Covanta announces partnership with Green Investment Group

Covanta Holding Corp., Morristown, New Jersey, has announced that it has entered into a strategic partnership with the Green Investment Group Ltd. (GIG), a subsidiary of the Sydney, Australia-based Macquarie Group Ltd. with offices in London and Edinburgh, Scotland, to develop, fund and own energy-from-waste (EFW) projects in Ireland and the U.K.

The partnership will be structured as a joint venture (JV), creating a platform to develop and invest in the combined project pipelines of the partners, as well as to pursue new opportunities for EFW project development or acquisitions. As the initial step in the partnership, GIG will invest in Covanta's Dublin plant through the JV, with proceeds from this transaction fully funding Covanta's anticipated equity requirements for all the advanced projects in the JV's combined U.K. pipeline.

Transaction highlights include:

• Validates development business model and represents repeatable strategy for unlocking value from Covanta's assets and proven capabilities.
• Recycles invested capital from Dublin to efficiently fund new project pipeline.
• Creates new growth platform with strategic partner.
• Expands U.K. pipeline to 6 development projects representing 2 million tons of annual capacity.
• Immediately deleverages the balance sheet and reduces capital intensity of development.
• Sets a clear path for meaningful additional cash flow growth.

"We believe that there is significant opportunity in international markets, and particularly in the U.K., for a sophisticated energy-from-waste operator,” Sam Zell, chairman of the board, Covanta, says. “This partnership with GIG is an optimal channel for Covanta to pursue that opportunity, and it represents a monumental shift in the company's growth trajectory. The inclusion of the Dublin project in this transaction highlights value in the company's assets and strategy and serves as a catalyst for accelerating growth in a more capital efficient manner. As a significant Covanta shareholder, I'm pleased to see the company complement its secure dividend and steady cash flow with a new path for growth and additional value creation."

Covanta and GIG will jointly develop EFW projects with initial focus in the U.K. and the potential to pursue opportunities in other international markets. As development projects reach financial close and move into the construction phase, the JV will acquire the available ownership in each project, with a premium payable to the original contributing partner. The JV will be governed and controlled jointly. Existing project level equity partnerships will remain unchanged.  Covanta will serve as the operations and maintenance (O&M) service provider for all JV projects.

As the initial step in the partnership, GIG will invest in the Dublin project, acquiring 50 percent ownership through the JV for around $160 million, subject to working capital adjustments. This transaction enables Covanta to recycle most of its invested capital in the Dublin project for reinvestment in the U.K. pipeline, while retaining a 50 percent equity interest and its role as O&M service provider. GIG's investment is expected to close during the first quarter of 2018, subject to customary conditions and approvals.

Covanta and GIG intend to combine their respective U.K. development pipelines, each consisting of three projects, for joint development and eventual acquisition by the JV. In total, the six projects would provide 2 million tons of annual waste processing capacity located in waste markets across the U.K. Within the combined portfolio, four projects have planning approvals and contractual structures already in place.

Pending permitting and project financing, all four of the developments are positioned to move into construction in the next 24 months. Rookery remains the most advanced of these projects and is expected to break ground in the first half of 2018.

The four projects have a total estimated capital cost of $1.6 billion. After considering the expected levels of project financing and existing equity partners in the projects, total JV equity funding is estimated to be $300 to $400 million. Covanta expects that the proceeds realized from the Dublin transaction, together with the development premium anticipated to be received upon the acquisition of the Rookery project by the JV, will provide sufficient funding for the entirety of its share of the funding requirements for all four projects ($150 to $200 million).

Each project is expected to yield a low to mid-teens return on equity, and in addition Covanta will earn a profit as the contractual O&M service provider to each project. In total, the pipeline of advanced projects is projected to generate $40 to $50 million of annual cash flow to equity, which implies a cash multiple of four to five times on invested equity.

In addition to the advanced projects described above, GIG is involved in two early stage projects that are expected to progress over the next two to three years. Going forward, the JV will explore and pursue additional opportunities for new project development and acquisitions in the U.K. and Ireland, as well as other attractive EFW markets globally.