Covanta Holding Corp. is forming a 50/50 joint venture with Macquarie Group Ltd. subsidiary Green Investment Group Ltd. to develop, fund and own energy-from-waste projects in Ireland and the United Kingdom.
"This partnership with [Green Investment Group, or GIG] is an optimal channel for Covanta to pursue that opportunity, and it represents a monumental shift in the company's growth trajectory," Covanta Board Chairman Sam Zell said in a Dec. 18 statement.
The joint venture will acquire available ownership when a development project reaches financial close and will pay a premium to the original contributing partner. The existing project-level equity partnerships, however, will remain unchanged.
The two companies plan to combine their respective U.K. development pipelines, with three projects each, for joint development and eventual acquisition by the joint venture. The six facilities would provide 2 million tonnes of annual waste processing capacity, Covanta said.
Four of the projects are already in advanced development and are expected to move into construction in the next 24 months. Those four projects have a total estimated capital cost of $1.6 billion and total joint venture equity funding is estimated to be $300 million to $400 million.
The pipeline of advanced projects is projected to generate $40 million to $50 million of annual cash flow to equity, which implies a cash multiple of 4x to 5x on invested equity, Covanta said.
Rookery is the most advanced of these projects and is expected to break ground in the first half of 2018.
The remaining two projects are associated with GIG and are in the early stages. These projects are expected to progress over the next two to three years.
But prior to the U.K. pipeline combination, GIG will acquire through the JV a 50% stake in Covanta's Dublin energy-from-waste facility 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 about 13x the forecasted full-year adjusted EBITDA of the project company.
Covanta said proceeds from the Dublin transaction, along with the development premium to be received upon the acquisition of the Rookery project by the joint venture, are enough to fund its about $150 million to $200 million share of funding the four projects.
The GIG investment is expected to close during the first quarter of 2018. Covanta will serve as operations and maintenance service provider for all the joint venture projects.
Covanta expects the Dublin project under the joint venture to contribute $30 million to $35 million to adjusted EBITDA and $10 million to $15 million to free cash flow, both on an annualized basis.
Moreover, Covanta expects the to realize a reduction in its consolidated net debt/adjusted EBITDA ratio of about 1x, compared to the ratio as of Sept. 30, due to the contribution of the Dublin project to the joint venture.
On Dec. 14, Covanta completed the refinancing of its Dublin project with a new €396 million 3.1% senior loan due 2032, and a new €50 million 5.2% second-lien junior loan due 2032.
Proceeds of the debt issuances were used to repay all existing senior and junior debt and the 13.50% convertible preferred instrument held by Blackrock. The new debt remains nonrecourse to Covanta and the joint venture.