88 times at March 31, upflately compared to year end, but down from September as presented during the November death sentence.
Speaker 3: As a reminder, both Pro forma Adjusted Ipata and Net Net in this calculation as presented, exclude the unrestricted subsidy.
As a reminder, both pro forma adjusted EBITDA and net debt in this calculation is presented exclude the unrestricted subsidiaries.
Speaker 3: We had $154 million in availability under our revolving credit facility at Quarter Act.
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.
Speaker 3: As Jim discussed, we recently expanded our revolving credit facility from $440 million to $600 million in order to bolster our liquidity.
In order to bolster our liquidity position.
Speaker 3: In addition to greater flexibility to make investments opportunistically, this increase will provide additional support for our energy hedge fund.
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.
Speaker 3: Stepping back, higher energy prices are great for CoVenta, as you've seen in recent
Speaker 3: in a world of structurally higher energy prices, the value of this business is greater and the credit is stronger.
In a world of structurally higher energy prices the value of this business is greater and the credit is stronger.
Speaker 3: However, we have a disciplined energy risk management program under which we fixed prices for up to 80% of our output on a rolling 36 month base.
However, we have a disciplined energy risk management program under which we fixed prices for up to 80% of our output on a rolling 36 month basis and as market prices continue to rise these hedges reflect noncash mark to market losses.
Speaker 3: And as market prices continue to rise, these hedges reflect non-cash market market laws.
Speaker 3: 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.
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.
Speaker 3: 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.
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.
Speaker 3: 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.
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.
Speaker 3: For 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.
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 and it's very positive, but volatile price environment.
Speaker 3: In conclusion, business conditions overall are highly supportive of the Covanta model, and we're focused on deliverance, strong growth, and adjusted EBITDA on a year-over-year basis in 2020.
In conclusion business conditions overall are highly supportive of the <unk> model and we're focused on delivering strong growth in adjusted EBITDA on a year over year basis in 2022.
Speaker 3: With that, we'll move to the Q&A portion of the call. Operator, would you please open the line for questions?
With that we'll move to the Q&A portion of the call operator would you. Please open the line for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our Ross.
Speaker 1: We will now begin the question and answer session. To ask a question, you may press star, then one on your touch tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster.
Sure.
Yes.
Baird.
Speaker 1: Our first question comes from Brian D. Rubio with Baird. Please go.
Alright first question comes from Brian <unk> with Baird.
Go ahead with your question.
Speaker 4: Just a few questions for me, I guess, starting off with the new with the new expanded credit facility, have the terms fundamentally changed in terms of interest rates or to speed.
Just a few questions for me I guess, starting off with the new with the new expanded credit facility.
Terms fundamentally changed in terms of.
Is if rates or.
Yes.
Speaker 2: And this is Jim, no Brian , no changes in material terms to the credit agreements. Really just an increasing commitment. The only thing I'd note is on the revolving portion of the credit agreement. We did convert that to sofa and from the bottom floor, but the spread is the same. So OK.
This is Jim no Brian no changes in material terms through the credit agreement, it's really just an increasing commitment. The only thing I'd note is on the revolving portion of the credit agreement, we did convert that to sofa from LIBOR, but the spread is the same.
So I wouldn't see that as material.
Got it and then the $137 million.
Speaker 4: got it and then the the hundred thirty seven million dollars you have uh... in fund respected helping for us what is those represent i know last quarter we talked about this yet some because of some cat collateralization of l's keys but then you move that over to the new revolver just want to get a sense of what that one thirty seven is because you are using that as part of your net that population
In funds restricted help with Ross.
Those represent I know last quarter, we talked about this yet some because of.
Cash Collateralization of Lps, but then you move that to the new revolver.
Wanted to get a sense of what that 137 is because you are using that as part of your net debt calculation.
Right, so $100 million of that 137, 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.
Speaker 2: Right, so 100 million of that 137, 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 is candidly spread across...
The rupee.
The remaining 37 is currently spread across.
<unk>.
Speaker 2: you know, both the domestic project restricted accounts, as well as
Both the domestic project cap restricted accounts.
As well as.
Speaker 2: you know, other short-term restricted accounts supporting different activities.
Other short term risk.
Restricted accounts supporting different activities.
Okay.
Speaker 4: that's helpful. Just going to the financial statements, you know, obviously these were cut on 331. 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 in it was investment in equity affiliates. I'm assuming that represents cash investments made into the assets that are no longer part of the credit group.
That's helpful go into the financial statements.
Obviously these will cut on 331.
Suzanne.
The European assets current after that but there was go through the cash flow statement. There was $77 million that was invested and it was investment in the equity affiliates I'm, assuming that represents cash investments made into.
The assets that are no longer part of the credit group.
Bryan that's correct.
Alright.
So just to be clear so that cash went out to those investments and then the investments were removed for the RP capacity, but there is no reimbursement for that $77 million correct.
Speaker 4: so just to be clear so that cash went out to those investments and then the investments were removed per the or peak passing but there's no reimbursement for that $77 million correct
That's correct.
Speaker 4: Okay, that's just want to make sure that I get all my ducks in the world there. And then just finally on pricing, you had mentioned that there was a benefit.
Okay.
Want to make sure that I get all my Ducks in the World. There and then just finally on pricing you had mentioned that there was a benefit.
Speaker 4: you know that you got from you know from mex because you had the plan outages you can't find what that benefit was and facing
That you got from.
From mix because you had the plant outages can you quantify what that benefit one might think.
Speaker 3: It's difficult to specifically quantify how much of it was related to mix. The reason is there are so many moving parts around the different waste streams at each of the plants. But clearly that was a theme. I would though.
Oh, it's Brad Helgeson.
It's difficult to specifically quantify how much of it was related to mix and then the reason is we just there's so many moving parts around the different waste streams at each of the plants, but clearly that was a theme I will.
Though.
Speaker 3: sort of caveat it with the comment that it was a factor, but it was very much on the edges. If you look at overall waste tip-free 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.
Sort of caveat it with the comment that it was a factor but it was 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 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.
Speaker 3: And you know as we're as we're resetting contract
And as we're as we're resetting contracts.
Speaker 3: we're doing so at higher prices in a very favorable environment for waste disposal assets.
We're doing so at higher prices.
And in a very favorable environment for waste disposal assets. So.
Speaker 3: I just wanted to highlight the mix because it is in there as a factor but really isn't the major.
I just I wanted to highlight the mix because it is in there is a factor, but really isn't the main driver.
Speaker 4: okay and actually i do have one last but just so the tonsils of ferris and not ferris uh... down what were shortly then you know the the amount of violence that you process uh... anything uh... to take away from that
Okay actually I do have one last one just on the tons sold ferrous and nonferrous.
Down lot more sharply than the amount of volumes that you process.
Anything to take away from that.
Speaker 3: 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.
Yes. So there is and this is exactly why actually we report both whats recovered and whats sold so 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 with increases or decreases in inventory.
Speaker 3: So it's basically, you know, when the, because the metal is recovered and shipped from the waste energy facility, more or less real time.
So it's basically when the because the metal is recovered and shipped from the <unk> from the waste to energy facility more or less real time.
Speaker 3: And then the timing at which that then 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 timing lags and an inventory build, build associated with that material. So it long story short, it just introduces a kind of normal fluctuation period around that.
And then the <unk>.
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.
Often you have you have timing lags.
And an inventory build builds associated with that material. So a long story short it.
Introduces a a kind of normal fluctuation period to period around that number.
Speaker 4: Great, I appreciate that color. That's all for me. Thank you.
Great.
The color that's all for me. Thank you.
Thanks.
Speaker 1: Our next call or question comes from Mike Targle with Morgan Stanley . Please go ahead with your question.
Our next call.
<unk> comes from Mike <unk> with Morgan Stanley . Please go ahead with your question.
Speaker 3: Hi guys, thanks for holding me call and for taking the question. Appreciate it's time. A couple questions, I guess. In 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 five, maybe that's all wrapped up in the 10 and the fifth, the 10 and the five and maintenance and other. Is that?
Hi, guys. Thanks for holding the call and for taking the question I appreciate the time.
Couple of questions I guess.
In the on the past call it sounded like there.
There'll be some margin pressure or is it sounded like.
I thought from fuel labor et cetera, but looking at the reconciliation on slide five maybe that's all wrapped up in the 10 to the fifth.
Down in the five and maintenance and other is that.
Speaker 5: fair to say or were there, were those pressures not really materialized in the quarter? How would you characterize?
Fair to say or were there did those pressures not really materialized in the quarter, how would you characterize I.
Speaker 5: I guess that 10 and five decrement from the previous Q1. Yeah...
I guess that 10 and five.
Decrement from the previous Q1.
Yeah.
Speaker 3: 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 five, in that reconciliation.
So we absolutely did feel that that pressure.
As I noted briefly in the prepared remarks.
It is essentially <unk>.
<unk> and netted with some other factors in the five in that in that reconciliation.
So.
Speaker 3: So essentially, if I unpack the five a little bit, excuse me.
Essentially if I unpack the five a little bit.
Excuse me if.
Speaker 3: If I impact the five a little bit, we had.
If I unpack the five a little bit.
We had.
<unk>.
Speaker 3: higher medical benefit. Let me let me unpack the part that first pull out the part that isn't what we're about to talk about. So, you know, we had higher medical benefit experience.
Higher medical benefit let me, let me unpack the part that first pull out the part that.
Isn't what we're about to talk about so.
We had higher medical benefit experienced in the first quarter compared to the first quarter last year were self insured on medical so.
Speaker 3: 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...
As people are increasingly getting out and.
Speaker 3: 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.
And seeing their doctors and having electric procedures some of.
Of that expense is now coming back to us.
Saw a significant decline in that expense during the Covid period. So that's part of it on a on a negative from an EBITDA perspective and the other is.
Speaker 3: during the COVID period. So that's part of it on a negative from an even though perspective.
Speaker 3: And the other is we, the other that I would pull out is
I would pull out as we.
Speaker 3: We typically will have construction revenue and expense that will enter into construction agreements for construction projects with.
We typically will have construction revenue and expense that will we will enter into construction agree.
Agreements for construction projects with.
Speaker 3: with municipal clients that own the waste energy plant that we operate for them.
Municipal clients that own the waste energy plant that we operate for them, it's not a big overall private 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.
Speaker 3: 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.
That was a negative in the quarter as well you pull those out.
Speaker 3: 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.
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.
Speaker 3: just the regular escalation of our ongoing costs, which, of course, now are running hotter than they have in the past.
Just the regular escalation of our of our of our ongoing costs, which of course now are running hotter than than they have in the past now.
The waste price growth is running hotter as well so just the way the way the numbers fell out in the quarter those essentially offset of course, what what isn't in that in that math is the 30 plus million dollars of higher commodity based revenue growth from price that we have elsewhere in the reconciliation.
Speaker 3: 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.
So.
In total across the revenue line items.
Speaker 3: 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.
Again as I mentioned in the prepared remarks, we made up for four four <unk>.
Multiple of what we saw on the cost side.
But.
But it was there.
And depending on how you want a lineup these line items.
It was in this presentation offset by waste price growth.
Speaker 5: Got it. Okay, that's helpful. And that waste price growth, I assume is based on the contract renewals and as they, you know, continue that will roll through the rest of the year. Is that fair to say?
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.
Yes that will continue to roll through.
Speaker 3: Yeah, that'll 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 contract, where we'll typically have annual reset.
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 four.
For all of those all of those inflation, France too 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.
Speaker 3: And those based on the really the fiscal calendars of our municipal clients, those tend to be heaviest actually mid-year 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.
Mid year and later in the 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.
Speaker 5: helpful, got it. And then I think I've had this issue in the past, but having trouble reconciling cash flow for the quarter. And then I think I've had this issue in the past, but having trouble reconciling cash flow for the quarter.
Helpful Got it and then.
Hum.
I think I've had this issue in the past.
Having trouble reconciling cash flow for the quarter.
Speaker 5: The 77 million that went out that the previous caller had a question about, I don't presume that's not in the EBITDA calc. And yet, cash on the balance sheet was up by 24 million. The revolver balance is down by 46 million. So that would apply a lot of cash flow. I'm missing something in there. I'm just curious what the difference is.
The 77 million that went out that with the previous.
Color.
About I don't 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.
Something I'm.
I am missing something in there I'm just curious what the what the differences.
Speaker 3: Yeah, for that one, maybe I'll suggest if you could follow up with Jim. Yeah, and we'll go through the cash flow statement line by line. It's just probably probably a difficult exercise right now on the fly on the call.
Yeah 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.
Probably a difficult exercise right now on the fly on the call.
Yes, that's fair Okay. Thanks, that's all from me.
Speaker 5: Yep, that's fair. Okay. Thanks. That's all for me.
Our next question comes from.
Speaker 1: Our next question comes from Nikhil Jain with Jenworth Financial. Please go ahead with your question.
Nikhil Jain with Genworth financial. Please go ahead with your question.
Yes, hi.
Speaker 6: Yeah, hi, thank you for the call. So, just have a few questions on the...
Thank you for the call.
To your question on the business and how are you.
Speaker 6: I also actually want to clarify the catch low line item. So maybe I'll just fall off on that or hold off on that. So just one on the recent kind of Moody's action on the unsecured node. Can you?
Also actually wanted to clarify the cash flow line items. So maybe I'll just follow up on that and hold off on that so.
Just one on.
The recent kind of Moody's action on the unsecured note can.
Can you.
I mean, what sort of conversations you had with Moody's I'm just curious in the.
Speaker 6: I mean, what sort of conversations you have with Moody's? I'm just curious in the sense that, you know, obviously the business is growing.
The sense that you know all this.
The business is growing.
Speaker 6: And I think you just made a comment that you are evaluating options on the collateral posting in the sense.
And I think you just made a comment that you are evaluating options on the collateral posting and defense.
Speaker 6: Maybe you can give some more color on what are you evaluating. So, you know, I'm just trying to get my arms around kind of.
Maybe you can give some more color on what are you evaluating so you know.
I'm just.
Trying to get a.
And my arms around kind of.
Speaker 6: What happened with Moody's and what action you're taking around the Kool-Aaron?
What happened with Moody's and what what actions you are taking around the collateral.
Okay.
Speaker 2: Yep, I Nick Hill this is Jim, so we are.
Yeah. Nick this is Jim So we are.
In regular contact with both agencies have been since the transaction closed and have been for many years.
Speaker 2: In regular contact with both agencies, have been since the transaction closed and have been for many years, right, as a public company.
As a public company.
Speaker 2: to cover the second piece first, perhaps, right? So...
To.
To cover the second piece first perhaps right so.
We increased the revolver as we noted the other primary.
Speaker 2: We increase 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 ISDA's CSAs that require cash and or letters of credit.
Initiatives that we've been working on is transitioning.
Some of our existing energy risk hedge book from traditional.
Is the CSA that require.
Cash and letters of credit.
Speaker 2: to lean-based structures where the counterparty would rely on sharing the security package with the bank.
Two lean based structures, where the counter party.
Would rely on.
<unk> sharing the security package with the banks.
Speaker 2: Alright, so that is, that's our primary.
Alright.
That is that's our primary.
Speaker 2: focus right now with different counterparties. And it's an ongoing process, but we're
Focus right now with.
With different Counterparties and it's an ongoing it's an ongoing process, but we are.
Engaged on it as well as a handful of other initiatives just to.
Speaker 2: you know, engaged on it as well as a handful of other initiatives just to, you know, maintain adequate liquidity, right? To support the business and risk.
Maintain adequate liquidity.
To support the business and risk management.
Speaker 2: You know, as far as the Moody's action, you know, I'm not sure we can really comment on it beyond what I would probably say is that.
As far as the Moody's action.
<unk>.
I'm not sure. We can we can really comment on it beyond what I would probably say is that.
Speaker 2: when the deal was structured.
When the deal was structured.
I think.
Speaker 2: 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.
It was a capital structure that had already to some degree tried to optimize and maximize secured capacity.
Capacity.
Such that an increase in that secured debt.
Speaker 2: You know, could, could hit a tipping point, right? It's like,
Could could hit a tipping point.
Speaker 2: And I just provide that as context. I obviously can't speak for them, but I think that's the context.
And I just provide that as context, I, obviously can't speak for them, but I think thats. The context I would I would put in it and this is Brad I'll add on a little bit so.
Speaker 3: And R is Brad, I'll add on a little bit. So, you know, and not commenting on the Moody's opinion specifically, but certainly R view is there are really two points here. The first point, you know, which I alluded to in the prepared remarks, is the fact that unambiguously.
Our and not commenting on on on the Moody's opinion, specifically, but certainly our view is there are really two points here, the first point, which I, which I alluded to in the.
In the prepared remarks is the fact that unambiguous Lee higher power prices are good for this business. It's good for the credit is good for everything period.
Speaker 3: are good for this business. It's good for the credit. It's good for everything. Period.
The second point is.
Speaker 3: 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.
<unk> point, the unsecured versus 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.
The hedge book.
Has required us to.
To tap further into our secured debt capacity.
Speaker 3: with additional revolver and indirectly with having hedge counter parties share in the collateral pool. Not to dismiss it, but it is what.
With additional revolver and indirectly with.
Having hedge counterparties sure in the collateral pool so.
That's that.
So not to dismiss it but it is what it is.
Okay.
So.
Speaker 6: If you, as you kind of move forward with like the
As you kind of move forward with like the.
Speaker 6: the new, what kind of moving towards, you know, structuring it on a lean base.
When you are what kind of moving towards a structuring it.
On a lean based.
What does that does that like basically free up you'll have all of our more like.
Speaker 6: What is that? Does that like basically free up? You're a little more like. I'm.
You may.
Speaker 6: maybe try to understand what would be the changes that we would see once that happens. So, considerably your cash would creep up because you're basically providing them a...
Maybe trying to understand like what would be the changes that we would see once that happened so presumably your cash.
Yeah.
Because you're basically providing them a rule.
Sure.
Speaker 6: that you shared, that they were going to share with the bank. Is that collection?
That he shared that they are going to share with the bank is that how I should think.
Speaker 3: Yeah, 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
Yes, yes, it's pretty simple so so to the extent that we have cash and or letters of credit.
Posted with a counterparty today, if were able to transition that counterparty to instead.
Rely on on the the collateral package under the credit agreement, then we will get that cash and LC and LC is back and that dollar for dollar would increase our liquidity.
Speaker 3: 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.
And reduce our reliance on the revolver.
Speaker 3: I think I would also just sort of overall make the comment just around the logic of that structure. This is the conversation we have with our counterparties, and I think our counterparties understand but we are not a trading operation.
Yeah.
I think I would also just sort of overall make the comment.
Just around the logic of that structure.
This is the conversation we have with our Counterparties and I think our counterparties understand but.
We are not.
A trading operation.
Speaker 3: 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.
We're not we're.
We're not taking positions.
Would ever result in a 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.
Speaker 3: and we limit our hedging activity to a level where we always have access physical generation every hour, every day that we have had.
<unk> hedged.
Speaker 3: So that as we deliver the electricity, that's when we settle the hedge.
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.
Speaker 3: 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.
The collateral that we have posted in many ways represents.
Belt and suspenders for the exposure that the counterparty really does face.
Speaker 3: 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...
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.
Speaker 6: Got it. So is there I mean, prices have gone up, you know, this quarter two so on the energy side
Got it so is there any I mean prices have gone up.
This quarter two so on the energy side.
Speaker 6: should we expect that, especially you'll need to post moccularol, so that means the liquidity you have right now that can get squeezed further, you know, to the point where
Should we expect that essentially you'll need to post more collateral. So that means the liquidity you have right now that's gonna get squeeze further.
You know to the point where.
Speaker 6: unless you're able to move them to the collateral sharing agreement. And just on that point, do the banks need to approve that? So where do you kind of stand with that?
Unless you are able to move them to the collateral sharing agreement and.
On just on that point do you still need the banks need to improve that so where do you kind of stand with that.
Part of the negotiation.
Speaker 3: Yeah, let me quickly just so I don't forget, let me answer that last question first.
Yeah, well, let me let me quickly just so I don't forget let me answer that last question first.
Speaker 3: And then I'll come back to the first part. So we have the ability in the Covenant package and the credit agreement to essentially have energy hedge counterparties as secured parties under the credit agreement. So the lenders have already agreed to it.
And then I'll come back to the your first the first part so we have we have the ability in the covenant package and the credit agreement too.
To essentially have.
Energy hedge counterparties as secured parties under the credit agreement so the.
The lenders have already agreed to it.
Speaker 3: in the original agreement. And so we're seeking to avail ourselves of that flexibility, which I think is the benefit of everybody.
In the original agreement.
So we are seeing.
Seeking to avail ourselves of that flexibility, which again I think as to the benefit of everybody.
Speaker 3: as far as the potential for additional collateral. So we've had to post additional collateral since.
And 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.
Speaker 3: The end of the quarter, as I mentioned, we have available liquidity at this moment of north of $300 million.
I mentioned, we have we have available liquidity at this moment of north of $300 million.
Speaker 3: 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
The collateral that we have already posted is based on forward prices as they are right now.
And so to the extent that we see.
Speaker 3: further increases in forward prices out the curve, that could potentially require posting of additional collateral.
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.
Speaker 3: 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, to give ourselves...
Everything is moving in the right direction in that scenario for the company, but that could potentially require additional additional collateral and thats exactly why.
We wanted to and continue to seek additional ways to increase our liquidity position.
Is to give ourselves.
Speaker 3: more than adequate cushion and I'll underscore more than adequate cushion against
More than adequate cushion and I'll underscore more than adequate cushion against.
Speaker 3: potential calls for additional collapse.
Potential potential calls for additional collateral.
Okay.
Speaker 6: Okay, that's all, we're gonna help you. Thank you. So you expect to wrap that up in Q2, essentially all of this or...
That's all very helpful. Thank you.
To wrap that up in Q2, essentially all of it.
Our.
It's going to take longer than that.
Speaker 3: Well, I think it's an ongoing process. So the revolver, as Jim mentioned, we completed that yesterday. So we have that additional.
I think it's an ongoing process. So so so the revolver as Jim mentioned we.
We completed that yesterday, so we have that additional.
Speaker 3: 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. But then as I said this is going to be an ongoing focus and we are always going to look to put ourselves in a better liquidity position beyond the second quarter.
Availability now.
The other the other initiatives, including restructuring the security.
Of the agreements.
There are different counterparties that are in different stages of <unk>.
The discussions we.
I would like to make significant progress across all of those fronts in the second quarter, yet, but but then as I said this is going to be I think an ongoing focus and were always going to look to put ourselves in a better liquidity position beyond the second quarter.
Speaker 6: Great, thank you. And just one question, and I'll get back in the queue on just clarification on the European.
Great. Thank you.
The one caution and I'll get back into queue on <unk>.
Just a clarification on the European.
Speaker 6: you know, such a theory is kind of moving out now off the restricted group. So that...
You know that's sooner or you just kind of moving out of there so.
So Dan.
Speaker 6: So should we with that, that's already been concluded now, right, in post first quarter. Should we now kind of see where, like you still have project ad listed and the restricted cash that's tied to maybe project ad PNI. How should we be thinking about that? Should that kind of those lines?
So should we read that that's already been concluded now right post first quarter. It should be now kind of see where like you still have project Atlas stand and the restricted cash that's tied to maybe project at P&I, how should how should we be.
Thinking about that you should that kind of.
Those line item kind of change now.
Speaker 3: No, so actually those line items already, excuse me.
No. So so actually those line items.
Already.
Excuse me.
Battling the vestiges of a.
Speaker 3: battling the vestiges of a cold that just won't go away.
Coal will go away.
Speaker 3: So those balances on the balance sheet actually relate to domestic project debt and domestic asset.
So those balances on the balance sheet actually relate to domestic.
Project debt.
Domestic assets so.
Speaker 3: So, the European non-recourse project that was actually always deconsolidated or has been for several years. 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-former credit ratio, for example. We're actually looking to close the separation legally over the next month.
The European Nonrecourse project debt was actually always deconsolidation or has been for several years.
So yes, so the.
The separation from a credit perspective has already happened so that we've already designated those subsidiaries as unrestricted so they are out of the pro forma credit ratio for example.
We're actually looking to close the separation legally.
Over the next months.
Speaker 6: Got it, got it. Thanks for the clarification there. Thank you.
Got it got it thanks for the clarification there. Thank you.
Sure.
Our next question comes from Kevin MA with nationwide mutual. Please go ahead with your question.
Speaker 1: Our next question comes from Kevin Ma with Nationwide Mutual. Go, please go ahead with your question.
Speaker 7: Hi, good morning. Thanks so much for hosting the call and taking questions for you to time. I'm just to follow up the prior caller's question on waiting. Are there any kind of like a longer term waiting targets or leverage targets you guys trying to manage to?
Hi, good morning, Thanks, so much for hosting the call and taking questions. I. Appreciate your time just to follow up.
The pie callers question on waiting.
Are there any kind of like a longer term.
Awaiting Paul again, it's a leverage target you guys are trying to manage too.
Speaker 3: Hi, it's Brad. No, not specifically. I think what we've very clearly, certainly communicated to the re-agency use and broadly, and I'll do so again, we will look to deliver the company over time. This is a business that over time generates a lot of free cash flow. EQT has been very explicit with
Hi, its 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, but this is a business that over time.
Generates a lot of free cash flow EQT has been very explicit.
With.
With there.
Speaker 3: intention to never take a cash dividend out of the business. So all the cash that we generate will stay in the
Intention to never take a cash dividend out of the business. So all of the cash that we generate will stay in the business that will then.
Speaker 3: That will then deliver the company either by investing for growth, which would certainly be our first priority, and then deliver the company that way, or in the absence of those opportunities during any particular period, go to reduced debt. We haven't put any sort of artificial targets or constraints on...
Delever the company either by investing for growth, which would certainly be our first priority.
And then de lever 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.
Speaker 3: 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.
On the capital allocation decisions that we're going to be banking over the next few years.
But all of them will result will result in a company that has a stronger credit profile over time.
As far as far as the ratings same same thing we don't have a specific ratings goal.
Speaker 3: 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...
Our expectation would be that as the company and its credit profile strengthens over time that the ratings will reflect that.
Speaker 7: Got it. No, I appreciate it. And then just kind of one last question. Um, you know, with the Moody's still on negative outlook, are you guys expecting kind of further waiting action down the road or just kind of like trying to get more color regarding your conversation with a Moody's and, and, um, other rating agent.
Got it no appreciate it and then just kind of one last question.
What Moody's still on negative outlook are you expecting kind of further waiting action down the wall or just kind of like trying to get more color regarding your compensation what.
Moody then.
In other rating agencies.
Speaker 2: 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, our intent is to improve the credit over time.
Kevin This is Jim.
I think the short answer to that is it.
No but.
Listen, we maintain steady dialogue with them and we'll continue to do so.
I had noted right our intent is to improve the credit over time.
Speaker 3: So there's nothing I'd point to now, right? Yeah, I mean, as you know, when the reading 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, you know, they'll be looking to do that.
So there is nothing I would point to know right.
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.
A relatively short period of time so.
There'll be they'll be looking to do that.
Great. Thank you.
Our next question comes from Omar Jama with Guardian. Please go ahead with your question.
Speaker 1: Our next question comes from Omar Jamah. With Guardian, please go ahead with your question.
Hello.
Speaker 8: My question is, good morning. It 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?
Good morning, My question is.
Good morning.
$77 million equity affiliate payment.
Should we expect to see any additional payments in this line item over the next several quarters.
Okay.
Speaker 2: 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.
This is this is Jim.
That is no.
The separation of <unk>.
The European business.
In step means Covanta is no longer required to fund the continued equity investments in that platform.
Speaker 2: So I'd expect that 77 that went out in Q1, which was...
So I would expect that 77 that went out in Q1, which was.
Speaker 2: earmarks almost entirely for the RICARI project that came into operation. We shouldn't see any more of that.
Earmarks.
Most entirely for the recovery projects that came into operation, we shouldnt see any more of that going forward.
Okay, and then the restricted funds.
Speaker 8: Okay, and then the restricted funds held in trust balance decline.
Held in trust balance declined from $235 million to $137 million what are those funds for.
Speaker 8: 235 to 137 million. What are those funds for?
Speaker 2: Yeah, so the biggest step there was it's a...
Yes, so the biggest step there was.
When the transaction closed last year, we had legacy letters of credit outstanding with our former agent Bank.
Speaker 2: When the transaction closed last year, we had legacy letters of credit outstanding with our former agent bank.
Speaker 2: that we cash collateralized that close.
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.
Speaker 2: 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.
So we posted.
Certain amount of cash with that counterparty that shows up on the Q4 balance sheet.
Speaker 2: And about 110 million of that represented representing that.
And about $110 million of that represented.
Representing that collateral backstop.
Speaker 2: 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 operation.
Over the course of the first quarter, we did transition those letters of credit to the revolver and or in 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.
Okay.
Speaker 8: 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. You typically have better quarters and two queue and three queue just to seasonality.
And then.
The seasonality in the business.
Obviously power prices are a lot higher now than they were even a month or two ago.
Largely hedged.
How do you typically have better quarters in <unk> and <unk> just due to seasonality.
Okay.
Speaker 3: This is Brad. Yes, we do. I mentioned this, the first quarter is far and away 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...
This is Brad we yes, we do I think.
I mentioned this that the first quarter.
As is far and away the low from a seasonality perspective, the low point of the year.
Again, driven driven primarily by the.
By the maintenance outage schedule.
It used to be that that.
Power prices were highest in the summer and lower in the winter.
In recent years.
Speaker 3: You know, you 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 price.
You've sort of had really two peak periods to some are still as good time for power but.
But the winter has become the high season for power prices.
Speaker 3: all the demands on gas. So we saw some of that, of course, in the first quarter, but the maintenance outage schedule really is...
All of the demands on gas.
So we saw some of that of course in the first quarter, but but the maintenance outage schedule really is the.
The driving factor of cash generation.
Speaker 3: 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 Q2, 3, and 4. The specific
In the in the quarter.
And then over the balance of the year.
See much much stronger results EBITDA and cash on a seasonal basis.
<unk> two three and four.
The specific.
Speaker 3: you know rank ordering of which is the best quarter it does move around a little bit uh... from the year to year uh... but generally the second half is overwhelmingly stronger uh... because in the in the second quarter uh... you know you're you're moving into the the more of a shoulder period for power prices and in the second quarter we're actually finishing up the
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.
Youre moving into the more of a shoulder period for power prices and in the second quarter were actually finishing up the <unk>.
Speaker 3: the 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.
The 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 long long story short is.
The business is very second half weighted.
Speaker 3: you know, without necessarily predicting Q3 versus Q4 on an EBITDA cash.
Without necessarily predicting Q3 versus Q4.
On an EBITDA and cash basis.
Okay, and then last thing I would say is the latter.
Speaker 8: Okay, and then the last thing I would say is the, you know, there are a lot of questions around the $77 million payment on the last call you said there would be no payments. I understand that.
A 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.
Speaker 8: these payments occurred before or were scheduled before you made those comments.
Scheduled before you made those comments or.
Speaker 8: kind of grandfathered in, but I think that's one potential issue going forward is that that continues to be the case that you don't make a lot of it.
Kind of grandfathered in but I think that's one potential issue.
Going forward is that that continues to be the case that you don't make a lot of equity payments.
Speaker 8: That's kind of what you said you would do, even though you of course have the flexibility to do so under all your RP baskets which are quite generous.
That's kind of what you said you would do even though of course has 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.
Speaker 1: Our next question comes from Karim Mansour with Whitebox Advisors. Please go ahead with your question.
Our next question comes from Corrine Mann sewer with White box advisors. Please go ahead with your question.
Alright, just relates again to your operating costs I know that most of your contracts have up.
Speaker 9: Hi, I just really think you're getting to your operating costs. I know that what your contracts have.
Speaker 9: inflation based escalators was inflation simply so much stronger than the escalators that it essentially drove your operating costs or did you guys like you alluded to earlier the higher medical insurance during the period drove that line out of ultimately kind of see the margin comparison shown through the quarter.
Inflation based escalators was inflation simply so much stronger than the escalators.
Essentially drove your operating costs or did you guys like you alluded to earlier the higher medical insurance during the period drove that line item. So ultimately.
The margin compression shown through the quarter.
Yes.
This is Brad.
Speaker 3: 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
Essentially the inflation just the way the numbers ended up in the quarter.
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 is.
Speaker 3: You know, it isn't necessarily as simple as looking at the P&L, but I'm talking same store basis inflation on the on the top line for waste revenue, tip fees and service fees essentially offset
It isn't necessarily as simple as looking at the P&L, So I'm talking same store basis.
Inflation on the on the topline for waste revenue tip fees and service fees essentially offset.
Speaker 3: same store escalation in our
Same store escalation in our costs.
Speaker 3: and in the EBITDAW reconciliation bridge on slide five of the call deck, that's largely largely offsetting one another in the last other category.
And in the EBITDA reconciliation bridge on slide five of the call deck.
That's largely largely offsetting one another in the last other category.
Speaker 3: 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.
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 that will certainly help.
Move energy prices forward and get back some of that some of that margin compression.
Okay. That's it for me I appreciate it.
Speaker 1: Our next question comes from Yana Manalkian with Vibrant Capital Partners. Please go ahead with your question.
Our next question comes from Ian Malkin.
Vibrant capital partners. Please go ahead with your question.
Speaker 10: Hi, my questions are actually already done, so thank you.
Hi, My question is on that.
Thank you.
Our next question comes from Eric <unk> with Pine Bridge. Please go ahead with your question.
Speaker 1: Our next question comes from Eric Gato with Pinebridge. Please go ahead with your question.
Hi, I just have a few more questions.
Speaker 11: Hi, I just have a few more questions on your hedges. How much, I guess, mover capacity do you have that you can use as collateral for your hedges and cash andboth.
Your hedges.
How much I guess new capacity do you have that that you can use that collateral for your hedges and the cash and LC.
Speaker 3: So if you could, can you, we're just dealing with a technical issue. Could you repeat your question?
Sorry, if you could.
We're just dealing with the technical issue could you repeat your question.
Speaker 11: Yeah, sure. I was just wondering how much being capacity.
Yes sure.
Just wondering how much loan capacity.
Speaker 11: do you actually have that you can use to post collateral for your head in lieu of cash and letters of credit? Oh, sorry.
Do you actually have that that you can use to post collateral credit hedges in lieu of cash.
As a credit.
Oh, sorry, yes, it's uncapped.
Speaker 12: It is uncapped in the credit agreement. Correct, right.
Oh it is uncapped.
It's uncapped in the credit agreement correct right.
Got it Okay and then.
Speaker 13: 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 secure debt instead to capitalize on that offer?
So I guess it forward curves continue to move up here would that change your strategy with entering into hedges to preserve some of that liquidity or.
Could you, possibly issue more secured debt instead of to capitalize on that opportunity.
Speaker 3: You know, I think we'll have to make those decisions as the facts evolve. You bring up a good question about our desire to enter into...
I think we'll have to make.
You'll make those make those decisions as as the fax evolve.
You bring up a good question about.
Our desire to enter into.
Speaker 3: new hedges. I'll take a little bit of a step back. So you know, we have an energy risk management program that has
New hedges.
Take a little bit of a step back so.
We have an energy risk management program that.
Has.
Speaker 3: You know, for many years, you served us very well and continues to serve us well. You know, you have to take the good of it the bad.
For for many years. He has served us very well and continues to serve us well.
To take the good with the bad.
Speaker 3: you know, 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 36 month time horizon to where, we're typically entering a year, so first 12 months.
And when prices are going up or down and you're deciding to take risk off the table.
But the way we've typically.
Operated under that program as we roll hedges in on a rolling basis.
Over 36 months time horizon to where we're typically entering a year. So first 12 months.
Speaker 3: 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 last year as the forward curves continued moving higher.
80% hedged and then significantly less hedged in years, two and three and we will leg into those over time, we actually deviated from that strategy for the first time late last year as the forward curves continued moving.
Moving higher.
With the.
Speaker 3: 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 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.
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 locked those in and out.
Left us in a position where again as I mentioned, we're essentially 80% hedged now out over three years.
Speaker 3: I suspect what we'll do over time is revert back to
Yes.
I suspect what will what we will do over time is.
Revert back to what we've always done which is take more of a.
Speaker 3: which is take more of a gradual average into it approach and and deal with it that way. So, but the reality is, you know, we have a hedge book that's larger than it 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, you know, those are our potential
A gradual average intuit approach.
And and deal with it that way, so, but but the reality is we have a hedge book that's larger than it would have been.
And so that's what we're dealing with now and as forward prices for those time periods continued to move forward.
Those are potential.
Create potential collateral calls that we're going to we're going to need to deal with it.
Speaker 3: create potential collateral calls that we're going to need to deal with and we're dealing with right now in terms
Dealing with right now in terms of.
Speaker 3: as I said before, trying to establish excess liquidity, far in excess of what we would ever expect to need under those.
As I said before.
Trying to establish.
Excess liquidity.
Far in excess of what we would ever expect to need under those under those those hedges.
Speaker 13: Right, okay. And she will be expecting, I guess, a good amount of this restricted cash to be released next year after the... Go.
Right, Okay, and should we expect I guess, a good amount of restricted cash to be released next year after the.
The summer and winter seasons.
Right.
Speaker 3: So two things, just to clarify, the restricted cash that's on the balance sheet, that primarily underpins the term loan seat.
So two things the just to clarify the restricted cash that's on the balance sheet that primarily.
<unk> underpins the term loan C that the.
The synthetic LC facility, so that will always be there and that nets against the term loan C. On the balance sheet as far as cash that we have posted with with Counterparties.
Speaker 3: 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 counter parties, yes, I mean, the way this naturally works is, of course, as we move forward and the hedges are settled.
Yes, I mean the way. This naturally works is of course as we move forward.
And the hedges.
The hedges.
Are settled.
They're settled in conjunction with physical generation.
Speaker 3: they're settled in conjunction with physical generation. And then, and so as they're settled, the collateral gets returned. So in the normal course, that collateral winds down over time. You know, what that doesn't contemplate, of course, is additional collateral needs to the extent that forward prices move, move up beyond where they are today. And that's what we're preparing for, or have prepared for.
And then and so.
As they're settled the collateral against returns so in the normal course that collateral winds down over time.
That doesn't.
Contemplate of course is <unk>.
Additional collateral needs to the extent that forward prices move move up.
Beyond where they are today.
And that's what we're preparing for or have prepared for.
Okay got it alright, that's it for me thank you.
Speaker 1: Again, if you have a question, please press star, then one. Our next question comes from Oscar Olivia with all spring global investments. Please go ahead with your question.
Again, if you have a question. Please press Star then one our next question comes from Oscar Olivia with all Spring Global investments. Please go ahead with your question.
Speaker 9: Good morning. Just more additional questions on your, your head gene agreement. He just goes how many county parties you have and then how many of those are crossover lenders.
Good morning.
Just some more additional questions on your on your hedging agreements.
Can you disclose how many counterparties do you have and then how many of those are crossover lenders.
On your ABL.
Speaker 3: Yeah, I'm looking at his brow, look at Jim. It's about 15 counter parties. And a small handful are also lenders under our credit agreement or are banks that are used to operating in a similar way.
Yes.
I'll look at it as Brown look at Jim its about 15 Counterparties.
In a small handful or are also lenders under our credit agreement or are banks that are are used to operating in a similar way.
Okay, and then in terms of the.
Speaker 9: The power markets that your experience, you may be the higher forward market, PGM, nice or, and you have another segment as well. Can you maybe touch on what's one of those as a drive and the increased hedging demand?
The power markets that youre experiencing maybe the higher forward markets.
PJM MISO or than you have in other segment as well can you maybe touch on what's one of those.
Driving the increase hedging demand.
Speaker 14: Yeah, sure. Yeah, it's PJM and New England.
Yes collateral demand sure, yes, its PJM and new England.
And Youre, just selling that power right youre not taking.
Other types of.
Hedging exposure.
No exactly. This is this is very very vanilla in the scheme of things we're selling power.
Speaker 3: No, exactly. This is very vanilla in the scheme of things. We're selling power. As I mentioned, we're not applying fuel. Our fuel is our biggest revenue source. So.
As I mentioned, we're not buying fuel.
Fuel is our biggest revenue source so.
No.
So we're just selling power.
Speaker 3: So we're just selling power. We're then entering into floating to fixed swaps with counter parties, which we then settle when we deliver physical generation to the grid.
That entering into floating to fixed swaps with.
With Counterparties.
Which we then settle when we.
When we deliver physical generation to the grid.
Speaker 9: 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 have had higher revenues that you might experience or might benefit from in the second quarter?
Got it maybe switching over to your metals business.
Or are there operators in different businesses have experienced issues with shipping times and it was there any kind of timing that impacted that business, where maybe you would have higher revenues I mean, my experience there might benefit from in the second quarter.
No not materially.
Speaker 15: And final question in terms of just overall growth opportunities, that would be fun to speak to Ashville, but is there anything that maybe on the books that was in on the books from first quarter or earlier that you had your call for fourth quarter?
Okay and final question in terms of just.
Overall growth opportunities.
That would be funded with free cash flow, but is there anything that maybe on the books that wasn't on the books from first quarter or earlier.
How did you call the fourth quarter.
Speaker 3: I'm not sure exactly what you mean by on the book. 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. Oh, okay. No, nothing material.
I'm not I'm not sure exactly what you mean by buy on the blood to new projects well something that you are signed onto constructor to add and one of your segments.
Maybe you didn't have as a growth project when you had your fourth quarter call earlier this year.
Okay, No no nothing material.
Alright, thank you.
Speaker 1: Our next question is a follow-up question with Knight Kale Jane.
Our next question is a follow up question with.
I killed Jane.
Speaker 6: with a gen-worth financial, please go ahead with your question. Yeah, thank you. So, question on the tipping fee. What typically drives the girls in the tipping fees? Is it just the escalation clauses in the contract? So is there something else in the market that we should be thinking about? So, so.
With Genworth financial please go ahead with your question.
Yeah. Thank you. So a question on the tipping fee, what typically drives the growth and the tipping fees are just the escalation clauses in the contracts or is there something else in the market that we should be thinking about.
So for full for a contract.
Speaker 3: For a contract that's existing, of course, it's the escalation that's built into the contract typically tied to an inflation escalator.
Thats existing of course, it's it's the escalation that's built into the contract typically tied to inflation escalator.
Speaker 3: For Coventa, the overwhelming driver of higher-kip 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
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.
Speaker 3: 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. You know, our biggest customers as a company, you know, you just run down the, run down the Amtrak line from Boston to Washington.
We have our 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.
Just run down the.
Run down the Amtrak line from Boston to Washington, So city of Boston City of New York City, Philadelphia City of <unk>.
Speaker 3: city of Boston, city of New York, city of Philadelphia, city of Washington DC, 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.
<unk>.
Washington D C, New Jersey, Connecticut Long Island that that's that's that's our bread and butter from a from a municipal solid waste perspective and in those markets.
You have less and less landfill capacity.
Speaker 3: 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 land.
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.
Speaker 3: So our competition is a landfill that increasingly is out of state, which imposes.
Increasingly is out of state.
<unk>.
Which which imposes.
Speaker 3: Transportation costs obviously and those transportation costs are only getting Or only getting more expensive so you think about that as a competitive and pricing wedge for us
Transportation costs, obviously in those transportation costs are only getting.
Our only getting more expensive. So you think about that as a competitive and pricing wedge for us.
Speaker 3: 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 then that drives.
And as we're as we're negotiating with our 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.
Speaker 3: the economic fundamentals of disposal contracts.
The economic fundamentals of disposal contracts.
So that's really been the driver for us.
Speaker 6: Thank you, and just one clarification that the the muni ways. How is that impact?
Got it thank you and just one clarification that the Muni way.
How has that impacted or recession.
The component in there which are tied to like.
Speaker 6: the components in there which are tied to like, you know, industrial.
Industrial.
Kind of manufacturing or production that may get impacted in a recession.
Speaker 6: kind of manufacturing or production that may get impacted or recession.
Yes, so what you see in.
Speaker 3: Yeah, so what you see in, I mean, it's, it's, it.
<unk>.
It's.
It's hard to remember the last time, we had a we had a recession.
Speaker 3: 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. And as you'd expect, it goes down primarily in the commercial and industrial sectors, but also to a degree residential. But it goes down. It goes down. And it goes down.
But what you see in those time periods as waste generation does go down a little bit.
It goes in as you'd expect it goes down.
Primarily in the commercial and industrial sectors, but all of it but also to a degree.
<unk>.
But.
It goes down it goes down very modestly if you if we look at that.
Speaker 3: very modestly, if you look at the chart of waste generation generally through
The chart of waste generation generally through.
Speaker 3: the global financial crisis, it was a blip in waste generation.
The global financial crisis. It was a 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 as it is a small fraction of overall waste in the market and our capacity is positioned where we're the we're the the.
Speaker 3: 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 where the first priority outlet for that waste.
First priority outlet for that waste with.
Speaker 3: with our customers and in our markets. So even through a recession, we're...
With our customers and in our markets so even through a recession.
We're.
Speaker 3: We may see, you know, particular customers on an individual basis, you know, may bring less waste than the otherwise would have, but overall our plants are full. Our plants have never been anything but full with multiples of our waste.
We may see particular customers.
On an individual basis.
They bring less waste than the 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.
Speaker 3: capacity available in the market that we can't take because we have fixed capacity and that's that's the waste That ends up getting on a truck and traveling hundreds of miles to a landfill
Got it thank you.
Sure.
Speaker 1: This concludes our question and answer session. I would like to turn the conference back over to Brad for any closing remarks.
This concludes our question and answer session I would like to turn the conference back over to Brad for any closing remarks.
Speaker 3: Thanks operator and thanks to everyone for joining us on the call. We appreciate all of the interest and all the questions and to the extent that we weren't clear about anything or other questions arise. You know, please reach out directly to Jim is the most efficient and everyone please have a healthy and safe long weekend. Thank you.
Thanks, operator, and thanks to everyone for joining us on the call. We appreciate.
All of the interest and all the questions and to the extent that we weren't clear about anything or other questions arise.
Reach out directly to Jim is the most efficient.
And.
<unk>.
Please have a healthy and safe long weekend. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Speaker 1: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.