MORRISTOWN, N.J., Dec. 18, 2017 /PRNewswire/ -- Covanta
Holding Corporation (NYSE:CVA) (the "Company" or "Covanta") today
announced that it has entered into a strategic partnership with the
Green Investment Group Limited ("GIG"), a subsidiary of Macquarie
Group Limited ("Macquarie"), to develop, fund and own
Energy-from-Waste ("EfW") projects in Ireland and the UK. The partnership will be
structured as a 50:50 joint venture (the "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 of the advanced projects in the JV's combined
UK pipeline.
Key Transaction Highlights
- 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 powerful new growth platform with experienced and
complementary strategic partner
- Expands UK pipeline to 6 development projects representing 2
million tonnes of annual capacity
- Immediately deleverages the balance sheet and reduces
capital intensity of development
- Sets a clear path for meaningful additional cash flow
growth
Sam Zell, Chairman of the Board,
Covanta said: "We believe that there is significant opportunity in
international markets, and particularly in the UK, for a
sophisticated energy-from-waste operator. 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."
JV Structure and Development Plan
Covanta and GIG will jointly develop energy-from-waste projects,
with initial focus in the UK 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
50:50 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.
Stephen Jones, President and CEO,
Covanta said: "I am very excited about this strategic arrangement
with a committed partner that brings substantial in-market
expertise, relationships and resources, and has a tremendous track
record of sourcing, developing and executing large-scale renewable
infrastructure projects. GIG and Covanta have highly complementary
skills, making this a powerful partnership to execute a robust
combined pipeline of opportunities. Since I joined Covanta,
one of my primary goals has been to drive successful international
development and meaningful growth on a consistent and repeatable
basis, and this partnership brings that goal to reality."
Edward Northam, Head of GIG in
Europe, added: "We are delighted
to have signed a partnership agreement with Covanta, a
world-leading owner and operator of waste-to-energy facilities. The
projects developed under the partnership will extract energy from
residual waste that would otherwise be lost to landfill, avoiding
harmful methane emissions. We are also pleased to announce GIG's
first investment in the Republic of
Ireland. Investing in Covanta's landmark Dublin project is the first step in realizing
the potential of the partnership. As it enters its first full year
of operations in 2018, the state-of-the-art facility will help
ensure Ireland continues to meet
its landfill diversion targets."
Dublin Refinancing
On December 14, Covanta completed
a comprehensive refinancing of the original capital structure of
the Dublin project, significantly
extending maturities and reducing cost. The project companies
raised (i) a new €396 million senior loan due 2032 at a rate of
3.1% and (ii) a new €50 million second lien junior loan due 2032 at
a rate of 5.2%. Proceeds from this debt issuance were used to repay
all existing senior and junior debt and the 13.50% convertible
preferred instrument held by Blackrock. The new debt remains
non-recourse to Covanta and the JV.
Dublin Investment
As the initial step in the partnership, GIG will invest in the
Dublin project, acquiring 50%
ownership through the JV for €136 million, subject to working
capital adjustments. The purchase price implies a total enterprise
value for the project, including net project debt, of approximately
€700 million, or a multiple of approximately 13x the forecasted
full-year Adjusted EBITDA of the project company. This valuation
reflects an attractive premium to the cost of development and
construction, and represents the market price for a premier world
class asset. This transaction enables Covanta to recycle most of
its invested capital in the Dublin
project for reinvestment in the UK pipeline, while retaining a 50%
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.
Brad Helgeson, Chief Financial
Officer, Covanta said: "This partnership offers an elegant solution
for funding attractive growth opportunities in the UK in a
capital-efficient manner, while simultaneously strengthening our
balance sheet and dividend for the near and long-term. The
realization of value from the Dublin project fully funds the entirety of our
expanded UK development pipeline, and positions us to accelerate
execution on our commitment to reduce leverage and grow cash
flow."
JV Project Pipeline and Funding
Covanta and GIG intend to combine their respective UK
development pipelines, each consisting of 3 projects, for joint
development and eventual acquisition by the JV. In total, the 6
projects would provide 2 million tonnes of annual waste processing
capacity, strategically located in attractive waste markets across
the UK. Within the combined portfolio, 4 projects are well-advanced
with planning approvals and contractual structures already in
place. Details on GIG's projects are currently confidential for
commercial reasons, but will be disclosed as they progress.
Pending permitting and project financing, all 4 of the advanced
developments referenced above 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. Details on the specific timeline, costs,
structure and financial contribution of each project will be
provided as it reaches financial close and moves into
construction.
The 4 advanced projects have a total estimated capital cost of
$1.6 billion. After taking into
account 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 4 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 4
to 5x 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 2-3 years. Going forward, the JV will explore and
pursue additional opportunities for new project development and
acquisitions in the UK and Ireland, as well as other attractive EfW
markets globally, leveraging the combined capabilities of Covanta,
GIG and Macquarie.
Accounting and Financial Metrics
Accounting Treatment
As a 50% equity partner in the JV, Covanta expects to account
for the results of the Dublin
project under the equity method, with Covanta's proportional share
of project net income reflected as equity in income on the income
statement. The results of Covanta's wholly-owned O&M subsidiary
will continue to be consolidated. The assets and liabilities of the
Dublin project will be classified
as held for sale as of December 31,
2017, and the project-level debt, which is already
non-recourse to Covanta, will be deconsolidated upon completion of
the transaction. Cash distributions to equity holders from the
Dublin project will be reflected
as dividends from unconsolidated investments on the statement of
cash flows.
Key Non-GAAP Metrics
Covanta expects that the Adjusted EBITDA contribution from
Dublin under the JV will be
$30 to 35 million on an annualized
basis, including the consolidated O&M results. When the
Dublin project is accounted for
under the equity method, Covanta's Adjusted EBITDA will reflect
proportional (50%) Adjusted EBITDA of the project company.
Covanta expects that the Free Cash Flow contribution from
Dublin under the JV will be
$10 to $15
million on an annualized basis. When the Dublin project is accounted for under the
equity method, Covanta's Free Cash Flow will reflect dividends
received from the project through the JV, as well as the
consolidated cash flow of the operating subsidiary. Project
dividends will be paid after principal payments on project-level
debt.
Initial Balance Sheet Impact
Following the contribution of the Dublin project to the JV and associated
accounting changes, Covanta expects to realize a reduction in its
consolidated net debt / Adjusted EBITDA ratio of approximately 1x
as compared to the ratio as of September 30,
2017.
Overview of GIG and Macquarie
GIG is a specialist in green infrastructure principal
investment, project delivery and the management of portfolio
assets, and related services. Its track record, expertise and
capability make it a global leader in green investment, dedicated
to supporting the growth of the global green economy.
The business was launched initially by the UK Government in
2012 as the first institution of its type in the world. The
organization was acquired by the diversified financial group
Macquarie Group Limited in 2017, creating one of Europe's largest teams of dedicated green
infrastructure investors, and now operates under the name Green
Investment Group.
Macquarie is a diversified financial group providing clients
with asset management and finance, banking, advisory and
risk and capital solutions across debt, equity and
commodities. Founded in 1969, Macquarie employs 13,966 people in 27
countries. At 30 September 2017,
Macquarie had assets under management of £277.2 billion.
Conference Call
Covanta will host a conference call at 12:00 PM Eastern time today (Monday December 18, 2017) to discuss this
transaction. The conference call will begin with prepared remarks
which will be followed by a question and answer period.
To participate, please
dial 1-866-393-4306 approximately 10 minutes prior
to the scheduled start of the call. If calling outside
of the United States, please
dial 1-734-385-2616. Please request the "Covanta
Holding Corporation Partnership Call" when prompted by the
conference call operator. The conference call will also be webcast
live from the Investor Relations section of the Company's
website. A presentation will be made available during the call
and will be found in the Investor Relations section of
the Covanta website at www.covanta.com.
An archived webcast will be available two hours after the end of
the conference call and can be accessed through the Investor
Relations section of the Covanta website
at www.covanta.com.
About Covanta
Covanta is a world leader in providing sustainable waste and
energy solutions. Annually, Covanta's modern Energy-from-Waste
facilities safely convert approximately 20 million tons of waste
from municipalities and businesses into clean, renewable
electricity to power one million homes and recycle approximately
550,000 tons of metal. Through a vast network of treatment and
recycling facilities, Covanta also provides comprehensive
industrial material management services to companies seeking
solutions to some of today's most complex environmental challenges.
For more information, visit covanta.com.
Cautionary Note Regarding Forward-Looking Statements
Certain statements in this press release may constitute
"forward-looking" statements as defined in Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), Section
21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), the Private Securities Litigation Reform Act of
1995 (the "PSLRA") or in releases made by the SEC, all as may be
amended from time to time. Such forward-looking statements involve
known and unknown risks, uncertainties and other important factors
that could cause the actual results, performance or achievements of
Covanta and its subsidiaries, or industry results, to differ
materially from any future results, performance or achievements
expressed or implied by such forward-looking statements. Statements
that are not historical fact are forward-looking statements.
Forward-looking statements can be identified by, among other
things, the use of forward- looking language, such as the words
"plan," "believe," "expect," "anticipate," "intend," "estimate,"
"project," "may," "will," "would," "could," "should," "seeks," or
"scheduled to," or other similar words, or the negative of these
terms or other variations of these terms or comparable language, or
by discussion of strategy or intentions. These cautionary
statements are being made pursuant to the Securities Act, the
Exchange Act and the PSLRA with the intention of obtaining the
benefits of the "safe harbor" provisions of such laws. Covanta
cautions investors that any forward-looking statements made by
Covanta are not guarantees or indicative of future performance.
Important assumptions and other important factors that could cause
actual results to differ materially from those forward-looking
statements with respect to Covanta include, but are not limited to,
the risks and uncertainties affecting Covanta's businesses
described in periodic securities filings by Covanta with the SEC.
Important factors, risks and uncertainties that could cause actual
results of Covanta and the JV to differ materially from those
forward-looking statements include, but are not limited to:
seasonal or long-term fluctuations in the prices of energy, waste
disposal, scrap metal and commodities; Covanta's ability to renew
or replace expiring contracts at comparable prices and with other
acceptable terms; adoption of new laws and regulations in
the United States and abroad,
including energy laws, environmental laws, tax laws, labor laws and
healthcare laws; failure to maintain historical performance levels
at Covanta's facilities and its ability to retain the rights to
operate facilities it does not own; Covanta's and the JV's ability
to avoid adverse publicity or reputational damage relating to its
business; advances in technology; difficulties in the operation of
its facilities, including fuel supply and energy delivery
interruptions, failure to obtain regulatory approvals, equipment
failures, labor disputes and work stoppages, and weather
interference and catastrophic events; difficulties in the
financing, development and construction of new projects and
expansions, including increased construction costs and delays;
limits of insurance coverage; Covanta's ability to avoid defaults
under its long-term contracts; performance of third parties under
its contracts and such third parties' observance of laws and
regulations; concentration of suppliers and customers; geographic
concentration of facilities; increased competitiveness in the
energy and waste industries; changes in foreign currency exchange
rates; limitations imposed by Covanta's existing indebtedness and
its ability to perform its financial obligations and guarantees and
to refinance its existing indebtedness; exposure to counterparty
credit risk and instability of financial institutions in connection
with financing transactions; the scalability of its business;
restrictions in its certificate of incorporation and debt documents
regarding strategic alternatives; failures of disclosure controls
and procedures and internal controls over financial reporting;
Covanta's and the JV's ability to attract and retain talented
people; Covanta's ability to utilize net operating loss
carryforwards; general economic conditions in the United States and abroad, including the
availability of credit and debt financing; and other risks and
uncertainties affecting Covanta's businesses described in periodic
securities filings by Covanta with the SEC. Although Covanta
believes that its plans, cost estimates, returns on investments,
intentions and expectations reflected in or suggested by such
forward-looking statements are reasonable, actual results could
differ materially from a projection or assumption in any
forward-looking statements. Covanta's and the JV's future financial
condition and results of operations, as well as any forward-looking
statements, are subject to change and to inherent risks and
uncertainties. The forward-looking statements contained in this
press release are made only as of the date hereof and Covanta does
not have or undertake any obligation to update or revise any
forward-looking statements whether as a result of new information,
subsequent events or otherwise, unless otherwise required by
law.
Discussion of Non-GAAP Financial Measures
We use a number of different financial measures, both
United States generally accepted
accounting principles ("GAAP") and non-GAAP, in assessing the
overall performance of our business. To supplement our assessment
of results prepared in accordance with GAAP, we use the measures of
Adjusted EBITDA, and Free Cash Flow, which are non-GAAP measures as
defined by the Securities and Exchange Commission. The non-GAAP
financial measures of Adjusted EBITDA and Free Cash Flow as
described below, and used in this release, are not intended as a
substitute or as an alternative to net income, cash flow provided
by operating activities or diluted earnings per share as indicators
of our performance or liquidity or any other measures of
performance or liquidity derived in accordance with GAAP. In
addition, our non-GAAP financial measures may be different from
non-GAAP measures used by other companies, limiting their
usefulness for comparison purposes. The presentations of Adjusted
EBITDA and Free Cash Flow are intended to enhance the usefulness of
our financial information by providing measures which management
internally use to assess and evaluate the overall performance of
its business and those of possible acquisition candidates, and
highlight trends in the overall business.
Adjusted EBITDA
We use Adjusted EBITDA to provide additional ways of viewing
aspects of operations that, when viewed with the GAAP results
provide a more complete understanding of our core business. As we
define it, Adjusted EBITDA represents earnings before interest,
taxes, depreciation and amortization, as adjusted for additional
items subtracted from or added to net income including the effects
of impairment losses, gains or losses on sales, dispositions or
retirements of assets, adjustments to reflect the Adjusted EBITDA
from our unconsolidated investments, adjustments to exclude
significant unusual or non-recurring items that are not directly
related to our operating performance plus adjustments to capital
type expenses for our service fee facilities in line with our
credit agreements. We adjust for these items in our Adjusted EBITDA
as our management believes that these items would distort their
ability to efficiently view and assess our core operating trends.
Going forward, as larger parts of our business will be conducted
through unconsolidated entities that we do not control, we will
begin to adjust for our proportionate share of the entities
depreciation and amortization, interest expense and taxes in order
to improve comparability to the Adjusted EBITDA of our wholly owned
entities.
Our projections of the proportional contribution of our
interests in the JV to our Adjusted EBITDA and Free Cash Flow are
not based on GAAP net income/loss or Cash flow provided by
operating activities, respectively, and are anticipated to be
adjusted to exclude the effects of events or circumstances in 2018
that are not representative or indicative of our results of
operations and that are not currently determinable. Due to the
uncertainty of the likelihood, amount and timing of any such
adjusting items, we do not have information available to provide a
quantitative reconciliation of projected net income/loss to an
Adjusted EBITDA projection or projected Cash flow provided by
operating activities to Free Cash Flow projection.
Free Cash Flow
Free Cash Flow is defined as cash flow provided by operating
activities, less maintenance capital expenditures, which are
capital expenditures primarily to maintain our existing facilities.
We use the non-GAAP measure of Free Cash Flow as a criterion of
liquidity and performance-based components of employee
compensation. We use Free Cash Flow as a measure of liquidity to
determine amounts we can reinvest in our core businesses, such as
amounts available to make acquisitions, invest in construction of
new projects, make principal payments on debt, or amounts we can
return to our stockholders through dividends and/or stock
repurchases.
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