CVA (CVA) 2017-12-20 Earnings Call Transcript

Good morning, everyone and welcome to Covanta Holding Corporation’s Conference Call and Webcast to discuss the Strategic Partnership with the Green Investment Group. An archived webcast will be available 2 hours after the end of the conference and can be accessed through the Investor Relations section of the Covanta website at www.covanta.com. The transcript will also be archived on the company’s website. At this time for opening remarks and introductions, I would like to turn the call over to Dan Mannes, Covanta’s Vice President of Investor Relations. Please go ahead.

Thank you and appreciate everyone joining us on our short notice today. Welcome to today’s call which will discuss Covanta’s Strategic Partnership with the Green Investment Group, a subsidiary of Macquarie. Hopefully, you have seen the press release issued this morning that describes the partnership in detail. To provide more color on this announcement on the call today, we have Sam Zell, our Chairman of the Board, Steve Jones, our President and CEO; and Brad Helgeson, our CFO. We will provide an overview of the partnership and then open it up for questions and answers. During the prepared remarks, certain slides will be referenced that were prepared to supplement the audio portion of this call. Those slides can be accessed now or after the call on the Investor Relations section of our website. These prepared remarks should be listened to in conjunction with these slides. Now, on to the Safe Harbor and other preliminary notes. The following discussion may contain forward-looking statements and our actual results may differ materially from those expectations. Information regarding factors that could cause such differences can be found in the company’s reports and registration statements filed with the SEC. The content of this conference call contains time-sensitive information that is only accurate as of the date of this live broadcast, December 18, 2017. We do not assume any obligation to update our forward-looking information unless required by law. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Covanta is prohibited. The information presented includes non-GAAP financial measures, because these measures are not calculated in accordance with GAAP, they should not be considered in isolation from our financial statements, which have been prepared in accordance with GAAP. For more information regarding definitions of our non-GAAP measures and how we use them as well as imitations as to their usefulness for comparative purposes, please see our press release, which was issued this morning and was furnished to the SEC on Form 8-K. With that, I would like to now turn the call over to our Chairman, Sam Zell. Sam?

Good morning and thank you everybody. As the company’s largest shareholder as well as the company’s Chairman, I am very pleased to report to you on the completion of an agreement with GIG to basically create an infrastructure joint venture fund and expand our UK activities. We have always felt that waste-to-energy is a core holding in environmental infrastructure. And consequently, we have always looked for an opportunity to find an infrastructure fund or infrastructure entity that could be our partner and grow the opportunities that obviously exist in the scale. A little bit of history when we took over Covanta in 2002, our first challenge was the phantom income that had been created by virtue of the construction activity 10 years somewhat previously. We successfully used our net operating loss carry-forward in order to generate capital that allowed us to grow and start the consolidation process within the United States waste-to-energy market. We acquired American Ref-Fuel, we acquired Veolia and we continue to acquire smaller add-ons, particularly in the special waste arena. Obviously, the future became a question of growth and where was that growth going to come from. We successfully completed the development, construction and beginning of operation of our Dublin facility, which is a huge brand new facility in Dublin, Ireland. It’s very attractively put, because its part of the EU and the EU is very waste-to-energy friendly. They have implemented that policy by raising landfill fees throughout the EU, closing landfills and being very friendly towards the expansion of waste-to-energy facilities, particularly in the United Kingdom. The joint venture we have created with Green Investment Corporation. I first should tell you that Green Investment was originally created by the British government and was privatized and Macquarie took over the company. They are very substantial infrastructure assets, both in England as well as in other parts of the world and are very anxious and excited about the idea of teaming up with companies which has the background and the talent in waste-to-energy to take that skill to other places. We start with the fact that we believe that we have now setup a repeatable scenario on using government as the model to continue to grow our business in the UK. We also have the opportunity of taking the capital that we put into Dublin and recycling it in a very efficient manner, which allows us to have the capital available to grow on our waste-to-energy base in the United Kingdom. A growth platforms and an experienced partner are critical elements to take the advantage of what we believe is an enormous opportunity in the growth of this business. Our joint venture will initially begin with six projects, most of which have been already approved so we are in a position to literally be shovel-ready and get going. We also, as a result of this transaction, will de-lever our balance sheet so as to ensure that the dividend we have been paying represents over time a smaller and smaller percentage of our cash flow as we see that cash flow over the next few years grow exponentially as we bring on more plants. We are very excited about this deal in a long time in the creation and represented what we thought when we first met our investment in Covanta is the way it should go on, lot has happened in between and it’s taken the right kind of partner to make this work. We think this creates a great growth story for Covanta going forward and we are very excited about the prospects. With that, I will turn it over to the CEO, Steve Jones.

Thanks, Sam. For those of you using the web deck, please turn to Slide 4. To begin with, I want to say how excited I am that reached agreement on this milestone partnership with Green Investment Group. As all of you are undoubtedly aware, we have been pursuing various avenues to grow our EfW portfolio in international markets. At the same time, we have been looking for ways to fund that growth while balancing other capital allocation priorities, most notably, our dividend and not further encumbering our balance sheet. The plan announced today offers a comprehensive solution. Looking at what this transaction means, it highlights value on our assets, validates our strategy and capabilities and unlocks value generated from our successful development efforts in Dublin. With GIC’s investment in the Dublin plant, we will be able to recoup the vast majority of our original investment while still keeping 50% equity ownership and of course retain our role as operator ensuring that the facility runs at peak performance for decades to come. By effectively recycling our capital in Dublin, we have demonstrated a strategy that could potentially be repeated in the future. As a partner, GIG brings far more than just a balance sheet. I will go into their resume shortly, but suffice it to say, they have tremendous capability and resources to advance projects and source new opportunity. While we believe that our three advanced projects in UK are very attractive partnering with GIG accelerates the route to market. At the same time, GIG had its own complementary development pipeline, which further enhances the partnership. The combined pipeline of six projects, represent 2 million tons of waste capacity when fully build-out. As a leader in EFW operations, Covanta will be the O&M operator for the project enabling us to build a UK platform that could ultimately mirror our U.S. model. Lastly, in addition to providing funding for the new project development, the recycling of capital that we invested in the Dublin project also accelerates our de-leveraging. We expect to reduce our net debt to adjusted EBITDA ratio by about a term relative to peak level at September 30 upon closing the transaction with reduced capital needs and a structure which enables us to capitalize on international market opportunities with a well-positioned partner. Our dividend is well supported and now has an enhanced trajectory growth in the future. Clearly, we are focused on growing our business in the UK, that’s probably worth taking a minute or two to remind you why this market makes sense for Covanta. Please turn to Slide 5. Covanta has a strong leadership position in the U.S. market and more energy for waste operating experience in any other company. As we have discussed in the past, we have assessed markets outside the U.S. where there is an opportunity to bring these capabilities to bear and generate value. Our focus has been on countries with mature waste infrastructure and a supportive regulatory environment. As many of you know, Europe broadly supports landfill diversion with EfW as a favored alternative. From our perspective, UK offers a single most attractive market opportunity given its shortfall of disposal capacity even with substantial investment to-date in the EfW space. As a country, the UK continues to export 3.5 million tons of waste to Continental Europe given that capacity shortfall. Per ton gate fees at EfW plants in UK are nearly double what we received in the U.S. In summary, the UK meets our requirements and it’s a market we have long pursued. Our development efforts in UK evolved materially over the last few years. We remain focused on larger merchant facilities in attractive waste markets in major metropolitan regions. And along with our project partners, we have secured critical planning permission on multiple sites, but rather than pursuing municipal waste procurement processes which can be highly competitive with uncertain timelines and complicated criteria, we are now partnering with large waste haulers that value disposal availability at our sites. These commercial entities make decisions far faster than municipalities and as equity partners in the project have aligned interests with our interest. We believe that we have a strategy to win in this market and with GIP alongside us we are in a great position to execute on it. Many of you may not be familiar with the Green Investment Group, so I’d like to take a minute to talk about their background. Please turn to Slide 6. The organization was originally formed by the UK government in 2012 with the Green Investment Bank or GIB with a mandate to facilitate investment in renewable, green infrastructure projects in the UK, including energy from waste. Over the last 5 years, GIB has funded over £3 billion in clean energy projects. They have vast knowledge of the investment landscape, a large and dedicated team with development, technical, commercial and financial expertise and a great reputation in the market. Earlier this year, GIB was privatized with Macquarie purchasing from the UK government and the business now operates as the Green Investment Group or GIG. Macquarie of course is one of the leading infrastructure investors in the world with assets under management of over 277 billion pounds. GIG and Macquarie bring capital to our projects, but more importantly, they are a strategic partner whose capabilities complement our capabilities very well. Quite simply, they are the ideal partner for Covanta in this market and beyond and I couldn’t be more excited to be working together with them. Turning to Slide 7, I will review our present combined pipeline of projects. We publicly discussed having 3 UK development projects in our pipeline, all of which are merchant facilities located near major metropolitan areas with strong project partners and waste suppliers. All three of these projects have already received planning approval and the 535,000 ton per year Rookery plant, which we partnered with Veolia, is expected to move into construction during the first half of 2018. The two projects that we have been developing with Biffa, the Protos and Newhurst projects, are also in a position to move into construction in the next 24 months with each of those plants having 350,000 tons per year of capacity. Adding to our existing pipeline, GIG brings another three opportunities, potentially doubling the number of projects under development and totaling another 800,000 tons of capacity. We are not yet in a position to share the specific details on these projects, but hope to do so as they progress further. In total, our partnership will be actively progressing 6 projects totaling 2 million tons of capacity and representing approximately $2 billion of total investment, by any measure, a massive opportunity for both of us. In addition to the UK and the Ireland, this partnership establishes a platform that can be leveraged to pursue opportunities in other international markets both we and GIG Macquarie have broader growth aspiration. And together we have the capabilities and plans to bring those aspirations to reality. So, stay tuned for further discussions on that front in the future. With that, I will turn the call over to Brad to discuss the transaction in more detail.

Thanks, Steve. Turning to Slide 8 you will see a high-level schematic of the partnership and its key elements. Covanta and GIG will work together to develop projects along with our existing project partners, pooling resources and sharing costs. As each project reaches financial close and moves into construction phase, the joint venture will acquire the project with a premium paid to the original developer. Note that we expect to receive a meaningful premium from the JV in the first half of 2018 when Rookery moves into construction. The JV will target project equity return in the low to mid-teens. For facility operations, Covanta will enter into contracts directly with the projects serve as O&M provider running at appropriate margins of those services. From an ownership and governance standpoint, this is a classic 50-50 joint venture with the partners sharing control and all management decisions. To the extent that there are existing project level equity partners, as is the case for our 3 announced UK projects, JV will acquire only the project equity interest of Covanta or GIG as the case maybe. As an example for the Rookery project, Covanta has an 80% equity ownership in the project with our partner, Veolia holding 20%. So, the joint venture would acquire our 80% resulting in a final effective ownership split in the project, 40% for Covanta, 40% for GIG and 20% for Veolia. In addition to advancing Greenfield projects, partnership will also pursue M&A opportunities. Covanta’s ability to consider acquisitions will be far greater in the context of this partnership and it is currently on a standalone basis. That will get into the Dublin transaction more specifically, please turn to Slide 9. Last week, we completed a refinancing of the entire Dublin project capital structure extending debt terms and significantly reducing costs with the project operational and performing well and against the backdrop of low rates and very strong bank and institutional capital market conditions, particularly for infrastructure assets, the environment was ideal to refinance. We raised approximately €450 million in new non-recourse debt with 15-year tenor at an average rate of approximately 3.3%. The proceeds used to pay off the original debt that funded construction as well as the 13.5% convertible preferred. This reduction in cost and extension of amortization schedule dramatically improves the profile of equity cash dividends from project going forward. As the first step in our strategic partnership, GIG has agreed to invest €136 million or 50% of the equity in the project through the joint venture. This implies an enterprise value multiple of 13x to EBITDA of the project company. The valuation delivers a meaningful premium to our original investment, but represents an appropriate market value for best-in-class assets like the Dublin plant. And again, Covanta will remain as the operator of the plant via our wholly-owned subsidiary outside of the JV. I will wrap up with an overview of the financial implications of the transaction and the strategy for Covanta both in the near and long-term, please turn to Slide 10. As Steve described, this partnership offers an elegant solution for funding our project development pipeline in a capital efficient manner. I committed on our last conference call in October that we would not move forward with Rookery or any other new project without a comprehensive plan to fund the entire pipeline in a way that does not further stress the corporate balance sheet or impact our other capital allocation priorities. This plan achieved those goals. The initial impact of GIG buying into Dublin will be an immediate reduction in Covanta’s net debt to adjusted EBITDA ratio by about 1 turn. We noted on the third quarter earnings call that the ratio at September 30 would represent the peak level and the Dublin coming online would mark a turning point, with leverage ratios declining from there. The net result of this transaction is essentially an acceleration of that process. Going forward, the partnership will reduce the capital intensity of development with project debt expected to remain off balance sheet in our anticipated project equity investment already funded. From an accounting perspective, we expect Dublin and future joint venture projects to be accounted for under the equity method. Relative to our previously stated expectations for the adjusted EBITDA and free cash flow contributions from Dublin, we now expect our proportionate ownership together with our O&M fee yield $30 million to $35 million of annual adjusted EBITDA and $10 million to $15 million of free cash flow. Note that the Dublin project will continue to be accounted for a consolidated basis until a transaction closes likely midway through the first quarter. In terms of the near to medium term investment outlook, assuming the four most advanced development projects in our new combined pipeline move forward. We estimate an equity investment requirement of $150 million to $200 million in total, which again is effectively now pre-funded. We expect these projects will contribute free cash flow to Covanta in the $40 million to $50 million range, which implies a very attractive cash multiple, cash investment multiple of 4 to 5 times. Stepping back, the combination of this investment opportunity in the Dublin transaction which pays for effectively translates into approximately $30 million of additional distributable cash flow to Covanta with no additional capital investment required, that’s a good trade. Looking out to the long-term, this partnership positions us to deliver cash flow growth at a meaningfully higher rate. With the international growth opportunity on top of the multiple avenues for sustainable organic growth in our base business, we’re now targeting double free cash flow by mid next decade in the pipeline projects are all online. This translates to a CAGR of over 10% over that period of time. And to the extent that we were able to leverage this platform for further opportunities to new markets or via M&A there will be meaningful upside to these targets. In summary, we see a very different growth trajectory for the company going forward and I’m very excited about that. With that, I will turn it back to Steve to discuss the next steps and the outlook for the development pipeline.

Thanks Brad. Let’s move to Slide 11. I’d like to wrap up by looking ahead to next steps and how we envision the project development can play out over the next several years. We expect Rookery to be the first project to move forward. We have received our draft environmental permit and are currently waiting for that to be finalized. In the meantime, we have begun development work on the site in anticipation of commencing construction in the first half of 2018. We have a financing structure and funding group in place and we will finalize that in early 2018 as well. After Rookery, we believe it’s possible that a second project could move into constructing later in 2018. With 1 to 2 more in 2019 as discussed four projects in our combined pipeline have planning permission already and are fairly well advanced. If you recall from Dublin, construction of these large infrastructure projects takes about 3 years. So we envision an overall investment in the UK of 5 years or so during which we’ll move projects forward and build them. Under the timeline, we expect the projects coming online beginning in 2021, as we are seeing now with Dublin once these project move forward they can deliver highly predictable returns, but these investments should provide a clearly visible multiyear trajectory of increasing cash flows many years into the future. With that, I’d like to hand it back to Sam for closing comments before you move into Q&A. Sam?

Thank you, Steve. In summation, it’s really kind of very simple. I think what we have done is we have solidified the base, have identified the growth, we have added the capital partners. We have created the opportunity to create an ongoing growing company. We believe we have changed the perception of Covanta, one of discount to replacement cost to an operating ongoing business that is very attractive to participate in. We are excited about the prospects. We are very comfortable with the risk reward ratio and we look forward to you all participating accordingly. Thank you very much.

We can now move on to Q&A.

Okay, fair enough. Thank you very much.

Thank you. Appreciate it.

And there are no further questions at this time. I will turn the call back over to Steve Jones, CEO of Covanta for closing remarks.

Thanks again for joining us on such short notice. As you can imagine, the management team, the board, we are really excited about announcing this partnership. If you remember in our Investor Day when I first started, I indicated that I wanted to start building more energy from waste plants likely to be in international markets, so putting this partnership together and recycling the capital from Dublin is in effect the execution phase associated with that goal. So, we are really pleased about that. And I think we are talking about a monumental shift in Covanta’s growth strategy and trajectory going forward. So, thanks again for joining us and being able to discuss really important partnership for us. Thanks.

That does conclude today’s conference call. You may now disconnect.

[Operator Instructions] Your first question comes from the line of Noah Kaye from Oppenheimer & Company. Noah, your line is open.

Good afternoon. Thanks very much for taking my questions and certainly to start with congratulations on undertaking this strategic partnership. Couple of questions from me. First, can you talk about the potential impact of the GIG Macquarie relationship on future project debt rates and how that factors into the equity return profile that you are calculating? In other words, we just want to understand are you assuming kind of a comparable refinancing to Dublin long-term debt structure similar interest rates for the four projects in development once they become operational or is the cash return you are profiling based off of kind of a construction financing type profile?

Yes, hey, Noah, it’s Brad. Yes, I think the project debt is going to be attractive. We would expect for all of these projects fundamentally first off, because they are well structured projects in terms of the assets or location in the contractual profile, so that certainly was the case for Dublin. I think Dublin, the refinancing we benefited from the fact of course that the project is operational, so we wouldn’t necessarily expect the precise kind of financing that we able to get for an operating asset or construction assets. I think Macquarie and GIG’s involvement can only help. And I think you are getting starts with well structured projects, which is what we think we have regardless of who the equity owners are, but given that they are our partner, I think it only brings further credibility to our strategy.

Okay, great. And then my next question is on the dividend as we think about this target of long-term 10% free cash flow CAGR, as you pointed out on your comments, it would appear that after 2018 kind of the next level up from these projects will be coming in 2021 and after. So, how should we think about the pace of dividend growth versus the timing of cash flows from these new projects coming online?

Well, so we just reiterated our dividend and our commitment to the dividend at the last board meeting in early December. And as you know we look at every December we look at where we are versus cash flow being generated. It’s obviously within the CAGR that we are talking about on additional free cash flow generation and puts us in a spot to be able to again look at raising that dividend, but we are not going to make any advanced projections on that just yet. We’ll, obviously with Sam’s guidance, be looking at December as we generate even more cash flow now from the set of assets that we are already operating and then we will be constructing.

Yes. And I appreciate this. I guess maybe just to rephrase my question you have typically set the dividend at a level that you felt was supportable by the cash flows on the assets and kind of de-risking kind of the commodity picture with the line of sight to longer term meaningful growth in free cash flow, what’s your comfort level and kind of having a relatively high payout ratio and the dividend in other words the ability to raise the dividend in advance of some of these projects coming online?

Yes, this is Sam Zell. I think that despite maybe the views or hopes of some of our other shareholders I think that we have been running this company in a very conservative fashion. I don’t think we want to take any significant risk by increasing the dividend unless we are 100% sure that the cash flow is in place. That’s the process we go through every year and that’s the process I expect that we will be going through going forward. We will raise the dividend when we feel very comfortable that we have significant margin and not better uses for that capital and I think that’s what we have been doing and that’s what we are going to be doing going forward.

Thank you. And if I could just sneak one more in, Steve, you mentioned, no doubt at all, fully appreciated, Steve, you mentioned Rookery, our understanding was the consultation period for that environmental permit had closed. So, can you just clarify what you mean by the draft environmental permit is received and then you are waiting for finalization?

Yes. So, we realized that across the UK market, the most difficult permit to get is the planning permit. And as I mentioned the three projects that we are bringing to the partnership and one of the projects that GIG is bringing to the partnership already have planning approval. The next step in the process to get the environmental permit and you brought up Rookery spin through the comment period we are expecting very shortly here to get the final permit. We have seen the draft permit already that’s where I referenced in my prepared remarks. We will get a final permit here shortly and then it goes through another 90-day period where people can watch concerns about the process really and then what most people will do will start the construction after that 90-day period. So, we are just about at the point where we are going to start that 90-day period, which is why we are comfortable that as we get into the first half of 2018, we will be able to start construction and that’s why we have gone out and you have heard us talk a little more than we have talked in the past about we are out there undertaking work at the site and we got financing lined up that were as we move into the first half of 2018, we will button all that down and start construction on the project.

Good. Thank you so much for taking my questions.

Thanks, Noah.

Your next question comes from the line of Michael Hoffman of Stifel. Michael, your line is open.

Thank you very much, Steve and Brad and Sam and Dan. On the GIG relationship, is there a finite life to who they are as an entity as a corporate entity or does this, in fact, exist in perpretuity as long as there was opportunity to develop?

So, the history as you know, Michael, was in 2012, the UK government started GIG in order to kind of jumpstart infrastructure, renewable investment in the UK now. So, they are a private company. Macquarie is going to obviously use them as an investment vehicle both in the UK and then also do the same in Ireland now. We are looking to work with them in both the UK and Ireland and also around the world. So, I don’t see into their existence now that they have been privatized by Macquarie. And obviously, Macquarie is the leading infrastructure firm in the world €277 billion of investment. So, I think we have got - I am really excited about this, we got a really great partnership with entities that are, I think going to be around for a long, long time and be very active in the infrastructure and renewable energy area.

Okay. And then Steve you have said in various public calls in the last 6 to 9 months, you have had a comfort talking about a 3% to 5% top line growth that should translate into 5% EBITDA. And adjusting the portfolio mix for this joint venture structure, do you standby that due going into ‘18, ‘19, ‘20 recognizing we have got to move things around in various buckets as far as where exists, but fundamentally, you are a 3% to 5% grower?

Yes. So, net organic growth has been in 3% to 5%, we are not backing away from that. What we talked about is the one slide was the fact that when you take that growth and now look at the new EMW projects that we expect to bring online. We are looking at in excess of this 10% compound average growth rate on free cash flow. So, we feel pretty good about where things will go from a growth standpoint. And there are number of years where we weren’t able to put out any growth targets for power, recently in the power budget in the U.S. and now we are through 2017 we have been able to transition with great company. And this is really an important definite process talking about our net organic growth 3% to 5%, now talking about new energy-from-waste projects internationally with a world class partner.

Okay. And then this is just be able to set everybody understanding about a model, the ‘18 would have been up because of Dublin, but now the way this is happening, ‘18 looks differently and then you would talk about a 3% to 5% growth rate on top of ‘18. And then as each of these things rolls in ‘21, ‘22, ‘23, they will have that corresponding free cash flow impact?

That’s correct, yes.

Okay, alright. And then Sam, in your opening remarks, you made initial comment about free cash flow and the proportion of a dividend and free cash flow, just curious about what your philosophy is about that in the context that this investment and where you would like to see that mix like over time?

I would like to have an answer to your question. I think I am going to see now, we haven’t had the [inaudible] or is it better to pay down funding on what we are doing and I think we have to answer that on a case by case basis.

Okay, fair enough. And then lastly for me, Sam, you are doing this investment for 15 years, how do you rank order this investment in Covanta versus the various things that you put capital into?

I don’t think I do that kind of valuation. So, my term, the investment advantage, when and if I am no longer a shareholder of Covanta, I will be happy to do that kind of calculation for you.

Thanks, Michael.

And your next question comes from the line of Andrew Buscaglia from Credit Suisse. Andrew, your line is open.

Hi, guys. Thanks for taking my question and congrats.

Hi, Andrew.

Could you just take a step back and talk about first off how long have these negotiations with GIG been going on, can you talk about who approach to - and then from GIG’s point of view, how they perceive you guys or thought of your - this potential long-term relationship. Obviously, they thought fairly highly of you, I think the value that they put on their portion of the Covanta Dublin facility is pretty high and with good reason, so kind of curious about the thoughts around that?

Yes. So, the way that started Macquarie obviously has been helping us with Dublin over the years. We were looking at refinancing. When we originally financed the Dublin project, it was a different market environment than it is today. So, as we were working with Macquarie you are talking about refinancing Dublin, the idea blossomed that and they had around that same time one that you are bidding for privatizing Green Investment Bank. And so the idea of lots of the - they had the Green Investment Bank as part of their firm and we were looking at refinancing and then look and trying to figure out how we were to going to fund the projects in UK. It has been lost in any of us on the management team, but when we announced the project in UK in Q2, Rookery and then the different projects in Q2, there was a collective view from the investors of how you are going to finance. So, Macquarie kind of came to us and said hey, we have got some clever ideas of how they could help us finance this project. So, that’s what kind of moved up in that direction and then we had discussions over the last several months on how to make that put that into action. Quite frankly, the Green Investment Group has got a little around $3.5 billion of assets they are managing in the infrastructure of Green Investment space, obviously a lot of capability. I think your question about what they look at from a Covanta standpoint we are the world’s leader in energy from waste. We have a lot of operating capabilities, so building plants and operating plants are what we bring to the table. So, when you marry these two organizations, I think we bring a lot of complementary skills which I think makes us a pretty powerful team both in the UK and Ireland and then it’s quite frankly we start to look around the world and figure out where else we both might be interested in investing in energy from waste plants.

Okay, yes that’s helpful. And yes kind of along those lines, you mentioned in here one other kind of high level growth category could be your acquisitions and can you talk about what is a combined kind of group here like what you perceive as potential acquisitions in terms of GIG opening the door for or is that contemplated in that 10% CAGR or is that - would that just be more upside?

That’s more upside. The 1% CAGR is really around them. We were calling and if you look at some of our material we are talking more advanced development which is the four projects that have plenty approvals. Beyond those four projects, there is another set of opportunities out there. And in the past, it’s little harder for us to participate in acquisitions. I think without getting into asset by asset, we do think there will be assets coming energy from waste assets coming to the market and as a combined team I think this makes us kind of a pretty powerful team to go look at those assets and potentially invest in them.

And you had said prior to this before outside the UK and Ireland as a combined sort of entity you guys would contemplate M&A, even though GIG is usually is primarily focused on the two regions?

Yes. I was actually - I was thinking more organic development, but M&A is also possible, but if you look around the world places like Asia, Southeast Asia in particular South America there’s - there’s other market where energy from waste is becoming the preferred disposal solution versus landfills and I think there will be opportunities for us to invest along with the investment group in these other market. And think about this way to for company of our size to go do business development end far-flung places gets expensive having a partner like Green Investment Group and Macquarie that - that operate a lot of these locales. It actually lowers the capital intensity of our business development activities. So I like that aspect of the - of the arrangement also.

Yes, definitely. Alright, well that’s it from me. Thanks, guys.

Thanks. Thanks, Andrew.

Your next question comes from the line of Henry Chien from BMO. Henry, your line is open.

Hi, good afternoon, guys. Thanks. Just a question on the in terms of the partnership arrangement is there - is there a capital level that’s committed by GIG for investing in the UK or broadly EfW acquisitions?

No, Henry it’s Brad. There isn’t a specific - there isn’t a specific of capital commitment that’s been made, what we’ve done is, we’ve committed to jointly develop on an exclusive basis projects in the UK and we’re going develop as many attractive opportunities as we can, if those opportunities mature to the point where they warrant investment then we’ll move ahead of that point.

Got it. Okay. And in terms of the partnership with GIG in terms of evaluating future acquisitions or future development, can you talk about how that partnership works is this one side lead, one aspect of the dealer or does Covanta take more of a strategic view, just kind of curious how the collaboration will work?

Yes, we haven’t scripted it out to that level of specificity as far as how we would look at an acquisition opportunities opposed to a development opportunity. I think, probably the most important takeaway for today is that where we’re both interested in investing further energy from waste that’s new project development, that’s of the existing assets, that’s UK it’s beyond the UK and we aren’t just doing it jointly.

Got it.

Prior to that, we - we have certain project development capabilities, as this Green Investment Group so combined team of projects developers looking for projects in a number of different markets from early UK and Ireland. And then bring those forward and conducting the right level due diligence and making sure that the return to criteria that we set out. So that’s kind of how we play in a broad type of how I think it work.

Got it. Okay. And just last quick one from me in terms of that the incremental 30 million and cash flow. Just kind your framework and how you can’t do that estimate is that just from that the projected capacity and ways volumes and kind of looking at power prices just how did you broadly come out with that estimate?

Yes, all of the above.

Yes.

We’re modeling out all the we would have lot of details you to expect all of the - the opportunities that we’re looking at and so really it’s our best estimate and it’s a range of course, but it’s not best estimate for what they’ll contribute on an annual basis and that’s distributable cash flow that’s a $40 million to $50 million number that I mentioned from the 4 advanced projects in the pipeline. So just those first 4 and netted against at that the free cash flow that were effectively giving up by having GIG invest 50% into the project.

Got it. Okay. Thanks, guys.

Your next question comes from line of Brian Lee of Goldman Sachs. Brian, your line is open.

Hi, guys. Thanks for taking the question. I guess first off on the four advanced projects. Can you talk to some degree around the status of off-takes? And then what would you expect any notable differences in pricing I know during the script you mentioned double the Irish gate or tipping versus the U.S. any notable differences across the different plants?

Well, I don’t want to get into talking about the negotiations in the contract terms. I mean, obviously one of the things we are doing now which is different than several years back when we look at the UK market is we are working with waste companies who need disposal capacity and they are important part of the equation. So, Veolia on Rookery, Biffa on Protos and Newhurst and so we are working through terms and conditions with those folks as we line up the waste effectively the fuel for these energy from waste projects. So, that’s going well. We have good discussions underway. And the point I was making too is that the Irish markets or the EU component, but also the UK market, they have landfill taxes. So, they levy a tax on waste that’s going to a landfill. So, it does lead to higher tipping fees in both the Irish market and the UK market than you would see in places like the U.S. and that does help underpin projects as they move forward.

Okay, fair enough. And maybe one for Brad on the $1.6 billion in capital costs that you guys outlined for the four advanced products in the UK, can you give us some color on the expected debt-to-equity split, would it be 75:25 like Dublin or something else? And then on the equity piece specifically maybe a little bit more color on the split between project partners and the JV by project. The reason I ask is we had assumed for Rookery you own the 80% as you mentioned and then sort of sub 50% for the two Biffa and then not sure what those thing for this new fourth project since the details are not disclosed as of yet, but it does seem like the $300 million to $400 million in JV equity and your $150 million to $200 million kind of that would be a little larger than what we were penciling us. So, wondering if maybe you can fill in some of the gaps? Thank you.

Sure. So, I will kind of walk through from the $1.6 billion down to our equity investment is and by doing that, I hope answers your question. So just off the bat, we will be project financing with primarily bank debt at the project level as you know. Rule of thumb is going to be about two-thirds project debt, one-third equity. So that of the equity of course we are sharing that leaving the joint venture which share the resulting equity requirement with our project level partners. So, in our case, Veolia for Rookery and Biffa for Protos and Newhurst and then the piece that is Covanta’s requirement would now then become the investment of the joint venture, which we would further split 50-50 with GIG. So, that’s how you get down to 150 to 200. Rookery as I mentioned Covanta is 80%, Veolia is 20%, so effectively through the joint venture we will own 40% and be responsible for 40% of the equity capital. For Protos and Newhurst with Biffa, we have entered into that development on a nonbinding basis on a heads up 50-50 basis, but on that final split remains subject to final discussions with Biffa and that’s what is their appetite, what is our appetite we just haven’t finished those discussions.

Okay, that’s super helpful. And maybe our starting equity sleeve assumption was a little bit low. Great, last one from me and I will pass it on to the queue, just maybe high level the proposed tax out of DC, I know it’s not a final package as of yet, but any potential impacts to this partnership that you can outline if at all? And then just may be more broadly for Covanta and the implications of the interest deductibility limitations just getting a couple of questions from investors around where you guys might have exposure here? Thank you.

Yes, it’s Brad again. So, no impact as far as the partnership itself per se though the tax reform will make it more tax efficient in the future for us repatriating dividends out of the projects. So, in terms of the international growth pipeline that we have, it certainly will be a positive. In terms of the interest deductibility, it appears as though the impact for us is going to be relatively limited at least for the first 5 years, beyond that we are seeing that there is potential for an increasing limitation on the deductibility of interest. So too early to say exactly what that impact maybe for us we still have a very large interval as everyone knows, which we expect to be shielding our taxes in any event well into the next decade.

Thanks, guys.

And your next question comes from Michael Hoffman of Stifel. Michael, your line is open.

Yes, the 3.5 million tons is being shipped out of the UK today. How much of that would you absorbed in the 2 million of development?

A good portion of it, it will be interesting to see with the 3.5 million tons where that ultimately settles out. It’s a little more complicated in that, because you have landfills continuing to close in the UK market. So, there is kind of puts and takes associated with where the waste is going to go. I mean we’re excited by that fact that 2 million tons of additional disposal capacity. I think is a really great addition to the UK market and really does help from a disposal standpoint as those landfills get little more less part of the disposal.

Okay. That’s it from me. Thanks.

Thanks.

And your final question comes from Yilma Abebe from JPMorgan. Yilma, your line is open.

Thank you. My first question is and - in the joint venture partnership does either have - have an option to exit the partnership a reason and terms around that should be aware of?

There are no hard options either put our call the ownership, I think what we have is fairly standard in terms of either partner is free to sell and in that event the other partner has right effectively right to first to step into the partners position.

Okay, okay. Thank you. And then the second question is in this partnership does GIG have any - any say and perhaps replacing Covanta then operated for any of these facilities Dublin or the future facilities?

I think the intention of the partners for Covanta to be the operator. I mean that’s obviously one of the reasons why GIG is interested in partnering with us that being said, the contracts we enter into with each of the project companies have to be on an arms-length basis and have to stand up to potential market tests. So it is written in stone that we will be the operator, we have to be - we have to be in a position to offer those services at an attractive price, which we fully intend to do.

Yes, I expect I mean one of the reasons that Brad mentioned is one of the reasons where ideal partners with GIG as we bring the operating capabilities may bring a lot other capabilities, so good complementary skill package, I believe it will be the operator and it expectation GIG on all these projects I would talked about today.

Okay. But I guess would that be some sort of formal bidding process for an operator of these facilities or is that assume that Covanta is going to be the operator?

No, with the operator.

Okay, okay. Thank you. And then my second question is on Dublin that the project has significantly here at generating income perhaps can you talk about that the logic and contributing Dublin in this joint venture, I get the point on sort of the recycling in a capital described, but maybe if you can touch on the logic in terms of generating contributing an asset, this generating and in this joint venture, when some of your other projects are still in the early stages on a relative basis?

Well, let me just say to start out. One of the things that’s interesting about is - about Dublin and what we’re doing here it’s really validating our business development model. Where and you mentioned if we’re recycling that the capital we’ve invested in Dublin in a premium valuation, but it really highlights the value of been able to develop project, bring them on stream and operate them going forward. And so that was a kind of a unique opportunity here that allowed us to in some respects to get an operating asset into the joint venture right from the get-go, but again really validating our business model and its repeatable for us. I mean if you think about a few years ago we recycled the capital from our investment in China, right, so that an opportunity that we really like. We are getting a great valuation. I think this is another example of us being able to basically value the capabilities that we bring to the market. I don’t know Brad you want to add into that?

Yes, I mean, Dublin is a very large plant, a very large investment and we had a lot of invested capital tied up in Dublin. That was a fantastic investment for us and for Ireland and everyone involved, but we looked at what the future opportunities are and we have the opportunity to effectively have someone else come in and invest 50%, so we keep 50% and we can turn that into another 4 to 6 projects right off the back. So that seems like a no-brainer to us.

Yes, this is Sam. I think that one of the things that shows is that we have the opportunity to run Covanta as asset light, which we have never had the opportunity to do before. And I would envision in the future whether it’s GIG or somebody else, this sets the template for the units of Covanta as a flyer and a builder of future infrastructure projects owned maybe less than 50% by Covanta, but Covanta benefiting from having the skill set that they are involved with.

I guess my question is why you contribute to the Dublin now and went up at a later date when you have sort of benefited from the upside of the investment here, why not contribute Dublin at a later date when the other projects are a little further ahead is really my question in terms of timing of contributing to Dublin at this time?

I think that’s a very good question and I wish that I was in control when opportunities got created and didn’t get created. I think we are getting a premium on Dublin, which reflects the fact that it’s operating and producing income. And we are looking forward doing the same thing on Rookery and all the others going forward. So, the answer is it’s like the old story about what the woman’s greatest asset is a man’s imagination, we need to be in a position to provide opportunity for our investors both our shareholders and our joint venture investors to see opportunity and I think that’s exactly what’s happening.

Thank you very much. That’s all I had.