FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO ____________
COMMISSION FILE NUMBER: 1-3122
COVANTA ENERGY CORPORATION
(formerly named Ogden Corporation)
(Exact name of registrant as specified in its charter)
DELAWARE 13-5549268
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(State or Other Jurisdiction (I.R.S. Employee
of Incorporation or Organization) Identification No.)
40 Lane Road, Fairfield, N.J. 07004
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code - (973) 882-9000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of each class Which Registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.50 per share
$1.875 Cumulative Convertible Preferred Stock (Series A)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [ ] NO [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [X]
The aggregate market value of registrant's voting stock and preferred stock held
by non-affiliates of the registrant as of June 10, 2002, based on the closing
price of such stock on the National Quotation Bureau's Pink Sheets was as
follows:
Common Stock, par value $.50 per share $ 797,252.52
$1.875 Cumulative Convertible
Preferred Stock (Series A) $ 11,567.15
The number of shares of the registrant's Common Stock outstanding as of June 10,
2002 was 49,828,284 shares. The number of shares of the registrant's $1.875
Cumulative Convertible Preferred Stock (Series A) outstanding as of June 10,
2002 was 33,049 shares.
PART I
ITEM 1. BUSINESS
Covanta Energy Corporation (hereinafter, together with its consolidated
subsidiaries, referred to as "Covanta" or the "Company") develops, owns and
operates energy generating facilities and water and wastewater facilities in the
United States and abroad.
Covanta Energy Corporation is the new name of Ogden Corporation
effective as of March 13, 2001. The Company was incorporated in Delaware as a
public utilities holding company on August 4, 1939. In 1948, the Company
registered with the Securities and Exchange Commission (the "SEC") as a
closed-end investment company. Following several acquisitions, the Company no
longer qualified as an investment company and from 1953 until 1999 operated as a
diversified holding company operating through subsidiaries. In May 1966, Ogden
was listed on the New York Stock Exchange.
Prior to September 1999, the Company conducted its business through
operating groups within each of three principal business units, Energy,
Entertainment and Aviation. In September 1999, the Company adopted a plan to
discontinue its Entertainment and Aviation operations, to pursue the sale or
other disposition of these businesses, to pay down corporate debt and to
concentrate on its businesses previously being conducted through its Ogden
Energy Group, Inc. subsidiary. Since September 1999, the Company implemented its
plan to sell discontinued businesses. That process was largely completed in 2000
and 2001. As of June 10, 2002, the principal Entertainment and Aviation assets
that remain unsold are:
(1) the businesses associated with the Arrowhead Pond Arena in Anaheim,
California, and with the Corel Centre in Ottawa, Canada and the
Ottawa Senators hockey team;
(2) the Company's assets in Argentina related to a casino and an
exhibition center; the casino assets are under contract for sale;
and
(3) the remaining unsold portion of the aviation fueling business,
which services airports operated by the Port Authority of New York
and New Jersey.
CHAPTER 11 REORGANIZATION
As previously reported, on April 1, 2002, Covanta Energy Corporation
and 123 of its domestic subsidiaries, filed voluntary petitions for
reorganization under Chapter 11 of the United States Code ("Chapter 11") in the
United States Bankruptcy Court for the Southern District of New York. The
pending Chapter 11 Cases are being jointly administered for procedural purposes
only. International operations and certain other subsidiaries were not included
in the filing.
Prior to September 1999, the Company had incurred very substantial
obligations to financial institutions for letters of credit largely relating to
the Corel Center arena in Ottawa, Canada and the Anaheim Pond arena in Anaheim,
California. To provide for continued compliance with the covenants related to
these obligations and the Company's other financial obligations, the Company, in
March 2001, entered into a Master Credit Facility with its banks in which, among
other things, it agreed to maintain stated liquidity levels and to discharge or
provide for its obligations with its banks by May 31, 2002. In addition, the
Company had outstanding approximately $148 million of convertible subordinated
debentures which had been issued in connection with non-energy operations and
which matured in 2002.
At the time the Master Credit Facility was executed, the Company
believed that it would be able to meet the liquidity covenants in the Master
Credit Facility, timely discharge its obligations on maturity of the Master
Credit Facility and repay or refinance its convertible subordinated debentures
from cash generated by operations, the proceeds from the sale of its non-core
businesses and access to the capital markets. However, a number of factors in
2001 and 2002 affected these plans, including:
(1) The sale of non-core assets took longer and yielded substantially
less proceeds than anticipated;
(2) The power crisis in California substantially reduced the Company's
liquidity in 2001 as a result of California utilities' failures to
pay for power purchased from the Company; and
(3) A general economic downturn during 2001 and a tightening of
credit and capital markets, particularly for energy companies
which was substantially exacerbated by the bankruptcy of Enron
Corporation. (See GENERAL BUSINESS CONDITIONS under MARKETS,
COMPETITION AND GENERAL BUSINESS CONDITIONS)
As a result of a combination of these factors in 2001 and early 2002,
the Company was forced to obtain seven amendments of the Master Credit Facility.
Also, because of the California energy crisis, analyses raising doubt about the
financial viability of the independent power industry, the Enron crisis, the
decline in financial markets as a result of the events of September 11, 2001 and
the drop in the demand for securities of independent power companies, the
Company was unable to access capital markets.
In 2001, the Company began a wide-ranging review of strategic
alternatives given the very substantial maturities in 2002, which far exceed the
Company's cash resources. In this connection, throughout the last six months of
2001 and the first quarter of 2002, the Company sought potential minority equity
investors, conducted a broad-based solicitation for indications of interest in
acquiring the Company among potential strategic and financial buyers and
investigated a combined private and public placement of equity securities. On
December 21, 2001, in connection with a further amendment to the Master Credit
Facility, the Company issued a press release stating its need for further
covenant waivers and for access to short term liquidity. Following this release,
the Company's debt rating by Moody's Investor Services, Inc. ("Moody's") and
Standard & Poor's Rating Services ("Standard & Poor's") was reduced below
investment grade on December 27, 2001 and January 16, 2002, respectively. These
downgrades further adversely impacted the Company's access to capital markets
and triggered the Company's commitments to provide $100 million in additional
letters of credit in connection with two waste-to-energy projects. Despite the
Company's wide-range search for alternatives, ultimately the Company was unable
to identify any option which satisfied its obligations outside the Chapter 11
process. On March 1, 2002, the Company availed itself of the 30-day grace period
provided under the terms of its 9.25% debentures due March 2022, and did not
make the interest payment, due March 1, 2002, at that time.
On April 1, 2002 the Company publicly announced that as a result of the
review the Company:
(1) Determined that reorganization under Chapter 11 represents the
only viable venue to reorganize the Company's capital structure,
complete the disposition of its remaining non-core entertainment
and aviation assets, and protect the value of the energy and
water franchise;
(2) Entered into a non-binding Letter of Intent with the investment
firm of Kohlberg Kravis Roberts & Co. ("KKR") for a $225 million
equity investment under which a KKR affiliate would acquire the
Company upon emergence from Chapter 11; and
(3) Announced a strategic restructuring program to focus on the U.S.
energy and water markets, expedite the disposition of non-core
assets and, as a result, reduce overhead costs.
On April 1, 2002, Covanta Energy Corporation and 123 of its
subsidiaries, each a debtor in possession (the "Debtors"), filed for protection
under Chapter 11. The Company seeks to maximize recoveries for its creditors.
The rights of Covanta's creditors will be determined as part of the
Chapter 11 process. Existing common equity and preferred shareholders are not
expected to participate in the new capital structure or realize any value. The
Company has obtained debtor-in-possession loan financing of approximately $289
million which it believes, when taken together with the Company's own funds,
provide it sufficient liquidity to continue to operate its core businesses
during the Chapter 11 proceeding. Protections according to the Company under
Chapter 11 are expected to assist the Company in maintaining the Company's
business intact pending the reorganization; however, the outcome of the Chapter
11 proceedings are not entirely within the Company's control and no assurances
can be made with respect to the outcome of these efforts. (See Part II,
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS)
On the same day, April 1, 2002, the New York Stock Exchange, Inc.
suspended trading of the Company's common stock and $1.875 cumulative
convertible preferred stock and began processing an application to the SEC to
delist the Company from the New York Stock Exchange. The SEC by Order dated May
16, 2002 granted the application of the New York Stock Exchange, Inc. for
removal of the Common Stock and $1.875 Cumulative Convertible Preferred Stock of
Covanta Energy Corporation from listing and registration on the Exchange under
the Securities Exchange Act of 1934.
The removal from listing and registration on the Exchange of the above
issues of the Company became effective at the opening of the trading session of
May 17, 2002 pursuant to the Order of the Commission.
Subject to the foregoing, the following describes the Company's
business currently being conducted during the Chapter 11 proceedings.
CORE BUSINESS
Since the early 1980s, the Company has engaged in developing, and in
some cases owning, energy-generating projects fueled by municipal solid waste,
and providing long-term services from these projects to communities. The Company
owns or operates more large-scale (greater than 500 tons per day of processing
capacity) waste-to-energy facilities on a full-service basis (where design,
construction and operation services are provided) than any other vendor in the
world. In addition, since 1989, the Company has been engaged in developing,
owning and/or operating independent power production projects utilizing a
variety of fuels. The Company's involvement in the operation of water and
wastewater facilities began in 1994.
The Company generally owns and operates projects in which its returns
are derived from equity distributions and/or operating fees. The Company's
projects sell the electrical power services they generate, or the waste or
water-related services they provide, under long-term contracts or market
concessions to utilities, governmental agencies providing power distribution,
creditworthy industrial users, or local governmental units. In selected cases,
such services may be provided under short-term arrangements as well. Similarly,
for water and wastewater-related services, the Company seeks to operate under
long-term contracts with governmental units.
The Company presently has interests in power projects with an aggregate
generating capacity of approximately 2441 MW (gross) either operating or under
construction in the United States, Central and South America, Europe and Asia.
The Company has an operating, and in some cases a design and construction role,
in water and wastewater projects with an aggregate processing capacity of
approximately 90 million gallons per day, all of which projects are in the
United States. In addition to its headquarters in Fairfield, New Jersey, the
Company's business is facilitated through its Fairfax, Virginia office, with
field offices in Manila, The Philippines; Bangkok, Thailand; Shanghai, China;
and Chennai, India.
(a) APPROACH TO PROJECTS.
(i) General Approach to Power Projects.
The Company conducts its power operations through wholly-owned
subsidiaries. The Company develops, operates and/or invests in non-utility
energy generation projects in the United States and abroad which sell their
output to utilities, electricity distribution companies or industrial consumers.
The Company's operating power projects utilize a variety of energy sources:
water (hydroelectric), natural gas, coal, geothermal energy, municipal solid
waste, wood waste, landfill gas, heavy fuel oil and diesel fuel.
Within the commercial parameters of each power project, the Company
attempts to sell electricity under long-term power sales contracts, and to
structure the revenue provisions of such power sales contracts in such a way
that the revenue components of such contracts correspond to the projects' cost
structure (including changes therein due to inflation and currency fluctuations)
of building, financing, operating and maintaining the projects. The Company
sells all its generated electricity and steam pursuant to contracts and does not
sell any material amount of energy on the open or spot markets.
On many of its power projects, the Company performs operation and
maintenance services on behalf of the project owner. Although all operation and
maintenance contracts are different, the Company typically performs these
services on a cost-plus-fixed-fee basis, with a bonus and limited penalty
payment mechanism related to specified benchmarks of plant performance.
Covanta generally financed its projects using equity or capital
commitments provided by it and other investors, combined with limited recourse
debt for which the lender's source of payment is project revenues and which is
collateralized by project assets. Consequently, the ability of the Company's
project subsidiaries to declare and pay cash dividends to the Company is subject
to certain limitations in the project loan and other documents. In some project
situations, Covanta or one of its intermediate holding companies has provided
limited support such as operating guarantees, financial guarantees of bridge
loans or other interim debt arrangements.
(ii) Structural Issues on Waste-to-Energy Projects.
In addition to generating electricity or steam, the Company's
waste-to-energy power projects provide waste disposal services to municipal
clients. Generally, the Company provides these services pursuant to long-term
service contracts ("Service Agreements") with local governmental units
sponsoring the project ("Client Communities"). One of the Company's
waste-to-energy facilities does not have a sponsoring Client Community.
Electricity, and in some cases steam, is sold pursuant to long-term power
purchase agreements with local utilities or industrial customers.
Each Service Agreement is different in order to reflect the specific
needs and concerns of the Client Community, applicable regulatory requirements
and other factors. The following description sets forth terms that are generally
common to these agreements:
- The Company designs the facility, helps to arrange for financing
and then constructs and equips the facility on a fixed price and
schedule basis.
- The Company operates the facility and generally guarantees it will
meet minimum waste processing capacity and efficiency standards,
energy production levels and environmental standards. The Company's
failure to meet these guarantees or to otherwise observe the
material terms of the Service Agreement (unless caused by the
Client Community or by events beyond its control ("Unforeseen
Circumstances")) may result in liquidated damages being charged to
the Company or, if the breach is substantial, continuing and
unremedied, the termination of the Service Agreement. In the case
of such Service Agreement termination, the Company may be obligated
to discharge project indebtedness.
- The Client Community is generally required to deliver minimum
quantities of municipal solid waste to the facility and is
obligated to pay a service fee for its disposal, regardless of
whether or not that quantity of waste is delivered to the facility
(the "Service Fee"). The Service Fee escalates to reflect indices
of inflation. In many cases the Client Community must also pay for
other costs, such as insurance, taxes and transportation and
disposal of the residue to the disposal site. If the facility is
owned by the Company, the Client Community also pays as part of the
Service Fee an amount equal to the debt service due to be paid on
the bonds issued to finance the facility. Generally, expenses
resulting from the delivery of unacceptable and hazardous waste on
the site are also borne by the Client Community. In addition, the
contracts generally require that the Client Community pay increased
expenses and capital costs resulting from Unforeseen Circumstances,
subject to limits which may be specified in the Service Agreement.
- The Client Community usually retains a portion of the energy
revenues (generally 90%) generated by the facility, with the
balance paid to the Company.
Financing for the Company's domestic projects is generally accomplished
through the issuance of tax-exempt and taxable revenue bonds issued by or on
behalf of the Client Community. If the facility is owned by a Company
subsidiary, the Client Community loans the bond proceeds to the subsidiary to
pay for facility construction and pays to the subsidiary amounts necessary to
pay debt service. For such facilities, project-related debt is included as a
liability in Covanta's consolidated financial statements. Generally, such debt
is secured by the revenues pledged under the respective indentures and is
collateralized by the assets of the Company's subsidiary and otherwise provides
no recourse to Covanta, subject to construction and operating performance
guarantees and commitments.
(iii) Other Project Structures.
The Company owns one waste-to-energy facility that is not operated
pursuant to a Service Agreement with a Client Community, and may consider
additional such projects in the future. In such projects, the Company generally
assumes the project debt and risks relating to waste availability and pricing,
risks relating to the continued performance of the electricity purchaser, as
well as risks associated with Unforeseen Circumstances. In these projects, the
Company generally retains all of the energy revenues from sales of power to
utilities or industrial power users and disposal fees for waste accepted at
these facilities. Accordingly, the Company believes that such projects carry
both greater risks and greater potential rewards than projects in which there is
a Client Community.
In addition, the Company has restructured several of its
waste-to-energy projects which originally were undertaken on the basis described
in (ii) above. These are briefly described below:
- Union County, New Jersey.
In Union County, New Jersey, a municipally-owned facility has been
leased to the Company, and the Client Community has agreed to deliver
approximately 50% of the facility's capacity on a put-or-pay basis. A put-or-pay
commitment means that the counterparty promises to deliver a stated quantity of
waste and pay an agreed amount for its disposal. This payment is due even if the
counterparty delivers less than the full amount of waste promised. The balance
of facility capacity is marketed by the Company, at its risk. The Company
guarantees its subsidiary's contractual obligations to operate and maintain the
facility, and on one series of subordinated bonds, its obligation to make lease
payments which are the sole source for payment of principal and interest on that
series of bonds. The current outstanding principal amount of these bonds, sold
to refinance a portion of the original bonds used to finance the facility, is
$19,500,000. In connection with this restructuring, the Client Community
assigned to the Company the long-term power contract with the local utility. As
part of this assignment, the power contract was amended to give the Company the
right to sell all or a portion of the plant's output to other purchasers. The
Company elected to sell all of the project's power to Sempra Energy Trading
Corporation under a three-year arrangement which on April 1, 2002 Sempra sought
to terminate as a result of the Chapter 11 filing described above. The matter
remains in dispute. Since April 2002, the Company has sold its output directly
into the local electricity grid, with no material loss of revenue. The Company
may enter into contracts similar to the Sempra contract, if it believes doing so
would enhance project revenues.
- Tulsa, Oklahoma.
In Tulsa, Oklahoma, the Client Community paid a fee to terminate its
Service Agreement. At the same time, the parties entered into a new arrangement
pursuant to which the Company was required to fund the cost of the facility's
Clean Air Act retrofit; the Client Community committed to deliver waste on a
put-or-pay basis, for a fee per ton; and the parties agreed to sharing of
certain excess revenues from facility operations. In addition, the Company no
longer has the right to require an adjustment to fees to cover the costs of
Unforeseen Circumstances, but may terminate the contract if the Client Community
declines to accept such increases. Under the new contract, the Client Community
has accepted the obligation to repay bonds issued to finance the facility,
including prepayment as a result of termination of the Service Agreement,
regardless of the reasons for the termination.
- Warren County, New Jersey.
In Warren County, New Jersey, the Company has offered to market the
facility's capacity, at its risk, in a restructuring plan that includes State
assistance with debt retirement. The Warren County restructuring is subject to
several conditions precedent, some of which are beyond the control of the
Company, notably the securing of State funds. The bonds issued to finance the
facility are secured only by the facility and related assets such as contracts
with the utility that buys the power generated by the facility and with the
municipal authority that has contracted for the disposal capacity of the
facility. The bonds are non-recourse to the Company. Because changes of law have
reduced the ability of New Jersey municipalities to direct waste to designated
facilities, this facility has not been able to attract waste at prices
sufficient to permit the payment in full of its debt service.
In connection with the restructuring of the Warren project, Warren
County, other New Jersey counties which previously contracted to use the Warren
project and the State of New Jersey are discussing a restructuring of the
project which would substantially reduce project debt service. On January 8,
2002, legislation on solid waste was enacted in the State of New Jersey that
authorizes the New Jersey Economic Development Agency to refinance portions of
County solid waste facility debt (L. 2001, Ch. 401). This legislation allows the
State of New Jersey to assume the obligation to repay the majority of debt
remaining on the Warren project. The Company believes that the counties and the
Company will be able to reach accommodation on the balance of the Warren project
debt, which will permit the Company to operate the facility on a profitable
basis. In any event, the State has indicated that it will prevent a bond default
from occurring and, to date, has provided funds to pay principal and interest
payments as they became due. If such a restructuring is not achieved, or if the
State fails to continue to pay project debt service in the interim and the
project defaulted on its debt, bond insurers (on behalf of bondholders) holding
a mortgage on the project could foreclose and take title to it.
- Lake County, Florida.
In Lake County, Florida, the Client Community has indicated its
intention to reduce or terminate its continuing payment obligations with respect
to the facility, and has expressed its desire to restructure its relationship
with the Company subsidiary to substantially reduce its payment obligation or to
institute condemnation proceedings to purchase the facility from the Company. In
late 2000, discussions regarding a mutually acceptable resolution of these
matters ended and the County commenced a court action seeking to have the
Service Agreement declared void on various constitutional and public policy
grounds. The County also seeks unspecified damages for amounts paid to the
Company since 1988. The case is at a very preliminary stage, and is now stayed
by the bankruptcy proceeding described in Note 1 to the accompanying
consolidated financial statements.
- Onondaga County, New York.
In Onondaga County, New York, the Client Community and the Company have
several commercial disputes between them. Among these is a demand by the Client
Community to provide certain credit support following rating downgrades of
Covanta's corporate debt. In February 2002 the Client Community issued a notice
purporting to terminate its contract with the Company. The Company believes such
notice was improper and has commenced a lawsuit in state court with respect to
such disputes, as well as the Client Community's right to terminate. This matter
has been removed to federal court and is now stayed by the bankruptcy proceeding
described in Note 1 to the accompanying consolidated financial statements.
(iv) Waste-To-Energy Technology.
The Company has the exclusive right to market in the United States the
proprietary mass-burn technology of Martin GmbH fur Umwelt und Energietechnik
("Martin"). All of the waste-to-energy projects that the Company has constructed
use the Martin technology, although the Company does operate some projects using
other technologies. The principal feature of the Martin technology is the
reverse-reciprocating stoker grate upon which the waste is burned. The patent
for the basic stoker grate technology used in the Martin technology expired in
1989, and there are various other expired and unexpired patents relating to the
Martin technology. The Company believes that it is Martin's know-how and
worldwide reputation in the waste-to-energy field, and the Company's know-how in
designing, constructing and operating waste-to-energy facilities, rather than
the use of patented technology, that is important to the Company's competitive
position in the waste-to-energy industry in the United States. The Company does
not believe that the expiration of the patent covering the basic stoker grate
technology or patents on other portions of the Martin technology will have a
material adverse effect on the Company's financial condition or competitive
position.
The Company believes that mass-burn technology is now the predominant
technology used for the combustion of solid waste. The Company believes that the
Martin technology is a proven and reliable mass-burn technology, and that its
association with Martin has created significant name recognition and value for
the Company's domestic waste-to-energy business. The Company's efforts
internationally have not been technology-specific.
The Company's rights to the Martin technology are provided pursuant to
an agreement between Martin and a Company affiliate (the "Cooperation
Agreement"). The Cooperation Agreement gives the Company exclusive rights to
market the Martin technology in the United States, Canada, Mexico, Bermuda,
certain Caribbean countries, most of Central and South America and Israel.
Martin is obligated to assist the Company in installing, operating and
maintaining facilities incorporating the Martin technology. The 15-year term of
the Cooperation Agreement renews automatically each year unless notice of
termination is given, in which case the Cooperation Agreement would terminate 15
years after such notice. Additionally, the Cooperation Agreement may be
terminated by either party if the other fails to remedy its material default
within 90 days of notice. The Cooperation Agreement is also terminable by Martin
if there is a change of control (as defined in the Cooperation Agreement).
Termination would not affect the rights of the Company to design, construct,
operate, maintain or repair waste-to-energy facilities for which contracts have
been entered into or proposals made prior to the date of termination.
(v) General Approach to Water and Wastewater Projects.
The Company's water and wastewater operations are conducted through
wholly-owned subsidiaries. The Company's mission is to design, construct,
maintain, operate and, in some cases, own water and wastewater treatment
facilities and distribution and collection networks in the United States.
The Company participates in projects in which, under contracts with
municipalities, it privatizes water and/or wastewater facilities, agrees to
build new or substantially augment existing facilities and agrees to operate and
maintain the facilities under long-term contracts.
Under contractual arrangements, the Company may be required to warrant
certain levels of performance and may be subject to financial penalties or
termination if it fails to meet these warranties. The Company may be required to
guarantee the performance of its subsidiary. The Company seeks to not take
responsibility for conditions that are beyond its control.
During 1999, the Company purchased a controlling interest in DSS
Environmental, Inc., which owns the patent for the DualSandTM filtration
technology. The Company believes that this technology offers superior
performance at a competitive cost, and that it will have wide application for
both water and wastewater projects. During 2001, Covanta was awarded several
small projects in upstate New York for the supply of DualSandTM systems to
municipalities and other entities that are improving existing systems. The
Company believes that its ability to offer the DualSandTM system, and the
system's scalability, will greatly enhance its competitiveness elsewhere in
North America where larger water and wastewater systems are required.
(b) FACILITIES UNDER CONSTRUCTION.
- Trezzo, Italy.
During 2000, the Company acquired a 13% equity interest in a 15 MW
mass-burn waste-to-energy project near the City of Trezzo sull' Adda in the
Lombardy Region of Italy (the "Trezzo Project"). The remainder of the equity in
the project is held by TTR Tecno Trattamento Rifiuti s.r.l., a subsidiary of
Falck S.p.a. ("Falck"). The Trezzo Project will be operated by Ambiente 2000
s.r.l. ("A2000"), an Italian special purpose limited liability company of which
the Company owns 40%. The solid waste supply for the project will come from
municipalities under long-term contracts and is guaranteed by Falck. The
electrical output from the Trezzo Project will be sold at governmentally
established preferential rates under a long-term purchase contract to Italy's
state-owned utility company, Ente Nazionale de Elettricita S.p.a. The project
closed its limited recourse financing in February 2001, and commercial operation
is expected during the third quarter of 2002.
- San Vittore, Italy.
In January 2001, A2000 also entered into a 15-year Operations and
Maintenance Agreement with E.A.L.L Energia Ambiente Litorale Laziale s.r.l., an
Italian limited liability company owned by CMI S.p.a. to operate and maintain a
15 MW waste-to-energy facility capable of processing up to 300 metric tons per
day of refuse-derived fuel in the Municipality of San Vittore del Lazio
(Frosinone), Italy. CMI S.p.a. is a holding company controlled by Falck. Limited
recourse project financing is in place. The San Vittore project has a 15-year
waste supply agreement with Reclas S.p.a. (mostly owned by regional
municipalities), and a long-term power offtake contract with ENEL, the
state-owned electricity provider. Construction of the San Vittore project began
in July 1999, and is nearly complete. Lurgi, a major German construction
company, is constructing the project and will operate it during the first year
after completion. Commercial operation is expected during the third quarter of
2002. A2000 will operate and maintain the project beginning in its second year
of operation.
- Tampa Bay, Florida.
During 2001, the Company designed and began construction of a 28
million gallons per day ("mgd") potable water desalinization project to be
constructed on behalf of Tampa Bay Water, a public authority serving the Tampa
Bay, Florida area. The project will utilize a reverse osmosis process and
incorporate DualSandTM technology. The Company will operate and maintain the
project on behalf of Tampa Bay Water pursuant to a 30-year contract.
(c) OPERATING FACILITIES.
- Geothermal.
The Company has interests in two geothermal facilities in Southern
California, the Heber and SIGC facilities, with a combined gross generating
capacity of 100 MW. The Company is the sole lessee of the SIGC project and is
the sole owner of the Heber project. The Company operates these facilities. The
Company also owns a geothermal resource, which is adjacent to and supplies fluid
to both geothermal facilities. The electricity from both projects is sold under
long-term contracts with Southern California Edison Company.
The Company also owns a 50% partnership interest in Mammoth-Pacific,
L.P., which owns three geothermal facilities with a gross capacity of 40 MW,
located on the eastern slopes of the Sierra Nevada Mountains at Casa Diablo Hot
Springs, California. The facilities have contractual rights to the geothermal
brine resource for a term not less than the term of the power contracts. All
three facilities sell electricity to Southern California Edison under long-term
contracts.
- Hydroelectric.
The Company owns 50% equity interests in two run-of-river hydroelectric
facilities which generate a total of 17 MW: Koma Kulshan and Weeks Falls. Both
Koma Kulshan and Weeks Falls are located in Washington State, and both sell
electricity to Puget Sound Power & Light Company under long-term contracts.
The New Martinsville facility located in West Virginia is a 40 MW
run-of-river project operated through a subsidiary. The Company is the lessee.
The output is sold to Monongahela Power Company under a long-term contract.
The Company operates the Don Pedro project and the Rio Volcan
facilities in Costa Rica, pursuant to long-term contracts, through an operating
subsidiary. The Company also has a nominal equity investment in each project.
The electric output from both of these facilities is sold to Instituto
Costarricense de Electricidad, a Costa Rica national electric utility.
Through its investment in Empresa Valle Hermoso (see discussion below
under "Natural Gas") the Company also has a small (less than 7%) ownership
interest in a hydroelectric project in Rio Yura, Bolivia. In June 2001, an
expansion and refurbishment of the existing Rio Yura facilities was completed
increasing the previously reported 12 MW output to 18 MW. The Rio Yura project
continues to sell its output to mining companies, local residents and the
national grid.
- Municipal Solid Waste.
The Company's interests in projects fueled with municipal solid waste
are described generally in (a) (ii) and (iii) above.
- Waste Wood.
The Company owns 100% interests in three waste wood fired electric
power plants in California: Burney Mountain Power, Mount Lassen Power and
Pacific Oroville Power. A fourth, Pacific Ultrapower Chinese Station, is owned
by a partnership in which the Company holds a 50% interest. Generally, fuel
supply is procured from local sources through a variety of short-term waste wood
supply agreements. The four projects have a capacity of 67.1 MW. All four
projects sell electricity to Pacific Gas & Electric Company Corp. under
long-term contracts.
- Landfill Gas.
The Company owns and operates eight landfill gas projects which produce
electricity by burning methane gas produced by the anaerobic digestion of the
solid waste contained in sanitary landfills. Seven of the projects are located
in California, and one is located in Maryland. The eight projects have a
capacity of 36.1 MW. Seven facilities sell electricity generated to local
utilities, under contracts having varying lengths, the longest expiring in 2011.
The project located in Maryland sells the electricity generated to Sempra Energy
Trading Corporation under a contract that expires in late 2002.
- Coal.
A consortium, of which the Company is a 26% member, has a 510 MW
(gross) coal-fired electric generating facility in the Republic of The
Philippines (the "Quezon Project"). The project first generated electricity in
October 1999, and full commercial operation occurred during the fourth quarter
of 2000. The other members of the consortium are an affiliate of International
Generating Company, an affiliate of General Electric Capital Corporation, and
PMR Limited Co., a Philippines partnership. The consortium sells electricity to
Manila Electric Company ("Meralco"), the largest electric distribution company
in the Philippines, which serves the area surrounding and including metropolitan
Manila. Under a long-term agreement, Meralco is obligated to take or pay for
stated minimum annual quantities of electricity produced by the facility. The
consortium has entered into contracts for the supply of coal at stated prices
for a portion of the term of the power purchase agreement. The Company is
operating the project under a long-term agreement with the consortium.
The Company has majority equity interests in three coal-fired
cogeneration facilities in three different provinces in the People's Republic of
China. Two of these projects are operated by an affiliate of the minority equity
stakeholder in the respective projects. Parties holding minority positions in
the projects include a private company, a local government enterprise and, in
the other case, affiliates of the local municipal government. The third project
is operated by a subsidiary of the Company. The steam produced at each of the
three projects is sold under long-term contracts to the industrial hosts but the
electric power is sold at "average grid rate" to a subsidiary of the Provincial
Power Bureau as well as industrial customers.
The Company previously reported ownership of four coal-fired
cogeneration facilities in the People's Republic of China. Due to changes in the
power market in the People's Republic of China, the Taixing Madian facility
located in Jiangsu Province was seriously affected. Given the age of the plant,
the low steam load, minimal chance of growth, reduction in tariff and dispatch,
and the threat of closure due to new regulations, divestment was proposed. At
the same time, the Company considered that it would be commercially sound to
increase its equity holding in the Taixing Yanjiang facility, which was not
experiencing these problems. In May of 2001, the Company worked out an
arrangement with its Chinese partner, the Taixing City Government, to exchange
all its equity interests in the Taixing Madian facility (60%) for an increased
equity share in the Taixing Yanjiang facility (from 60% to 96.3%).
- Natural Gas.
In 1998, the Company acquired an equity interest in a barge-mounted 120
MW diesel/natural gas-fired facility located near Haripur, Republic of
Bangladesh. This project began commercial operation in June 1999, and is
operated by a subsidiary of the Company. The Company owns approximately 45% of
the project company equity. An affiliate of El Paso Energy Corporation owns 50%
of such equity, and the remaining interest is held by Wartsila North America,
Inc. The electrical output of the project is sold to the Bangladesh Power
Development Board ("BPDB") pursuant to a long-term agreement. That agreement
also obligates the BPDB to supply all of the natural gas requirements of the
project. The BPDB's obligations under the agreement are guaranteed by the
Government of Bangladesh. In 1999, the project received $87 million in financing
and political risk insurance from the Overseas Private Investment Corporation.
In 1999, the Company acquired ownership interests in two 122 MW
gas-fired combined cycle facilities in Thailand: the Sahacogen facility and the
Rojana Power facility. On March 28, 2002 the Company sold all its interests in
both facilities as well as its interest in the operating company to its local
partners in the respective projects.
The Company owns an approximately 12% interest in Empresa Valle Hermoso
("EVH") which was formed by the Bolivian government as part of the
capitalization of the government-owned utility ENDE. EVH owns and operates 182
MW of gas-fired generating capacity. The Company also participates in a joint
venture that supplies EVH with management services support.
The Company owns a 50% equity interest in a 15 MW natural gas-fired
cogeneration project in the Province of Murcia, Spain (the "Linasa Project").
The Linasa Project is operated by a subsidiary of the Company. The electrical
output of the Linasa Project is being sold under a long-term purchase contract
to the Spanish electrical utility, Iberdrola, at governmentally-established
preferential rates for cogeneration projects (currently expected to extend until
2007) and at market rates thereafter. The thermal output and a portion of the
electrical output from the Linasa Project are being sold to the Company's 50%
partner, Industria Jabonera LINA S.A., a soap and detergent manufacturer, under
a long-term energy service agreement.
- Diesel/Heavy Fuel Oil.
The Company owns interests in three diesel fuel facilities in The
Philippines. The Bataan Cogeneration project is a 65 MW facility that has a
long-term contract to sell its electrical output to the National Power
Corporation (with which it also has entered into a fuel management agreement for
fuel supply) and the Bataan Export Processing Zone Authority. This project is
operated by the Company. The Island Power project is a 7 MW facility that has a
long-term power contract with the Occidental Mindoro Electric Cooperative.
Magellan Cogeneration, Inc. ("MCI") owns and operates the Magellan
cogeneration project, a 65 MW diesel fired electric generating facility located
in the province of Cavite, the Philippines. This project sells a portion of its
energy and capacity to the National Power Corporation and a portion to the
Cavite Export Processing Zone Authority ("PEZA") pursuant to long-term power
purchase agreements. On January 3, 2002, PEZA, the main power off-taker for this
project, served the project with notice of termination of the Power Purchase
Agreement ("PPA") for alleged non-performance by the project. MCI has sought a
court injunction against termination of the PPA and to require arbitration of
the dispute which involves alleged non-reliable operations and alleged improper
substitution of National Power Corp power for Magellan production. On February
6, 2002, The Regional Trial Court, National Capital Judicial Region, Branch 115,
Pasay City issued a Temporary Restraining Order barring PEZA from terminating
the PPA. On April 5, 2002 after a series of hearings, such Court replaced such
Temporary Restraining Order with a Preliminary Injunction. Such Preliminary
Injunction restrains PEZA from terminating the PPA until such time as the merits
of the case are resolved. In the event that such case were ultimately to be
decided in favor of PEZA, MCI would lose not only the PPA but also that portion
of the plant site under lease from PEZA as such lease is tied to the PPA.
Revenue for this facility for the year ended December 31, 2001 was $22.0
million.
In 1999, the Company acquired an equity interest in a 105 MW heavy fuel
oil-fired generating facility located near Samalpatti, Tamil Nadu, India. This
project achieved commercial operation during the first quarter of 2001. The
project is operated by a subsidiary of the Company. The Company owns a 60%
interest in the project company. Shapoorji Pallonji Infrastructure Capital Co.
Ltd. and its affiliates own 29% of such equity with the remainder of 11% being
held by Wartsila India Power Investment, LLC. The electrical output of the
project is sold to the Tamil Nadu Electricity Board ("TNEB") pursuant to a
long-term agreement. Bharat Petroleum Corporation Ltd. supplies the oil
requirements of the project. TNEB's obligations are guaranteed by the Government
of the State of Tamil Nadu.
In 2000, the Company acquired a controlling interest in its second
Indian project, the 106 MW Madurai project located at Samayanallur in the State
of Tamil Nadu, India. The project began commercial operation in the fourth
quarter of 2001. The Company owns approximately 75% of the project equity, and
operates the project through a subsidiary. The balance of the project ownership
interests are held by individuals who originally developed the project. The
project's electrical output is sold under a long-term contract to TNEB, and
TNEB's obligations are supported by the Government of the State of Tamil Nadu.
The Indian Oil Corporation Limited supplies fuel to the project.
- Water and Wastewater.
The Company operates and maintains wastewater treatment facilities for
eight small municipalities and industrial customers in New York State. Such
facilities together process the equivalent of approximately 67 mgd.
The Company also designed, built and now operates and maintains a 24
mgd potable water treatment facility and associated transmission and pumping
equipment, which supplies water to residents and businesses in Bessemer,
Alabama, a suburb of Birmingham. Under a long-term contract with the
Governmental Services Corporation of Bessemer, the Company received a fixed
price for design and construction of the facility, and is paid a fixed fee plus
pass-through costs for delivering processed water to the City's water
distribution system. Construction was completed ahead of schedule during 2000.
During 2000 and 2001, the Company was awarded several small contracts
in upstate New York for the supply of its patented DualSandTM systems to
municipalities that are improving existing systems. The Company's obligations
generally include equipment supply and installation, and in some cases
construction work related to other plant improvements, in addition to the
DualSandTM systems.
(d) PROJECT DEVELOPMENT.
During 2001 the Company's Three Mountain Power project, a 500 MW
gas-fired project to be located adjacent to the Company's Burney facility in
Shasta County, California, received all of the principal permits necessary to
commence construction. However, due to the changes in the California energy
markets as well as in its own financial situation, the Company wrote-off
approximately $24.5 million of costs associated with this project and decided
to delay project implementation until California market conditions improve.
In addition, during 2001 the Company experienced limited access to
capital due to a combination of factors relating to delays in selling non-energy
and non-water businesses, delays in receipt of cash flow from California, and
general economic downturn (See Part II, MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION). The conditions have limited the
Company's flexibility in financing projects in development and the Company's
capacity to fund additional development efforts.
(e) PROJECT SUMMARIES.
Summary information with respect to the Company's projects that are
currently operating or under construction is provided in the following table:
PROJECTS(1)
DATE OF
ACQUISITION/
NATURE OF COMMENCEMENT
LOCATION SIZE INTEREST(1) OF OPERATIONS
A. HYDROELECTRIC
1. New Martinsville West Virginia 40MW Lessee/Operator 1991
2. Rio Volcan Costa Rica 16MW Part Owner/Operator 1997
3. Don Pedro Costa Rica 16MW Part Owner/Operator 1996
4. Koma Kulshan(2) Washington 12MW Part Owner/Operator 1997
5. Weeks Falls(2) Washington 5MW Part Owner 1997
6. Rio Yura(3) Bolivia 18MW Part Owner 1998
----
SUBTOTAL 107MW
B. GEOTHERMAL
1. Heber California 52MW Owner/Operator 1989
2. SIGC California 48MW Lessee/Operator 1994
3. Mammoth G1(2) California 10MW Part Owner/Operator 1997
4. Mammoth G2(2) California 15MW Part Owner/Operator 1997
5. Mammoth G3(2) California 15MW Part Owner/Operator 1997
----
SUBTOTAL 140MW
C. NATURAL GAS
1. Empresa Valle Bolivia 182MW Part Owner/ 1995
Hermoso(4) Operations Mgmt.
4. Haripur(5) Bangladesh 120MW Part Owner/Operator 1999
5. Linasa(2) Spain 15MW Part Owner/Operator 2000
----
SUBTOTAL 317MW
D. COAL
1. Quezon(6) Philippines 510MW Part Owner/Operator 2000
2. Lin'an(7) China 24MW Part Owner 1997
3. Huantai(7) China 24MW Part Owner 1997
4. Yanjiang(8) China 24MW Part Owner/Operator 1997
----
SUBTOTAL 582MW
E. DIESEL/HEAVY FUEL OIL
1. Island Power Philippines 7MW Part Owner 1996
Corporation(9)
2. Bataan Cogeneration Philippines 65MW Owner/Operator 1996
3. Magellan Cogeneration Philippines 65MW Owner/Operator 1999
4. Samalpatti(7) India 105MW Part Owner/Operator 2001
5. Madurai(10) India 106MW Part Owner/Operator 2001
-----
SUBTOTAL 348MW
F. MUNICIPAL SOLID WASTE
1. Tulsa(11) Oklahoma 11MW Lessee/Operator 1986
2. Marion County Oregon 13MW Owner/Operator 1987
3. Hillsborough County Florida 29MW Operator 1987
4. Tulsa(13) Oklahoma N.A. Lessee/Operator 1987
5. Bristol Connecticut 16.3MW Owner/Operator 1988
6. Alexandria/Arlington Virginia 22MW Owner/Operator 1988
7. Indianapolis Indiana N.A. Owner/Operator 1988
8. Hennepin County(11) Minnesota 38.7MW Lessee/Operator 1989
9. Stanislaus County California 22.5MW Owner/Operator 1989
10. Babylon(12) New York 16.8MW Owner/Operator 1989
11. Haverhill Massachusetts 46MW Owner/Operator 1989
12. Warren County(14) New Jersey 13MW Owner/Operator 1988
13. Kent County Michigan 18MW Operator 1990
14. Wallingford(14) Connecticut 11MW Owner/Operator 1989
15. Fairfax County Virginia 79MW Owner/Operator 1990
16. Huntsville Alabama N.A. Operator 1990
17. Lake County Florida 14.5MW Owner/Operator 1991
18. Lancaster County Pennsylvania 35.7MW Operator 1991
19. Pasco County Florida 31.2MW Operator 1991
20. Huntington(15) New York 24.3MW Owner/Operator 1991
21. Hartford(16) Connecticut 68.5MW Operator 1987
22. Detroit(17) Michigan 68MW Lessee/Operator 1991
23. Honolulu(17) Hawaii 57MW Lesse/Operator 1990
24. Union County(18) New Jersey 44MW Lessee/Operator 1994
25. Lee County Florida 39.7MW Operator 1994
26. Onondaga County(15) New York 39.5MW Owner/Operator 1995
27. Montgomery County Maryland 55MW Operator 1995
----
SUBTOTAL 813.7MW
G. WASTE WOOD
1. Burney Mountain California 11.4MW Owner/Operator 1997
2. Pacific Ultrapower California 25.6MW Part Owner 1997
Chinese Station(2)
3. Mount Lassen California 11.4MW Owner/Operator 1997
4. Pacific Oroville California 18.7MW Owner/Operator 1997
------
SUBTOTAL 67.1MW
H. LANDFILL GAS
1. Gude Maryland 3MW Owner/Operator 1997
2. Otay California 3.7MW Owner/Operator 1997
3. Oxnard California 5.6MW Owner/Operator 1997
4. Penrose California 10MW Owner/Operator 1997
5. Salinas California 1.5MW Owner/Operator 1997
6. Santa Clara California 1.5MW Owner/Operator 1997
7. Stockton California 0.8MW Owner/Operator 1997
8. Toyon California 10MW Owner/Operator 1997
----
SUBTOTAL 36.1MW
------
TOTAL MW IN OPERATION 2410.9MW
I. WATER AND WASTEWATER
1. Bessemer Alabama 24 mgd Design/Build/Operate 2000
2. Clinton New York 2.5 mgd Operator 1995
3. Bristol/Myers Squibb New York 50 mgd Operator 2000
4. Chittenango New York 1.0 mgd Operator 1998
5. Canastata New York 2.5 mgd Operator 1998
6. Cortland New York 10 mgd Operator 1995
7. Kendall Corp. New York 0.2 mgd Operator 1995
8. Mohawk New York 0.1 mgd Operator 1995
9. Kirkland New York 0.3 mgd Operator 1995
-------
TOTAL MGD IN OPERATION 90.6 mgd
PROJECTS UNDER CONSTRUCTION:
1. Trezzo Italy 15MW Part Owner/Operator 2002 (est.)
2. San Vittore Italy 15MW Operator 2002 (est.)
3. Tampa Bay Florida 28 mgd Design/Build/Operate 2003 (est.)
------
TOTAL PROJECTS UNDER CONSTRUCTION 30MW and 28 mgd
TOTAL MW IN OPERATION/
CONSTRUCTION: 2440.9
TOTAL MGD IN OPERATION/
CONSTRUCTION: 118.6
NOTES
(1) Covanta's ownership and/or operation interest in each facility listed
below extends at least into calendar year 2007 except: New Martinsville
for which the initial term of the operation contract terminates in 2003;
Bataan Cogeneration for which the initial term of the operation contract
terminates in 2004; Magellan Cogeneration for which the initial term of
the operation contract terminates in 2005; Gude for which the initial term
of the operation contract terminates at the end of 2002; Oxnard for which
the initial term of the operation contract terminates in 2004; Penrose for
which the initial term of the operation contract terminates in 2006; Toyon
for which the initial term of the operation contract terminates in 2006;
Bristol/Meyers Squibb for which the initial term of the operation contract
terminates in 2003; and Clinton, Kendall Corp, Mohawk and Kirkland for
which the operation contracts are renewable annually.
(2) The Company has a 50% ownership interest in the project.
(3) The Company has an approximate 12% interest in a company that owns 58% of
this project.
(4) The Company owns an approximate 24% interest in a consortium that
purchased 50% of Empresa Valle Hermoso. The remaining 50% is owned by
Bolivian pension funds.
(5) The Company has an approximate 45% interest in this project. This project
is capable of operating through combustion of diesel oil in addition to
natural gas.
(6) The Company has an approximate 26% ownership interest in this project.
(7) The Company has a 60% ownership interest in this project.
(8) The Company has a 96% ownership interest in this project.
(9) The Company has an approximate 40% ownership interest in this project.
(10) The Company has an approximate 75% interest in this project.
(11) Facility is owned by an owner/trustee pursuant to a sale/leaseback
arrangement.
(12) Facility has been designed to allow for the addition of another unit.
(13) Phase II of the Tulsa facility, which was financed as a separate project,
expanded the capacity of the facility from two to three units.
(14) Company subsidiaries were purchased after completion, and use a mass-burn
technology that is not the Martin Technology.
(15) Owned by a limited partnership in which the limited partners are not
affiliated with Covanta.
(16) Under contracts with the Connecticut Resource Recovery Authority and
Northeast Utilities, the Company operates only the boiler and turbine for
this facility.
(17) Operating contracts were acquired after completion. Facility uses a
refuse-derived fuel technology and does not employ the Martin Technology.
(18) The Union County facility is leased to a Company subsidiary.
OTHER
During 2001, the Company continued to implement its plans to sell the
businesses in its Entertainment and Aviation groups. As of June 10, 2002, the
principal Entertainment assets that remain unsold are the businesses associated
with the Arrowhead Pond Arena in Anaheim, California, and with the Corel Centre
in Ottawa, Canada and the Ottawa Senators hockey club, and the Company's assets
in Argentina related to a casino and an exhibition center. The casino assets in
Argentina are currently under a contract of sale. (SEE PART II, MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,
DISCONTINUED OPERATIONS AND NET ASSETS HELD FOR SALE.)
In January of 2002 the Company sold the major portion of its aviation
fueling business. The sale included all of Covanta's aviation fueling operations
at 19 airports in the United States, Canada and Panama, but did not include
Covanta's operations at the three major New York City area airports. As of June
10, 2002, the principal Aviation assets that remain unsold are the fueling and
fuel facility management businesses at the three major New York City area
airports.
OTHER INFORMATION
Any statements in this communication which may be considered to be
"forward-looking statements," as that term is defined in the Private Securities
Litigation Reform Act of 1995, are subject to certain risks and uncertainties.
The factors that could cause actual results to differ materially from those
suggested by any such statements include, but are not limited to, those
discussed or identified from time to time in the Company's public filings with
the SEC and more generally, general economic conditions, including changes in
interest rates and the performance of the financial markets; changes in domestic
and foreign laws, regulations, and taxes; changes in competition and pricing
environments; and regional or general changes in asset valuations.
MARKETS, COMPETITION AND GENERAL BUSINESS CONDITIONS
(a) GENERAL BUSINESS CONDITIONS.
Covanta's business can be adversely affected by general economic
conditions, war, inflation, adverse competitive conditions, governmental
restrictions and controls, natural disasters, energy shortages, weather, the
adverse financial condition of customers and suppliers, various technological
changes and other factors over which Covanta has no control.
The Company's power operations face a domestic market that is changing
and will continue to change substantially in the years ahead. Due to the
instability of the California market in 2000 and the economic downturn in 2001,
it has become less certain that complete deregulation of the marketplace will
take place. Discussions are taking place at both the Federal and state levels
that will shape the domestic power generation markets for the coming decade. The
international market for energy services is characterized by a large demand and
much competition for projects within a relatively immature market framework.
The domestic market for the Company's waste-to-energy services has
largely matured and is now heavily regulated. New opportunities for domestic
projects are expected to be scarce for the foreseeable future. This reflects a
number of factors that have adversely affected communities' willingness to make
long-term capital commitments to waste disposal projects, including declining
prices at which energy can be sold and low alternative disposal costs. Another
factor adversely affecting the demand for new waste-to-energy projects, as well
as having an impact on existing projects, was a 1994 United States Supreme Court
decision invalidating state and local laws and regulations mandating that waste
generated within a given jurisdiction be taken to a designated facility. The
invalidation of such laws has created pressure on Client Communities as well as
the Company to lower costs or restructure contractual arrangements in order to
continue to attract waste supplies and ensure that revenues are sufficient to
pay for all project costs. (See Approach to Projects, "Other Project
Structures.")
The Company's water and wastewater operation faces an immature but
developing domestic market for private water and wastewater services.
The Company does not expect to engage in material development activity
until it emerges from Chapter 11. Competition for new projects is intense in all
the domestic and foreign markets in which the Company conducts or intends to
conduct its businesses and its businesses are subject to a variety of
competitiveness and market influences. The economic climate can adversely affect
Covanta's operations. Covanta expends substantial amounts for the development of
new businesses. The financial support required to undertake some of these
activities comes from the Company. Beyond staffing costs, expenditures can
include the costs of contract and site acquisition, feasibility and
environmental studies, technical and financial analysis, and in some cases the
preparation of extensive proposals in response to public or private requests for
proposals. Development of some projects involves substantial risks which are not
within the Company's control. Success of a project may depend upon obtaining in
a timely manner, acceptable contractual arrangements and financing, appropriate
sites, acceptable licenses, environmental permits and governmental approvals.
Even after the required contractual arrangements are achieved, implementation of
a project often is subject to substantial conditions that may be outside the
control of the Company. In some, but not all, circumstances, the Company will
make contractual arrangements for the partial recovery of development costs if a
project fails to be implemented for reasons beyond the Company's control.
Once a project is financed and constructed, Covanta's business can be
impacted by a variety of risk factors which can affect profitability over the
life of a project. Some of these risks are at least partially within the
Company's control, such as successful operation in compliance with law, and the
presence or absence of labor difficulties or disturbances. Other risk factors
are largely out of the Company's control and, over a long-term operation may
have an adverse impact on a project. These risks include changes in law, severe
weather and related casualty events, and changes in technologies that offer less
expensive means of generating electricity or of providing water or wastewater
treatment services.
(b) CALIFORNIA CONDITIONS.
The Company currently owns, in whole or in part, 17 power projects in
California, with a total gross generating capacity of approximately 260 MW.
These facilities use renewable fuels such as waste wood, biogas, geothermal, and
municipal solid waste, and sell electricity to three California utilities,
Southern California Edison Company ("SCE"), SEMPRA Energy and Pacific Gas &
Electric Corp. ("PG&E") under long-term power purchase agreements.
Significant market disruptions occurred in the California electricity
markets in 2001. The deregulation scheme effected by California failed during
the last half of 2000, causing both SCE and PG&E to fail to meet most of their
respective financial obligations, including their obligations to pay for
electricity purchased from the Company's projects. SCE made no payments for
electricity delivered from November 2000 through March 2001. PG&E made partial
payments for electricity delivered in December 2000 and January 2001 and no
payments for February and March 2001. On March 27, 2001, California's Public
Utilities Commission ("CPUC") approved a significant retail rate increase for
California utilities. At the same time the CPUC changed the index used in the
short run avoided cost formula and ordered the utilities to pay currently for
electricity purchased from suppliers such as the Company beginning April 1,
2001. On April 6, 2001 PG&E filed for Chapter 11 bankruptcy in the Northern
District of California. Pursuant to the March 27 CPUC order, SCE began making
payments for power delivered after March 27th. PG&E commenced payments pursuant
to the CPUC order on April 6, 2001. Both SCE and PG&E have continued to pay for
deliveries of energy and capacity since that time.
In June 2001, those projects in the SCE service territory entered into
agreements with SCE whereby the projects received a payment of 10% of the
outstanding receivable in exchange for the projects' agreement to standstill on
any pending litigation against SCE. In addition, upon the occurrence of certain
events, the outstanding receivable would be paid in full and the energy payments
would no longer be calculated using the utilities short run avoided cost but
rather would be fixed for five years at 5.37 cents/kWh. The pricing for the five
year fixed price period was approved by the CPUC. These agreements were amended
in November 2001 to change the triggering events for the payment of the
receivable and to set the start of the fixed price period on May 1, 2002. On
March 1, 2002 SCE paid all outstanding receivables owed to the Covanta projects.
In July 2001, those Covanta projects located in the PG&E service
territory entered into agreements with PG&E to modify the existing PPAs to
replace the energy pricing provisions with the five-year fixed price of 5.37
cents/kWh and to have the Bankruptcy Court approve the assumption of the PPAs by
PG&E. The Bankruptcy Court in the PG&E bankruptcy approved the agreements on
July 13, 2001. The fixed price period for Covanta projects in the PG&E service
territory started immediately. In October 2001, the Company sold the
pre-petition payables of three wholly-owned facilities at a 10% discount. A
portion of the money received from the sale was placed in escrow pending
resolution of a pricing issue. The escrow is expected to be released to the
facilities in late 2002. In January 2002 all but one of the Covanta projects
entered into a Supplemental Agreement with PG&E by which PG&E agreed to commence
making payments of the pre-petition payables in twelve equal monthly
installments. The Bankruptcy Court approved the Supplemental Agreement on
February 28, 2002. The Company has received the first five monthly installment
payments.
INTERNATIONAL BUSINESS
The Company has ownership interests and/or operates (or will operate
upon completion of construction) projects on four continents. They are:
- North America: 46 energy generating projects totaling 1113 MW
(gross); 9 water or wastewater projects totaling 90 mgd capacity.
- Asia: 11 energy generating projects totaling 1050 MW (gross).
- South and Central America: 4 energy generating projects totaling 232
MW (gross).
- Europe: 3 energy generating projects totaling 45 MW (gross).
The Company does not expect to engage in any development activity in
foreign markets during 2002.
The ownership and operation of facilities in foreign countries entails
significant political and financial uncertainties and other structuring issues
that typically are not involved in such activities in the United States. These
risks include unexpected changes in electricity tariffs, conditions in financial
markets, currency exchange rates, currency repatriation restrictions, currency
convertibility, changes in laws and regulations and political, economic or
military instability, civil unrest and expropriation. Such risks have the
potential to cause substantial delays or material impairment to the value of the
project being developed or business being operated.
Many of the countries in which the Company operates are lesser
developed countries or developing countries. The political, social and economic
conditions in some of these countries are typically less stable than those
prevalent in the United States. The financial condition and creditworthiness of
the potential purchasers of power and services provided by the Company (which
may be a governmental or private utility or industrial consumer) or of the
suppliers of fuel for projects in these countries may not be as strong as those
of similar entities in developed countries. The obligations of the purchaser
under the power purchase agreement, the service recipient under the related
service agreement and the supplier under the fuel supply agreement generally are
not guaranteed by any host country or other creditworthy governmental agency.
Whenever such governmental guarantees are not available, the Company undertakes
a credit analysis of the proposed power purchaser or fuel supplier. It also has
sought, to the extent appropriate and achievable within the commercial
parameters of a project, to require such entities to provide financial
instruments such as letters of credit or arrangements regarding the escrowing of
the receivables of such parties in the case of power purchasers.
The Company's power projects in particular are dependent on the
reliable and predictable delivery of fuel meeting the quantity and quality
requirements of the project facilities. The Company has typically sought to
negotiate long-term contracts for the supply of fuel with creditworthy and
reliable suppliers. However, the reliability of fuel deliveries may be
compromised by one or more of several factors that may be more acute or may
occur more frequently in developing countries than in developed countries,
including a lack of sufficient infrastructure to support deliveries under all
circumstances; bureaucratic delays in the import, transportation and storage of
fuel in the host country; customs and tariff disputes; and local or regional
unrest or political instability. In most of the foreign projects in which the
Company participates, it has sought, to the extent practicable, to shift the
consequences of interruptions in the delivery of fuel, whether due to the fault
of the fuel supplier or due to reasons beyond the fuel supplier's control, to
the electricity purchaser or service recipient by securing a suspension of its
operating responsibilities under the applicable agreements and an extension of
its operating concession under such agreements and/or, in some instances, by
requiring the energy purchaser or service recipient to continue to make payments
in respect of fixed costs. In order to mitigate the effect of short-term
interruptions in the supply of fuel, the Company has endeavored to provide
on-site storage of fuel in sufficient quantities to address such interruptions.
Payment for services that the Company provides will often be made in
whole or part in the domestic currencies of the host countries. Conversion of
such currencies into U.S. dollars generally is not assured by a governmental or
other creditworthy country agency, and may be subject to limitations in the
currency markets, as well as restrictions of the host country. In addition,
fluctuations in the value of such currencies against the value of the U.S.
dollar may cause the Company's participation in such projects to yield less
return than expected. Transfer of earnings and profits in any form beyond the
borders of the host country may be subject to special taxes or limitations
imposed by host country laws. The Company has sought to participate in projects
in jurisdictions where limitations on the convertibility and expatriation of
currency have been lifted by the host country and where such local currency is
freely exchangeable on the international markets. In most cases, components of
project costs incurred or funded in the currency of the United States are
recovered without risk of currency fluctuation through negotiated contractual
adjustments to the price charged for electricity or service provided. This
contractual structure may cause the cost in local currency to the project's
power purchaser or service recipient to rise from time to time in excess of
local inflation, and consequently there is risk in such situations that such
power purchaser or service recipient will, at least in the near term, be less
able or willing to pay for the project's power or service.
Due to the fact that many of the countries in which the Company is
active are lesser developed countries or developing countries, the successful
development of a project or projects may be adversely impacted by economic
changes in such countries or by changes in government support for such projects.
Adverse economic changes may, and have, resulted in initiatives (by local
governments alone or at the request of world financial institutions) to reduce
local commitments to pay long-term obligations in U.S. dollars or U.S. dollar
equivalents. There is therefore risk that the Company's development efforts in
such countries may from time to time be adversely affected by such changes on a
temporary or long-term basis.
In addition, the Company has generally participated in projects which
provide services that are treated as a matter of national or key economic
importance by the laws and politics of the host country. There is therefore risk
that the assets constituting the facilities of these projects could be
temporarily or permanently expropriated or nationalized by a host country, or
made subject to local or national control.
The Company has sought to manage and mitigate these risks through all
available means that it deems appropriate, including: political and financial
analysis of the host countries and the key participants in each project;
guarantees of relevant agreements with creditworthy entities; political risk and
other forms of insurance; participation by international finance institutions,
such as affiliates of the World Bank, in financing of projects in which it
participates; and joint ventures with other companies to pursue the development,
financing and construction of these projects. Beginning in 2002, the Company
intends to divest its interests in some of its foreign projects in an effort to
concentrate its business domestically. To this end, on March 28, 2002, the
Company sold its interests in two 122 MW gas-fired combined cycle facilities in
Thailand: the Sahacogen facility and the Rojana Power facility as well as its
interest in the operating company to its local partners in the respective
projects.
Covanta and its subsidiaries currently employ approximately 4,700 U.S.
and foreign employees, of whom approximately 2,200 are employed in the Company's
core business.
EMPLOYEE LABOR RELATIONS
Certain employees of Covanta are employed pursuant to collective
bargaining agreements with various unions. During 2000, Covanta successfully
renegotiated collective bargaining agreements in certain of its business sectors
with no strike-related loss of service. Covanta considers relations with its
employees to be good and does not anticipate any significant labor disputes in
2002.
ENVIRONMENTAL REGULATORY LAWS
(a) DOMESTIC.
Covanta's business activities in the United States are pervasively
regulated pursuant to Federal, state and local environmental laws. Federal laws,
such as the Clean Air Act and Clean Water Act, and their state counterparts,
govern discharges of pollutants to air and water. Other Federal, state and local
laws comprehensively govern the generation, transportation, storage, treatment
and disposal of solid and hazardous waste, and also regulate the storage and
handling of petroleum products (such laws and the regulations thereunder,
"Environmental Regulatory Laws").
The Environmental Regulatory Laws and other Federal, state and local
laws, such as the Comprehensive Environmental Response Compensation and
Liability Act ("CERCLA" or "Superfund") (collectively, "Environmental
Remediation Laws"), make Covanta potentially liable on a joint and several basis
for any onsite or offsite environmental contamination which may be associated
with the Company's activities and the activities at sites, including landfills,
which the Company's subsidiaries have owned, operated or leased or at which
there has been disposal of residue or other waste handled or processed by such
subsidiaries or at which there has been disposal of waste generated by the
Company's activities. Through its subsidiaries, the Company leases and operates
a landfill in Haverhill, Massachusetts, and leases a landfill in Bristol,
Connecticut, in connection with its projects at those locations. Some state and
local laws also impose liabilities for injury to persons or property caused by
site contamination. Some Service Agreements provide for indemnification of the
operating subsidiaries from some such liabilities. In addition, other
subsidiaries involved in landfill gas projects have access rights to landfills
pursuant to certain leases at landfill sites which permit the installation,
operation and maintenance of landfill gas collection systems. A portion of these
landfill sites is and has been a federally designated "Superfund" site. Each of
these leases provide for indemnification of the Company subsidiary from some
liabilities associated with these sites.
The Environmental Regulatory Laws require that many permits be obtained
before the commencement of construction and operation of waste-to-energy,
independent power and water and wastewater projects. There can be no assurance
that all required permits will be issued, and the process of obtaining such
permits can often cause lengthy delays, including delays caused by third-party
appeals challenging permit issuance. Failure to meet conditions of these permits
or of the Environmental Regulatory Laws and the corresponding regulations can
subject an operating subsidiary to regulatory enforcement actions by the
appropriate governmental unit, which could include monetary penalties, and
orders requiring certain remedial actions or limiting or prohibiting operation.
In addition, certain of Covanta's discontinued businesses also are required to
comply with various regulatory and permitting requirements and can be subject to
regulatory enforcement actions. To date, Covanta has not incurred material
penalties, been required to incur material capital costs or additional expenses,
nor been subjected to material restrictions on its operations as a result of
violations of environmental laws, regulations or permits.
The Environmental Regulatory Laws and Federal and state governmental
regulations and policies governing their enforcement are subject to revision.
New technology may be required or stricter standards may be established for the
control of discharges of air or water pollutants for storage and handling of
petroleum products or chemicals, or for solid or hazardous waste or ash handling
and disposal. Thus, as new technology is developed and proven, it may be
required to be incorporated into new facilities or major modifications to
existing facilities. This new technology may often be more expensive than that
used previously.
The Clean Air Act Amendments of 1990 required the U.S. Environmental
Protection Agency (the "EPA") to promulgate New Source Performance Standards
("NSPS") and Emission Guidelines ("EG") applicable to new and existing municipal
waste combustion units for particulate matter (total and fine), opacity, sulfur
dioxide, hydrogen chloride, oxides of nitrogen, carbon monoxide, dioxins and
dibenzofurans. The general compliance deadline for the NSPS and EG was December
19, 2000. The Company completed necessary facility retorfits to achieve the
applicable new limits under the NSPS and EG by December 19, 2000 and has
demonstrated compliance with those standards.
The Environmental Remediation Laws prohibit disposal of hazardous waste
other than in small, household-generated quantities at the Company's municipal
solid waste facilities. The Service Agreements recognize the potential for
improper deliveries of hazardous wastes and specify procedures for dealing with
hazardous waste that is delivered to a facility. Although certain Service
Agreements require the Company's subsidiary to be responsible for some costs
related to hazardous waste deliveries, to date, no operating subsidiary has
incurred material hazardous waste disposal costs.
Domestic drinking water facilities developed in the future by the
Company will be subject to regulation of water quality by the EPA under the
Federal Safe Drinking Water Act and by similar state laws. Domestic wastewater
facilities are subject to regulation under the Federal Clean Water Act and by
similar state laws. These laws provide for the establishment of uniform minimum
national water quality standards, as well as governmental authority to specify
the type of treatment processes to be used for public drinking water. Under the
Federal Clean Water Act, the Company may be required to obtain and comply with
National Pollutant Discharge Elimination System permits for discharges from its
treatment stations. Generally, under its current contracts, the Client Community
is responsible for fines and penalties resulting from the delivery to the
Company's treatment facilities of water not meeting standards set forth in those
contracts.
(b) INTERNATIONAL.
Among the Company's objectives is providing energy generating and other
infrastructure through environmentally protective project designs, regardless of
the location of a particular project. This approach is consistent with the
increasingly stringent environmental requirements of multilateral financing
institutions, such as the World Bank, and also with the Company's experience in
domestic waste-to-energy projects, where environmentally protective facility
design and performance has been required. The laws of other countries also may
require regulation of emissions into the environment, and provide governmental
entities with the authority to impose sanctions for violations, although these
requirements are generally not as rigorous as those applicable in the United
States. Compliance with environmental standards comparable to those of the
United States may be conditions to the provision of credit by multilateral
banking agencies as well as other lenders or credit providers. As with domestic
project development, there can be no assurance that all required permits will be
issued, and the process can often cause lengthy delays.
ENERGY AND WATER REGULATIONS
The Company's domestic businesses are subject to the provisions of
Federal, state and local energy laws applicable to their development, ownership
and operation of their domestic facilities, and to similar laws applicable to
their foreign operations. Federal laws and regulations govern transactions with
utilities, the types of fuel used and the power plant ownership. State
regulatory regimes govern rate approval and other terms under which utilities
purchase electricity from independent power producers, except to the extent such
regulation is pre-empted by Federal law.
Pursuant to the Federal Public Utility Regulatory Policies Act
("PURPA"), the Federal Energy Regulatory Commission (the "FERC") has promulgated
regulations that exempt qualifying facilities (facilities meeting certain size,
fuel and ownership requirements, or "QFs") from compliance with certain
provisions of the Federal Power Act ("FPA"), the Public Utility Holding Company
Act of 1935 ("PUHCA"), and certain state laws regulating the rates charged by,
or the financial and organizational activities of, electric utilities. PURPA was
enacted in 1978 to encourage the development of cogeneration facilities and
other facilities making use of non-fossil fuel power sources, including
waste-to-energy facilities. The exemptions afforded by PURPA to QFs from
regulation under the FPA and PUHCA and most aspects of state electric utility
regulation are of great importance to the Company and its competitors in the
waste-to-energy and independent power industries.
Except with respect to waste-to-energy facilities with a net power
production capacity in excess of thirty megawatts (where rates are set by the
FERC), state public utility commissions must approve the rates, and in some
instances other contract terms, by which public utilities purchase electric
power from QFs. PURPA requires that electric utilities purchase electric energy
produced by QFs at negotiated rates or at a price equal to the incremental or
"avoided" cost that would have been incurred by the utility if it were to
generate the power itself or purchase it from another source. PURPA does not
expressly require public utilities to enter into long-term contracts to purchase
the output supplied by QFs.
Under PUHCA, any entity owning or controlling 10% or more of the voting
securities of a "public utility company" or company which is a "holding company"
of a public utility company is subject to registration with the SEC and
regulation by the SEC unless exempt from registration. Under PURPA, most
projects that satisfy the definition of a "qualifying facility" are exempt from
regulation under PUHCA. Under the Energy Policy Act of 1992, projects that are
not QFs under PURPA but satisfy the definition of an "exempt wholesale
generator" ("EWG") are not deemed to be public utility companies under PUHCA.
Finally, projects that satisfy the definition of "foreign utility companies" are
exempt from regulation under PUHCA. The Company believes that all of its
operating projects involved in the generation, transmission and/or distribution
of electricity, both domestically and internationally, qualify for an exemption
from PUHCA and that it is not and will not be required to register with the SEC.
In the past there has been consideration in the U.S. Congress of
legislation to repeal PURPA entirely, or at least to repeal the obligation of
utilities to purchase power from QFs. There is continuing support for
grandfathering existing QF contracts if such legislation is passed. Various
bills have also proposed repeal of PUHCA. Repeal of PUHCA would allow both
independents and vertically integrated utilities to acquire electric assets
throughout the United States that are geographically widespread, eliminating the
current requirement that the utility's electric assets be capable of physical
integration. Also, registered holding companies would be free to acquire
non-utility businesses, which they may not do now, with certain limited
exceptions. With the repeal of PURPA or PUHCA, competition for independent power
generators from utilities would likely increase. This is likely to have little
or no impact on existing Covanta projects, but may mean additional competition
from highly capitalized companies seeking to develop projects in the United
States.
In addition, the FERC, many state public utility commissions and
Congress have implemented or are considering a series of proposals to
restructure the electric utility industry in the United States to permit utility
customers to choose their utility supplier in a competitive electric energy
market. The FERC has issued a series of orders requiring utilities to offer
wholesale customers and suppliers open access on their transmission lines on a
comparable basis to the utilities' own use of the line. All public utilities
have already filed "open access" tariffs to implement this requirement. As the
trend toward increased competition continues, the utilities contend that they
are entitled to recover from departing customers their fixed costs that will be
"stranded" by the ability of their wholesale customers (and perhaps eventually,
their retail customers) to choose new electric power suppliers. These include
the costs utilities are required to pay under many QF contracts which the
utilities view as excessive when compared with current market prices. Many
utilities are therefore seeking ways to lower these contract prices, or rescind
or buy out these contracts altogether, out of concern that their shareholders
will be required to bear all or part of such "stranded" costs. Regulatory
agencies to date have recognized the continuing validity of approved power
purchase agreements, and have rejected attempts by some utilities to abrogate
these contracts. At the same time, regulatory agencies have encouraged
renegotiations of power contracts where rate payer savings can be achieved as a
result. The Company anticipates that the regulatory impetus to restructure
"above market" power purchase agreements will continue in many of the
jurisdictions where it owns or operates generating facilities. Future U.S.
electric rates may be deregulated in a restructured U.S. electric utility
industry and increased competition may result in lower rates and less profit for
U.S. electricity sellers developing new projects. Falling electricity prices and
uncertainty as to the future structure of the industry can be expected to
inhibit U.S. utilities from entering into long-term power purchase contracts. On
the other hand, deregulation could open up markets for the sale of electricity,
including retail markets, previously available only to regulated utilities.
While at present, the impact of the recent California situation (see MARKETS,
COMPETITION AND GENERAL BUSINESS CONDITIONS, above) cannot be predicted, it has
led some states and their public service commissions to re-examine the timing,
nature and desirability of electric utility restructuring.
The Company presently has ownership and operating interests in electric
generating projects outside the United States. Most countries have expansive
systems for the regulation of the power business. These generally include
provisions relating to ownership, licensing, rate setting and financing of
generating and transmission facilities.
Covanta's water and wastewater business may be subject to the
provisions of state and local utility laws applicable to the development,
ownership and operation of water supply and wastewater facilities. Whether such
laws apply depends upon the local regulatory scheme as well as the manner in
which the Company provides its services. Where such regulations apply, they may
relate to rates charged, services provided, accounting procedures, acquisitions
and other matters. In the United States, rate regulations have typically been
structured to provide a predetermined return on the regulated entities'
investments. The regulated entity benefits from efficiencies achieved during
the period for which the rate is set.
ITEM 2. PROPERTIES
During 2000, Covanta moved its executive offices from New York City to
Fairfield, New Jersey. The Company's executive offices are now located at 40
Lane Road, Fairfield, New Jersey, in an office building located on a 5.4 acre
site owned by Covanta Projects, Inc. It also leases approximately 47,000 square
feet of office space in Fairfax, Virginia.
The following table summarizes certain information relating to the
locations of the properties owned or leased by Covanta Energy Group, Inc. or its
subsidiaries:
APPROXIMATE
SITE SIZE NATURE OF
LOCATION (IN ACRES)(1) SITE USE INTEREST(2)
1. Fairfield, New Jersey 5.4 Office space Own
2. Fairfax, Virginia __ Office space Lease
3. New York, New York __ Office space Lease
4. Marion County, Oregon 15.2 Waste-to-energy facility Own
5. Alexandria/Arlington, Virginia 3.3 Waste-to-energy facility Lease
6. Bristol, Connecticut 18.2 Waste-to-energy facility Own
7. Bristol, Connecticut 35 Landfill Lease
8. Indianapolis, Indiana 23.5 Waste-to-energy facility Lease
9. Stanislaus County, California 16.5 Waste-to-energy facility Lease
10. Babylon, New York 9.5 Waste-to-energy facility Lease
11. Haverhill, Massachusetts 12.7 Waste-to-energy facility Lease
12. Haverhill, Massachusetts 16.8 RDF processing facility Lease
13. Haverhill, Massachusetts 20.2 Landfill Lease
14. Lawrence, Massachusetts 11.8 RDF power plant (closed) Own
15. Lake County, Florida 15 Waste-to-energy facility Own
16. Wallingford, Connecticut 10.3 Waste-to-energy facility Lease
17. Fairfax County, Virginia 22.9 Waste-to-energy facility Lease
18. Union County, New Jersey 20 Waste-to-energy facility Lease
19. Huntington, New York 13 Waste-to-energy facility Lease
20. Warren County, New Jersey 19.8 Waste-to-energy facility Lease
21. Hennepin County, Minnesota 14.6 Waste-to-energy facility Lease
22. Tulsa, Oklahoma 22 Waste-to-energy facility Lease
23. Onondaga County, New York 12 Waste-to-energy facility Lease
24. New Martinsville, W. VA N/A Hydroelectric power generating Lease
25. Heber, California 8 Geothermal power plant Own
26. Heber, California 18 Geothermal power plant Own
27. Heber, California 40 Geothermal power plant Lease
28. Bataan, Philippines 3,049 m2 Diesel power plant Lease
29. Zhejiang Province, N/A Coal-fired Land Use Right
People's Republic of China cogeneration facility reverts to China Joint
Venture Partner upon
termination of Joint
Venture Agreement
30. Shandong Province, N/A Coal-fired Land Use Right
People's Republic of China cogeneration facility reverts to China Joint
Venture Partner upon
termination of Joint
Venture Agreement
31. Jiangsu Province, N/A Coal-fired Land Use Right
People's Republic of China cogeneration facility reverts to China Joint
Venture Partner upon
termination of Joint
Venture Agreement
32. Casa Diablo Hot Springs, 1,510 Geothermal projects Land Use Rights from
California Geothermal Resource
Lease
33. Rockville, Maryland N/A Landfill gas project Lease
34. San Diego, California N/A Landfill gas project Lease
35. Oxnard, California N/A Landfill gas project Lease
36. Sun Valley, California N/A Landfill gas project Lease
37. Salinas, California N/A Landfill gas project Lease
38. Santa Clara, California N/A Landfill gas project Lease
39. Stockton, California N/A Landfill gas project Lease
40. Los Angeles, California N/A Landfill gas project Lease
41. Burney, California 40 Wood waste project Lease
42. Jamestown, California 26 Wood waste project Own (50%)
43. Westwood, California 60 Wood waste project Own
44. Oroville, California 43 Wood waste project Lease
45. Whatcom County, Washington N/A Hydroelectric project Own (50%)
46. Weeks Falls, Washington N/A Hydroelectric project Lease
47. Cavite, Philippines 13,122 m2 Diesel project Lease
48. Manila, The Philippines 535 m2 Office space Lease
49. Bangkok, Thailand 265 m2 Office space Lease
50. Chennai, India 1797 ft2 Office space Lease
51. Samalpatti, India 211 m2 Office space Lease
52. Samayanallur, India 144 m2 Office space Lease
53. Samayanallur, India 19.4 Heavy fuel oil project Lease
54. Samayanallur, India 11.4 Heavy fuel oil project Lease
55. Samalpatti, India 30.3 Heavy fuel oil project Lease
56. Shanghai, China 144.7 m2 Office space Lease
57. Burney, California 3,000 ft2 Office space Lease
58. East Syracuse, New York 6,200 ft2 Office space Lease
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(1) All sizes are in acres unless otherwise indicated.
(2) All ownership or leasehold interests relating to projects are subject to
material liens in connection with the financing of the related project,
except those listed above under items 12, 29-31, and 33-40. In addition,
all leasehold interests extend at least as long as the term of applicable
project contracts, and several of the leasehold interests are subject to
renewal and/or purchase options.
ITEM 3. LEGAL PROCEEDINGS
On April 1, 2002, the Debtors filed for their respective petitions for
protection under Chapter 11 of the Bankruptcy Code. The petitions were filed in
the U.S. Bankruptcy Court for the Southern District of New York, and are being
jointly administered under the lead case, In re Ogden New York Services, Inc.,
No. 02-40826 (CB). (See Part II, MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS) Generally, all actions against
the Company and its subsidiaries that filed Chapter 11 petitions are stayed
during the pendency of the Chapter 11 proceedings.
The Company has various other legal proceedings involving matters
arising in the ordinary course of business. The Company does not believe that
there are any pending legal proceedings, other than as described in the
preceding paragraph or ordinary routine litigation incidental to its business,
to which the Company is a party or to which any of its property is subject, of
which the outcome would have a material adverse effect on the Company's
consolidated position or results of operation.
The Company's operations are subject to various Federal, state and
local environmental laws and regulations, including the Clean Air Act, the Clean
Water Act, CERCLA and Resource Conservation and Recovery Act ("RCRA"). Although
the Company's operations are occasionally subject to proceedings and orders
pertaining to emissions into the environment and other environmental violations,
the Company believes that it is in substantial compliance with existing
environmental laws and regulations.
The Company may be identified, along with other entities, as being
among potentially responsible parties responsible for contribution for costs
associated with the correction and remediation of environmental conditions at
disposal sites subject to CERCLA and/or analogous state laws. In certain
instances the Company may be exposed to joint and several liability for remedial
action or damages. The Company's ultimate liability in connection with such
environmental claims will depend on many factors, including its volumetric share
of waste, the total cost of remediation, the financial viability of other
companies that also sent waste to a given site and, in the case of divested
operations, its contractual arrangement with the purchaser of such operations.
The Company is engaged in ongoing investigation and remediation actions
with respect to three airports where it provides aviation fueling services on a
cost-plus basis pursuant to contracts with individual airlines, consortia of
airlines and operators of airports. The Company currently estimates the costs of
those ongoing actions (determined as of March 2002) will be approximately
$1,000,000 (over several years), and that airlines, airports and others should
reimburse it for substantially all these costs. To date, the Company's right to
reimbursement for remedial costs has been challenged successfully in one prior
case in which the court found that the cost-plus contract in question did not
provide for recovery of costs resulting from the Company's own negligence. That
case did not relate to any of the airports described above. Except in that
instance, and in the American/United litigation noted below, the Company has not
been alleged to have acted with negligence. The Company has also agreed to
indemnify various transferees of its divested airport operations with respect to
certain known and potential liabilities that may arise out of such operations
and in certain instances has agreed to remain liable for certain potential
liabilities that were not assumed by the transferee. Accordingly, the Company
may in the future incur liability arising out of investigation and remediation
actions with respect to airports served by such divested operations to the
extent the purchaser of these operations is unable to obtain reimbursement of
such costs from airlines, airports or others. To date such indemnification has
been sought with respect to one airport. Because the Company did not provide
fueling services at that airport, it does not believe it will have significant
obligations with respect to this matter. The Company is currently reviewing the
potential impact of its filing under Chapter 11 on its exposure for these
liabilities.
The potential costs related to all of the foregoing matters and the
possible impact on future operations are uncertain due in part to the complexity
of governmental laws and regulations and their interpretations, the varying
costs and effectiveness of cleanup technologies, the uncertain level of
insurance or other types of recovery and the questionable level of the Company's
responsibility. Although the ultimate outcome and expense of any litigation,
including environmental remediation, is uncertain, the Company believes that the
following proceedings will not have a material adverse effect on the Company's
consolidated financial position or results of operations.
(a) Environmental Matters
(i) On June 8, 2001, the EPA named Ogden Martin Systems of Haverhill,
Inc. as one of 2000 Potentially Responsible Parties ("PRPs") at
the Beede Waste Oil Superfund Site (the "Site"), Plaistow, New
Hampshire. The EPA alleges that the Haverhill facility disposed
approximately 45,000 gallons of waste oil at the Site, a former
recycling facility. The total volume of waste allegedly disposed
by all PRPs at the Site is estimated by the EPA as approximately
14,519,232 gallons. The EPA alleges that the costs of response
actions completed or underway at the Site total approximately
$14,900,000, exclusive of interest, and estimates that the total
cost of cleanup of this site will be an additional $70,000,000. A
PRP group has formed and the Company is participating in PRP
group discussions towards settlement of the EPA's claims. As a
result of uncertainties regarding the source and scope of
contamination, the large number of PRPs and the varying degrees
of responsibility among various classes of potentially
responsible parties, the Company's share of liability, if any,
cannot be determined at this time.
(ii) On April 9, 2001, Ogden Ground Services, Inc. and "Ogden
Aviation" (collectively "Ogden"), together with approximately 250
other parties, were named by Metropolitan Dade County, Florida
(the "County") as PRPs, pursuant to CERCLA, RCRA and state law,
with respect to an environmental cleanup at Miami International
Airport. The County alleges that, as a result of releases of
hazardous substances, petroleum, and other wastes to soil,
surface water, and groundwater at the Airport, it has expended
over $200,000,000 in response and investigation costs and expects
to spend an additional $250,000,000 to complete necessary
response actions. An Interim Joint Defense Group has been formed
among PRPs and discovery of the County's document archive is
underway. A tolling agreement has been executed between PRPs and
the County in order to allow for settlement discussions to
proceed without the need for litigation. As a result of
uncertainties regarding the source and scope of the
contamination, the large number of PRPs and the varying degrees
of responsibility among various classes of potentially
responsible parties, the Company's share of liability, if any,
cannot be determined at this time.
(iii) On May 25, 2000 the California Regional Water Quality Control
Board, Central Valley Region (the "Board"), issued a cleanup and
abatement order to Pacific-Ultrapower Chinese Station ("Chinese
Station"), a general partnership in which one of the Company's
subsidiaries owns 50% and which operates a wood-burning power
plant located in Jamestown, California. This order arises from
the use as fill material, by Chinese Station's neighboring
property owner, of boiler bottom ash generated by Chinese
Station. The order was issued jointly to Chinese Station and to
the neighboring property owner as co-respondents. Chinese Station
completed the cleanup during the summer of 2001 and submitted its
Clean Closure Report to the Board on November 2, 2001. The Board,
by letter dated June 14, 2001, alleged co-respondents have a
potential civil liability, as of that date, of $975,000; however,
no penalty demand has been issued. This matter remains under
investigation by the Board and other state agencies with respect
to alleged civil and criminal violations associated with the
management of the material. Chinese Station believes it has valid
defenses, and has pending a petition for review of the order.
(iv) On January 4, 2000 and January 21, 2000, United Air Lines, Inc.
("United") and American Airlines, Inc. ("American"),
respectively, named Ogden New York Services, Inc. ("Ogden New
York"), in two separate lawsuits filed in the Supreme Court of
the State of New York. The lawsuits seek judgment declaring that
Ogden New York is responsible for petroleum contamination at
airport terminals formerly or currently leased by United and
American at New York's Kennedy International Airport. These cases
have been consolidated for joint trial. Both United and American
allege that Ogden negligently caused discharges of petroleum at
the airport and that Ogden New York is obligated to indemnify the
airlines pursuant to the Fuel Services Agreements between Ogden
New York and the respective airline. United and American further
allege that Ogden New York is liable under New York's Navigation
Law, which imposes liability on persons responsible for
discharges of petroleum, and under common law theories of
indemnity and contribution.
The United complaint is asserted against Ogden New York,
American, Delta Air Lines, Inc., Northwest Airlines Corporation
and American Eagle Airlines, Inc. United is seeking $1,540,000 in
technical contractor costs and $432,000 in legal expenses related
to the investigation and remediation of contamination at the
airport, as well as a declaration that Ogden and the airline
defendants are responsible for all or a portion of future costs
that United may incur.
The American complaint, which is asserted against both Ogden New
York and United, sets forth essentially the same legal basis for
liability as the United complaint. American is seeking
reimbursement of all or a portion of $4,600,000 allegedly
expended in cleanup costs and legal fees it expects to incur to
complete an investigation and cleanup that it is conducting under
an administrative order with the State Department of
Environmental Conservation. The estimate of those sums alleged in
the complaint is $70,000,000.
The Company disputes the allegations and believes that the
damages sought are overstated in view of the airlines'
responsibility for the alleged contamination and that the Company
has other defenses under its respective leases and permits with
the Port Authority.
On January 29, 2002, the court entered a stipulation and order in
these cases, staying most discovery until June 24, 2002 while the
parties engage in non-binding mediation, which is anticipated to
be completed on or before May 31, 2002.
(v) On December 23, 1999 Allied Services, Inc. was named as a third
party defendant in an action filed in the Superior Court of the
State of New Jersey. The third-party complaint alleges that
Allied generated hazardous substances to a reclamation facility
known as the Swope Oil and Chemical Company Site, and that
contamination migrated from the Swope Oil Site. Third-party
plaintiffs seek contribution and indemnification from Allied and
over 90 other third-party defendants for costs incurred and to be
incurred to cleanup. This action was stayed, pending the outcome
of first- and second-party claims. The Company has received no
further notices in this matter since the stay was entered. As a
result of uncertainties regarding the source and scope of
contamination, the large number of potentially responsible
parties and the varying degrees of responsibility among various
classes of potentially responsible parties, the Company's share
of liability, if any, cannot be determined at this time.
(vi) On January 12, 1998, the Province of Newfoundland filed an
Information Against Airconsol Aviation Services Limited
("Airconsol") alleging that Airconsol violated provincial
environmental laws in connection with a fuel spill on or about
January 14, 1997 at Airconsol's fuel facility at the Deer Lake,
Canada Airport. Airconsol contested the allegations and
prevailed. The Court voided the Information. The Crown has
appealed the Court's decision and the Company contested
Airconsol's alleged liability. On January 21, 2002, the Crown
abandoned its appeal.
(vii) In 1984, the Company sold all of its interests in several
manufacturing subsidiaries, some of which used asbestos in their
manufacturing processes and one of which was Avondale shipyards,
now operated as a subsidiary of Northrop Grumman Corporation.
Some of these sold subsidiaries have been and continue to be
parties to litigation arising primarily from workplace asbestos
exposure. The Company has been named as a party to one such case
filed in 2001 in which there are 45 other defendants. The case
which is in its early stages and is stayed against the Company by
the Chapter 11 proceding, appears to assert that the Company is
liable on theories of successor liability. Before the Company's
bankruptcy filing, the Company had filed for its dismissal from
the case on the basis that it is not a successor to the
subsidiary who allegedly caused the plaintiffs asbestos exposure.
The Company does not believe it is liable to persons who may
assert claims for asbestos related injuries relating to the
operations of its former subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of Covanta
during the fourth quarter of 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Covanta Energy Corporation (Debtor in Possession) and Subsidiaries
PRICE RANGE OF STOCK AND DIVIDEND DATA
2001 2000
- --------------------------------------------------------------------------------
High Low High Low
Common:
First Quarter ................ 18.125 15.00 14.0625 10.125
Second Quarter................ 22.85 16.05 12.375 7.25
Third Quarter................. 18.84 9.71 17.50 8.75
Fourth Quarter................ 15.25 3.18 16.00 12.375
---------------------------------------------
Preferred:
First Quarter................. -No Activity- 75.00 75.00
Second Quarter................ 130.00 110.00 75.00 75.00
Third Quarter................. 105.00 90.00 80.00 80.00
Fourth Quarter................ 81.00 75.00 83.0625 83.0625
---------------------------------------------
On April 1, 2002, Covanta Energy Corporation and certain of its domestic
subsidiaries filed for reorganization under Chapter 11 of the U.S. Bankruptcy
Code. On the same day, the New York Stock Exchange, Inc. suspended trading of
the Company's common stock and $1.875 cumulative convertible preferred stock and
began processing an application to the Securities and Exchange Commission to
delist the Company from the New York Stock Exchange.
The Securities and Exchange Commission (the "Commission") by Order dated May 16,
2002 granted the application of the New York Stock Exchange, Inc. for removal of
the Common Stock and $1.875 Cumulative Convertible Preferred Stock of Covanta
Energy Corporation from listing and registration on the Exchange under the
Securities Exchange Act of 1934.
The removal from listing and registration on the Exchange of the above issues of
the Company became effective at the opening of the trading session on May 17,
2002 pursuant to the Order of the Commission.
Until April 1, 2002, Covanta's common and $1.875 preferred stocks were listed on
the New York Stock Exchange. As of June 13, 2002 there were approximately 4,730
common stockholders and 620 preferred stockholders.
The Company suspended its common stock dividend in 1999. Quarterly dividends of
$.46875 were paid for the four quarters of 2001 and 2000 on the $1.875 preferred
stock. For additional information concerning the payment of dividends, see Item
7, Management's Discussion and Analysis of Financial Condition and Results of
Operations.
On March 3, 1999, pursuant to an Agreement and Plan of Merger, a subsidiary of
Covanta acquired 100% of the issued and outstanding stock of Flight Services
Group, Inc. (FSG) from the two individual shareholders (the Shareholders) of
FSG. Pursuant to this transaction Covanta issued an aggregate of 207,190 shares
of restricted common stock, par value $.50 per share (the Common Stock) to the
Shareholders. The Common Stock issued to the Shareholders was exempt from
registration pursuant to Rule 501 and 505 of Regulation D of the Securities Act
of 1933, as amended (the 1933 Act) and Rule 144 of the Securities Exchange Act
of 1934, as amended. The Shareholders executed an Investment Letter agreeing to
abide by all of the requirements of the foregoing Rules and Regulations and each
share of Common Stock issued to the Shareholders contains a legend to the effect
that the shares were acquired for investment and not with a view to the public
distribution thereof and will not be transferred in violation of the 1933 Act.
Covanta Energy Corporation (Debtor in Possession) and Subsidiaries
ITEM 6. SELECTED FINANCIAL DATA
- ---------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2001 2000 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
(In thousands of dollars, except per-share amounts)
TOTAL REVENUES FROM CONTINUING OPERATIONS............. $1,082,767 $1,020,002 $1,027,693 $ 925,153 $ 960,458
--------- --------- --------- --------- ---------
Income (loss) from continuing operations before
cumulative effect of change in accounting principle... (231,027) (85,621) (36,290) 37,248 36,787
Income (loss) from discontinued operations............ (143,664) (41,851) 49,722 38,886
Cumulative effect of change in accounting principle... (3,820)
--------- --------- --------- --------- ---------
Net income (loss)..................................... (231,027) (229,285) (81,961) 86,970 75,673
--------- --------- --------- --------- ---------
BASIC EARNINGS (LOSS) PER SHARE:
Income (loss) from continuing operations before
cumulative effect of change in accounting principle... (4.65) (1.73) (0.74) 0.74 0.73
Income (loss) from discontinued operations............ (2.90) (0.85) 1.00 0.78
Cumulative effect of change in accounting principle... (0.08)
--------- --------- --------- --------- ---------
Total................................................. (4.65) (4.63) (1.67) 1.74 1.51
--------- --------- --------- --------- ---------
DILUTED EARNINGS (LOSS) PER SHARE:
Income (loss) from continuing operations before
cumulative effect of change in accounting principle... (4.65) (1.73) (0.74) 0.73 0.72
Income (loss) from discontinued operations............ (2.90) (0.85) 0.98 0.76
Cumulative effect of change in accounting principle... (0.08)
--------- --------- --------- --------- ---------
Total................................................. (4.65) (4.63) (1.67) 1.71 1.48
--------- --------- --------- --------- ---------
TOTAL ASSETS.......................................... 3,185,826 3,298,828 3,728,658 3,649,044 3,443,981
--------- --------- --------- --------- ---------
LONG-TERM DEBT (LESS CURRENT PORTION)................. 1,600,983 1,749,164 1,884,427 1,864,772 1,911,707
--------- --------- --------- --------- ---------
SHAREHOLDERS' EQUITY................................. 6,244 231,556 442,001 549,100 566,091
--------- --------- --------- --------- ---------
SHAREHOLDERS' EQUITY PER COMMON SHARE................ 0.11 4.65 8.92 11.20 11.24
--------- --------- --------- --------- ---------
CASH DIVIDENDS DECLARED PER COMMON SHARE.............. .625 1.25 1.25
--------- --------- --------- --------- ---------
Net loss in 1999 includes net after-tax charges of $97.8 million, or $1.99 per
diluted share, reflecting costs associated with existing non-core businesses and
impairment of certain assets, comprised of $62.5 million, or $1.27 per diluted
share, for continuing operations and $35.3 million, or $.72 per diluted share,
for discontinued operations. Net loss in 2000 includes net after-tax charges of
$56.0 million, or $1.13 per diluted share, reflecting the write-down of net
assets held for sale and $60.4 million, or $1.22 per diluted share, reflecting
costs associated with non-core businesses and organizational streamlining costs
comprised of $45.5 million, or $.92 per diluted share, for continuing operations
and $14.9 million, or $.30 per diluted share, for discontinued operations. Net
loss in 2001 includes net after tax charges of $212.7 million, or $4.28 per
diluted share, reflecting the write-down of and obligations related to net
assets held for sale.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's Financial Statements and Notes thereto.
BANKRUPTCY FILING
On April 1, 2002 ("Petition Date"), Covanta Energy Corporation and 123 of its
domestic subsidiaries filed voluntary petitions for reorganization under Chapter
11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United
States Bankruptcy Court for the Southern District of New York (the "Bankruptcy
Court"). The pending Chapter 11 Cases (the "Chapter 11 Cases") are being jointly
administered for procedural purposes only. International operations, and certain
other subsidiaries and joint venture partnerships were not included in the
filing. See Notes 1 and 32 to the Consolidated Financial Statements for a more
detailed discussion of these Chapter 11 Cases.
The Company's Consolidated Financial Statements have been prepared on a "going
concern" basis in accordance with accounting principles generally accepted in
the United States of America. The "going concern" basis of presentation assumes
that the Company will continue in operation for the foreseeable future and will
be able to realize its assets and discharge its liabilities in the normal course
of business. Because of the Chapter 11 Cases and the circumstances leading to
the filing thereof, the Company's ability to continue as a "going concern" is
subject to substantial doubt and is dependent upon, among other things,
confirmation of a plan of reorganization, the Company's ability to comply with,
and if necessary renew, the terms of the Debtor in Possession Credit Facility
(see Notes 15 and 32 to the Consolidated Financial Statements), and the
Company's ability to generate sufficient cash flows from operations, asset sales
and financing arrangements to meet its obligations. There can be no assurances
this can be accomplished and if it were not, the Company's ability to realize
the carrying value of its assets and discharge its liabilities would be subject
to substantial uncertainty. Therefore, if the "going concern" basis were not
used for the Company's Consolidated Financial Statements, then significant
adjustments could be necessary to the carrying value of assets and liabilities,
the revenues and expenses reported, and the balance sheet classifications used.
The Company's Consolidated Financial Statements do not reflect adjustments that
may occur in accordance with the American Institute of Certified Public
Accountant's Statement of Position No. 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" ("SOP 90-7"), which the Company will
adopt for its financial reporting in periods ending after April 1, 2002 assuming
that the Company will continue as a "going concern". In the Chapter 11 Cases,
all or substantially all of the unsecured liabilities as of the Petition Date
are subject to compromise or other treatment under a plan of reorganization
which must be confirmed by the Bankruptcy Court after submission to all required
parties for approval pursuant to the relevant provisions of the Bankruptcy Code.
For financial reporting purposes, those liabilities and obligations whose
treatment and satisfaction is dependent on the outcome of the Chapter 11 Cases
will be segregated and classified as Liabilities Subject to Compromise in the
Consolidated Balance Sheets under SOP 90-7.
DISCONTINUED OPERATIONS AND NET ASSETS HELD FOR SALE
All non-core businesses, including remaining Entertainment and Aviation
businesses are classified as net assets held for sale in the Consolidated
Balance Sheet. Those businesses held at December 31, 2001 include: the Company's
interest in certain entertainment assets in Argentina, Anaheim, California and
Ottawa, Canada; its Metropolitan Entertainment subsidiary, a concert promotion
business (Metropolitan); and the Port-Authority related component of its
aviation fueling business. The other non-core business included in net assets
held for sale at December 31, 2001 was CGS, with a zero net asset value
resulting from a $0.4 million write-down in 2001.
The Company sold CGS in January 2002, but received no proceeds. In March 2002,
the Company closed on the sale of Metropolitan and received $3.1 million. In
March 2002, the Company signed a contract for the sale of Casino Iguazu (one of
the entertainment assets in Argentina) for $3.5 million in cash. The Company
expects to sell the remaining businesses during 2002. The successful completion
of the sales processes for remaining non-core assets and the actual amounts
received may be impacted by general economic conditions in the markets in which
these assets must be sold and necessary regulatory and third party consents.
Net assets held for sale at December 31, 2001 and 2000 (expressed in thousands
of dollars) were as follows:
2001 2000
---- ----
Current Assets $15,436 $ 73,237
Property, Plant and Equipment - Net 4,044 19,939
Other Assets 6,348 73,310
Notes Payable and Current Portion of Long-Term Debt (28,651)
Other Current Liabilities (18,859) (52,053)
Long-Term Debt (670)
Other Liabilities (347) (14,498)
------- --------
Net Assets Held for Sale $ 6,622 $ 70,614
======= ========
With the exception of the operations of Datacom and CGS, the operations of these
businesses are included in discontinued operations for the years ended December
31, 2000 and 1999. At December 31, 2000 the Company had substantially completed
the remaining unsold Aviation and Entertainment business as net assets held for
sale. Also, at December 31, 2000, the Company applied the provisions of SFAS No.
121 to the net assets held for sale. SFAS No. 121 requires assets held for sale
to be valued on an asset by asset basis at the lower of carrying amount or fair
value less costs to sell. In applying those provisions, Covanta management
considered recent appraisals, valuations, offers and bids, and its estimate of
future cash flows related to those businesses. As a result, the Company recorded
a pre-tax loss of $77.2 million in the year 2000. This amount relates entirely
to businesses previously classified in the Entertainment segment. This amount is
shown in write-down and obligations related to net assets held for sale in the
2000 Statement of Consolidated Operations and Comprehensive Loss. At December
31, 2000, the valuation provision of $3.7 million provided against them during
2000 was reversed in discontinued operations.
In accordance with the provisions of SFAS No. 121, the assets included in net
assets held for sale have not been depreciated commencing January 1, 2001, which
had the effect of decreasing the loss before income taxes in 2001 by
approximately $4.6 million.
During 2001, the Company sold several of these assets including its aviation
businesses in Spain, Italy and Colombia and the portion of its fueling business
that does not serve airports operated by the Port Authority of New York and New
Jersey (Non-Port Authority Fueling). Gross cash proceeds from the sales of
businesses that were included in net assets held for sale were approximately
$38.8 million during 2001.
During 2001, the Company had reached a definitive agreement to sell the portion
of its fueling business that is related to airports operated by the Port
Authority. However, given the impact of the events of September 11, 2001 on the
aviation industry and the Port Authority, no closing date was set for that Port
Authority component pending Port Authority approval of the sale. The Company is
reviewing this contract in light of its Chapter 11 filing.
The following is a list of Aviation businesses sold in 2001, the gross proceeds
from those sales and the realized gain or (loss) on those sales (in thousands of
dollars):
Description of Business Gross Proceeds Realized Gain (Loss)
- ----------------------- -------------- --------------------
Non-Port Authority Fueling $ 15,200 $ (4,026)
Colombia Airport Privatization 9,660 1,404
Rome, Italy Aviation Ground Operations 9,947 1,855
Spain Aviation Ground Operations 1,753 (261)
Aviation Fixed Base Operations 2,098 777
Other 197 (2,517)
--------- ----------
$ 38,855 $ (2,768)
========= ==========
The above realized loss of $2.8 million is included in net gain (loss) on sale
of businesses in the 2001 Statement of Consolidated Operations and Comprehensive
Loss.
During the year ended December 31, 2001, the Company also disposed of Datacom
and its Australian Venue Management operations. Those disposals resulted in no
cash proceeds. Accordingly, prior to those disposals, the Company recorded
write-downs of those two businesses based on negotiated sales prices, resulting
in pre-tax charges of $16.8 million and $2.0 million, respectively. Also,
various parcels of land and other assets held for sale were written down based
on the Company's estimates of sales prices, resulting in an additional charge of
$1.0 million.
At December 31, 2001, because of the economic turmoil and subsequent devaluation
of the peso in Argentina, the Company wrote down to zero its investments in the
La Rural exposition center, an entertainment venue in Argentina. The Company
also wrote down to a net realizable value of $2.4 million its investment in
Casino Iguazu in Argentina based on the status of negotiations evidenced by the
subsequent contract to sell the Casino for $3.5 million. The Company estimated
$1.1 million of costs to sell the Casino. These write-downs resulted in pre-tax
charges of $16.4 million and $4.5 million, respectively. In addition, at
December 31, 2001, the Company considered the status of current negotiations on
the potential sale of Metropolitan and the negative impact on the concert
business of the event of September 11, 2001,and wrote-down Metropolitan to $2.5
million resulting in a pre-tax charge of $5.4 million.
The carrying value of the Company's assets relating to the Arrowhead Pond, the
Centre and the Team (all as defined below) have been materially adversely
affected by events occurring at the end of 2001 and in 2002 to date. On December
21, 2001 the Company announced that its inability to access the capital markets,
the continuing delays in payment of remaining California energy receivables and
delays in the sale of aviation and entertainment assets had adversely impacted
Covanta's ability to meet cash flows covenants under its Master Credit Facility.
The Company also stated that the banks had provided a waiver for the covenants
only through January of 2002, had not agreed to provide the additional short
term liquidity the Company had sought and that the Company was conducting a
comprehensive review of its strategic alternatives.
On December 27, 2001 and January 11, 2002 the Company's credit rating was
reduced by Moody's and Standard & Poor's. These downgrades triggered
requirements to post in excess of $100 million in performance and other letters
of credit for Energy projects and for which the Company did not have available
commitments under its Master Credit Facility. Subsequently, the Company's credit
ratings were further reduced.
The Company required further waivers from its cash flow covenants under its
Master Credit Facility for the period after January 2002. On January 31, 2002
the Company announced that it had obtained waivers through the end of March
2002, subject, however, to its meeting stringent cash balance requirements set
by its banks.
Among other things, these cash balance requirements prevented the Company from
paying interest due on March 1, 2002 on its 9.25% Debentures. In addition, the
restrictions prevented contributions to the working capital needs of the Ottawa
Senators Hockey Club Corporation (the "Team") of the National Hockey League (the
"NHL"), the prime tenant of the Corel Centre near Ottawa, Canada (the "Centre").
These events resulted in draws during March 2002 of the letters of credit for
the $19.0 million and $86.2 million guarantees discussed below with respect to
the Team and the Centre, respectively. In return for drawing on the letters of
credit, the Company obtained an interest in the loans that had been secured by
the letters of credit that had been drawn.
On April 1, 2002, the Company filed for relief under Chapter 11 of the
Bankruptcy Code.
The events leading up to the bankruptcy filing and the filing itself have
materially adversely affected the Company's ability to manage the timing and
terms on which to dispose of its interests and related obligations with respect
to the Centre, the Team and the Arrowhead Pond, as described below.
With respect to the Centre and the Team, these events led to the termination, in
2002, of a pending sale of limited partnership interests and related
recapitalization of the Team that, if completed as contemplated, would have been
expected to stabilize the finances of the Team and Centre for a considerable
period of time. Given the Company's inability to fund short-term working capital
needs of the Team, and given the events described above, the Company is not in a
position to determine the timing and terms of disposition of the Team and the
Centre in a manner most advantageous to the Company. Currently, a process is
underway to dispose of both in connection with the NHL and the senior secured
lenders to the Team.
Based upon all currently available information, including an initial offer to
purchase dated June 20, 2002 and certain assumptions as to the future use, and
considering the factors listed above, the Company recorded a pre-tax impairment
charge as of December 31, 2001 of $140.0 million related to the Centre and the
Team.
The $140.0 million charge, which has been included in write-down of and
obligations related to net assets held for sale in the 2001 Statement of
Consolidated Operations and Comprehensive Loss, represents the Company's
estimate of the net cost to sell its interests in the Centre and Team and to be
discharged of all related obligations and guarantees. The resulting estimated
after tax cost of $118.8 million (net of tax of $21.2 million) has been included
in Obligations Related to Net Assets Held for Sale on the December 31, 2001
Consolidated Balance Sheet. However, in view of the proposed sales of these
interests, and the need for approval by the Bankruptcy Court, DIP lenders and
NHL of such transactions, uncertainty remains as to the actual amount of the
impairment.
The Company's guarantees at December 31, 2001 comprised a: (1) $19.0 million
guarantee of the Team's subordinated loan payable; (2) $86.2 million guarantee
of the senior term debt of the Centre; (3) $45.3 million guarantee of the senior
subordinated debt of the Centre for which $6.3 million in cash collateral has
been posted by the borrower; (4) $3.1 million guarantee of senior secured term
debt of the team; (5) guarantee of the interest payments on $37.7 million of
senior secured term debt of the Team; (6) guarantee to make working capital
advances to the Centre from time to time in amounts necessary to cover any
shortfall between certain operating cash flows, operating expenses and debt
service of the Centre; and (7) $17.5 million cost for terminated foreign
exchange currency swap agreements. The swap agreements had a notional amount of
$130.6 million and were entered into by the Centre related to the $86.2 million
senior term and $45.3 million senior subordinated debt. These swap agreements
had extended originally through December 23, 2002 but were terminated by the
counter-parties in May 2002.
The Company's guarantees arose during 1994, when a subsidiary of Covanta entered
into a 30-year facility management contract at the Centre pursuant to which it
agreed to advance funds to the Team, and if necessary, to assist the Centre's
refinancing of senior secured debt incurred in connection with the construction
of the Centre. In compliance with these guarantees, the Company entered into
agreements pursuant to which it was required to purchase the $19.0 million and
$86.2 million series of debt referred to above if such debt was not timely
refinanced or upon the occurrences of certain defaults. On March 12, 2002 the
holders of the secured subordinated debt of the Team required the Company to
purchase such debt in the total amount (together with accrued and unpaid
dividends) of $19.0 million. On March 14, 2002, the holders drew on a $19.0
million letter of credit for which the Company was the reimbursement party. On
March 22, 2002, as the result of defaults occurring in 2002, the holders of the
senior secured debt required the Company to purchase such debt in the total
amount (together with accrued and unpaid dividends) of $86.2 million. The
holders drew on a letter of credit on March 27, 2002 for which the Company was
the reimbursement party to fund the purchase. The remaining series of
subordinated secured debt of the Centre in the amount of $45.3 million is also
subject to a put right pursuant to the terms of the underlying agreements. But
such subordinated secured debt has not been put to the Company, although the
holder has the right to do so. The obligation to purchase such debt is not
secured by a letter of credit.
In addition to the $140.0 impairment charge, and following the termination of
the pending sale of limited partnership interests discussed above, the Company
also recorded a pre-tax charge of $5.5 million at December 31, 2001 to fully
reserve against receivables due from the Team. The $5.5 million charge has been
included in Other Operating Costs and Expenses in the 2001 Statement of
Consolidated Operations and Comprehensive Loss.
The events set forth above have also materially adversely affected the Company's
ability to manage the timing and terms on which to dispose of its interest and
related obligations in the Arrowhead Pond in Anaheim, California (the "Arrowhead
Pond"). The Company's limited ability to fund short term working capital needs
at the Arrowhead Pond under the DIP credit facility and the need to resolve the
bankruptcy case may create the need to dispose of the Arrowhead Pond presently
when Mighty Ducks attendance and the concert business, a prime driver of
revenues, is in substantial decline and attendance at the building is not at
levels consistent with past experience. Based upon all currently available
information, including a recently received valuation and certain assumptions as
to the future use, and considering the effects of the events set forth above,
the Company recorded an impairment charge as of December 31, 2001 of $74.4
million related to the Company's interest in the Arrowhead Pond.
The $74.4 million charge, which has been included in write-down of and
obligations related to net assets held for sale in the 2001 Consolidated
Statement of Consolidated Operations and Comprehensive Loss, represents the
write-off of the $16.4 million previous carrying amount at that date and the
Company's $58.0 million estimate of the net cost to sell its interests in the
long-term management agreement discussed in the following paragraph. The
resulting estimated net after tax cost to sell of $37.1 million (net of tax of
$20.9) has been included in Obligations Related to Net Assets Held for Sale on
the December 31, 2001 Consolidated Balance Sheet. However, in view of the
proposed sales of this interest, and the need for approval by the Bankruptcy
Court and DIP Lenders of such transactions, uncertainty remains as to the actual
amount of the impairment.
A subsidiary of the Company is the manager of the Arrowhead Pond under a
long-term management agreement. The Company and the City of Anaheim are parties
to a reimbursement agreement to the financial institution which issued a letter
of credit in the amount of approximately $117.2 million which provides credit
support for Certificates of Participation issued to finance the Arrowhead Pond
project. As part of its management agreement, the manager is responsible for
providing working capital to pay operating expenses and debt service (including
swap exposure and reimbursement of the lender for draws under the letter of
credit including draws related to an acceleration by the lender of all amounts
payable under the reimbursement agreement) if the revenues of Arrowhead Pond are
insufficient to cover these costs. The Company has guaranteed the obligations of
the manager. The City of Anaheim has given the manager notice of default under
the management agreement. In such notice, the City indicated that it did not
propose to exercise its remedies at such time.
The Company is also the reimbursement party on a $26.0 million letter of credit
and a $1.5 million letter of credit relating to a lease transaction for
Arrowhead Pond. The $26.0 million letter of credit, which is security for the
lease investor, can be drawn upon the occurrence of an event of default. The
$1.5 million letter of credit is security for certain indemnification payments
under the lease transaction documents. The lease transaction documents require
the Company to provide additional letter of credit coverage from time to time.
The additional amount required for 2002 is estimated to be approximately $11.5
million, which the Company has not provided. Notices of default have been
delivered in 2002 under the lease transaction documents. As a result of the
default, parties may exercise remedies, including drawing on letters of credit
and recovering fees to which the manager may be entitled for managing Arrowhead
Pond.
The Company's exposure upon the occurrence of an event of default under the
lease transaction is estimated to be approximately $37.5 million, which is
secured by the $26.0 million letter of credit among other things. The Company is
also obligated to fulfill its indemnification obligations under the lease
transaction documents, the amount of which cannot be determined at this time.
Such indemnification obligations are secured in part by the $1.5 million letter
of credit. The parties to the lease transaction have agreed to delay the
exercise of remedies for the existing defaults until October 21, 2002. The
Company is exploring alternatives and no additional impairment charge related to
the lease transaction for the Arrowhead Pond was considered necessary at
December 31, 2001.
All of the above pre-tax SFAS No. 121 charges are included in write-down of net
assets held for sale in the 2001 Statement of Consolidated Operations and
Comprehensive Loss.
2001 VS. 2000
Continuing Operations: Revenues from continuing operations for 2001 were $62.8
million higher than 2000, primarily reflecting an increase in Other segment
revenues of $47.1 million, and an increase in Energy segment revenues of $14.1
million.
Service revenues in 2001 increased $6.2 million compared to 2000. Energy service
revenues decreased $54.0 million compared to 2000 primarily due to a decrease of
$72.0 million related to the environmental consulting business, which was sold
in November 2000. This decrease was partially offset by an increase of $18.0
million due mainly to contractual annual escalation adjustments at many plants,
increases in the supplemental waste business, and a water service operating
agreement with the City of Bessemer, Alabama which began in October 2000. The
Other segment's service revenues increased $60.1 million mainly due to the
inclusion in continuing operations of $65.6 million related to unsold Aviation
and Entertainment businesses in 2001 which were included in discontinued
operations in 2000, partially offset by a decrease of $5.5 million due to the
sale of Applied Data Technology, Inc. ("ADTI") in 2000.
Electricity and steam sales revenues increased $66.4 million compared to 2000,
attributable mainly to the Samalpatti and Madurai projects in India commencing
operation in 2001, and increased production and favorable energy pricing
experienced primarily at plants in California as well as increased pricing
experienced at certain waste-to-energy plants with merchant energy capacity.
Equity in income of investees and joint ventures decreased $6.4 million compared
to the year ended December 31, 2000. That decrease is primarily attributable to
decreases at joint ventures in California experiencing lower contractual energy
rates and a write-down of assets recorded at a joint venture in Bolivia
resulting from closing down part of a generating facility due to lower demand in
that country, partially offset by an increase in earnings at the Quezon project
in the Philippines, which commenced operations in the second quarter of 2000.
Construction revenues decreased $6.3 million compared to 2000. The decrease is
attributable to the completion of the retrofit construction activity mandated by
the Clean Air Act Amendments of 1990, the decision to wind down activities in
the civil construction business, and the completion of construction of a
wastewater project in the third quarter of 2000, partially offset by the
commencement of the Tampa Bay water desalination project in 2001, and increased
activity in Dual Sand(TM) contracts in 2001.
Other sales - net decreased $14.0 million compared to 2000 due to decreased
activity in the operations of Datacom, which was sold in the fourth quarter of
2001.
Other revenues - net increased $18.6 million versus 2000. Other revenues in 2001
included $19.7 million of insurance settlement proceeds and other matters
related to the Lawrence, Massachusetts facility, $5.7 million of development
fees received and other matters related to the Quezon plant in the Philippines,
insurance proceeds of $1.4 million related to a wastewood plant, and insurance
proceeds of $2.8 million relating to sold Aviation and Entertainment businesses.
2000 included a $12.2 million insurance settlement related to the Lawrence
facility.
Net loss on sale of businesses for 2001 included the loss of $4.0 million on the
sale of the Non-Port Authority portion of the Aviation fueling business, and a
$2.0 million loss on the sale of the Australian venue management businesses.
These losses were partially offset by a $1.9 million gain on the sale of the
aviation ground handling operations at the Rome, Italy airport, a gain of $.8
million representing an adjustment on the sale of the Aviation fixed base
operations, and a gain of $1.4 million on the sale of the Company's interest in
the airport privatization business in Colombia, South America. The net loss on
sale of businesses in 2000 included a loss of $1.0 million on the sale of ADTI.
Total costs and expenses increased by $193.4 million in 2001, compared to 2000,
due mainly to the increased write-down of and obligations related to net assets
held for sale of $183.6 million.
The Energy's segment's plant operating expenses decreased by $19.5 million in
2001 compared to 2000. Plant operating expenses decreased due primarily to a
decrease of $61.6 million in the environmental consulting business, which was
sold in November 2000 and the net reversal of allowances for doubtful accounts
of $2.6 million in 2001 related to receivables from California utilities
compared to provisions of $6.2 million in 2000 (see Liquidity/Cash Flow below).
That decrease was partially offset by increased fuel costs attributable to
higher natural gas and oil prices, higher generation, primarily at waste-wood
plants in California, $33.1 million of increased expenses due to the
commencement of operations at the Samalpatti and Madurai projects, and the
commencement of operations at a wastewater project.
Construction costs decreased by $4.1 million in 2001 compared to 2000. The
decrease is due to the completion of the retrofit construction activity mandated
by the Clean Air Act Amendments of 1990, completion of the construction of a
wastewater project in the third quarter of 2000, and a decrease in the civil
construction business (which business management anticipates will cease in
2002), partially offset by an increase due to the commencement of construction
of the water desalination project, and increased activity in Dual Sand(TM)
contracts in 2001.
Depreciation and amortization expense decreased by $8.3 million in 2001 compared
to 2000. This decrease is primarily related to a $13.8 million decrease in
Corporate and Other segment depreciation and amortization, which in 2000
included $11.4 million of accelerated amortization of a new data processing
system. Also, Energy's depreciation and amortization expense increased by $5.6
million in 2001 compared to 2000 primarily due to commencement of operation of
the Samalpatti and Madurai projects in 2001, partially offset by the effect of
accelerated depreciation in 2000 related to certain air pollution control
equipment being replaced in connection with the Clean Air Act Amendments of
1990.
Debt service charges increased by $2.4 million in 2001 compared to 2000. The
increase is primarily due to project debt outstanding related to the Samalpatti
and Madurai projects, which were not consolidated in 2000, partially offset by
lower debt service expense due to lower project debt related to various
facilities caused by redemption and maturity of bonds. The Energy segment had
one interest rate swap agreement outstanding that resulted in additional debt
service expense of $2.2 million and $1.1 million for 2001 and 2000,
respectively.
Other operating costs and expenses for 2001 increased $43.1 million due to
activity in the Other segment. This increase was due mainly to the inclusion in
continuing operations of unsold Aviation and Entertainment businesses in 2001,
which were included in discontinued operations in 2000. This increase was
partially offset by the effect of the sale of ADTI in 2000 and the sale of
Datacom in November 2001.
Costs of goods sold for 2001 decreased $4.6 million compared to 2000 due mainly
to the sale of Datacom in November 2001.
Selling, administrative and general expenses for 2001 increased $9.2 million
compared to 2000. This increase is due mainly to the inclusion in continuing
operations of the unsold Aviation and Entertainment businesses in 2001. That
increase was partially offset by a decrease in corporate overhead expenses that
was fundamentally the result of a decrease in most overhead costs due to the
wind-down of the Company's New York office. Selling, administrative and general
expenses for the Energy segment decreased $6.8 million compared to 2000
principally due to the sale in November 2000 of the environmental consulting
business.
Project development expenses in 2001 increased by $8.8 million from 2000. The
increase is mainly due to the write-off of development costs related to an
energy project in California, offset by a decrease in overhead and other costs
related to other development, mainly in the Asian market.
Other expenses - net decreased $17.4 million compared to 2000. This decrease is
due mainly to costs incurred in 2000 of $18.0 million representing creditors'
fees and expenses incurred in connection with the waiver by certain creditors of
certain covenants and the extension of credit through November 2000, and $4.8
million representing fees and expenses incurred in connection with financing
efforts to support the then-proposed recapitalization plan. 2000 also included
$16.6 million related to Energy's cost-reduction plan and a $2.8 million
impairment write-down of one project in China. In 2001, the effect of these 2000
costs was partially offset by the amortization of $25.5 million of the Company's
costs in securing its Revolving Credit and Participation Agreement (the
Agreement) in March 2001 and subsequent amendments. Such costs are being
amortized through March 2002.
Interest expense - net in 2001 decreased $5.1 million compared to 2000.
Corporate interest expense-net decreased $2.4 million primarily due to lower
average debt outstanding and lower rates on variable-rate debt, partially offset
by a decrease in interest income on cash balances. The Energy segment's interest
expense-net decreased by $3.9 million in 2001 compared to 2000 due mainly to
interest income on cash balances and a decrease in interest expense caused
mainly by payments on debt, primarily debt associated with the Quezon project.
That debt was fully paid in March 2001. These decreases were partially offset by
the Other segment's interest expense-net which increased $1.3 million due to the
inclusion in continuing operations of the unsold Aviation and Entertainment
businesses in 2001.
The effective tax rate for 2001 was 7.1% compared to 29.7% for 2000. The lower
effective rate in 2001 was primarily due to increased pre-tax losses in the
current year including certain write-downs of and obligations related to net
assets held for sale and dispositions for which tax benefits were not recognized
through a valuation allowance offset by increased tax expense related to higher
foreign income in 2001. See Note 23 to the Consolidated Financial Statements for
a more detailed reconciliation of variances from the Federal statutory income
tax rate.
Discontinued Operations: In 2000, the loss from discontinued operations totaled
$143.7 million. The loss before interest and taxes from discontinued operations
was $169.5 million, primarily reflecting net losses of $97.0 million on the
disposal of Aviation and Entertainment businesses, legal, accounting, consulting
and overhead expenses incurred in connection with the discontinuance of those
businesses, and accelerated depreciation in connection with shortened estimated
useful lives of management information systems.
Property, plant and equipment - net increased $111.9 million during 2001 due
mainly to the acquisition of majority ownership interests in two energy project
companies causing the consolidation of those companies, which were previously
accounted for under the equity method.
2000 VS. 1999
Continuing Operations: Revenues from continuing operations for 2000 were $7.7
million lower than 1999, primarily reflecting a decrease in Corporate and Other
segment revenues of $33.7 million, partially offset by an increase in Energy
segment revenues of $26.0 million.
Service revenues in 2000 decreased $13.4 million compared to 1999. Energy
service revenues increased $4.4 million compared to 1999 primarily due to
increased production and contractual annual escalation adjustments at many
plants aggregating $7.6 million, offset by a decrease of $3.2 million in the
environmental consulting business that was sold in November 2000. The Other
segment's service revenues decreased $17.8 million mainly due to the sale of
ADTI in the first quarter of 2000.
Electricity and steam sales revenue increased $71.0 million compared to 1999
attributable mainly to increased production and to favorable energy pricing
experienced primarily at power plants in California, including incremental
revenues from the acquisition of the remaining interest in a California plant
during the second quarter of 1999. The commencement of operations during 1999 of
projects in Thailand and the Philippines, as well as increased pricing
experienced at certain waste-to-energy plants with merchant energy capacity,
also contributed to the overall increase in this category.
Equity in income of investees and joint ventures increased $11.1 million
compared to the year ended December 31, 1999. Approximately $9.4 million of the
increase is attributable to the commencement of operations of projects in Asia.
The remaining increase is mainly due to increased generation at existing
projects.
Construction revenues decreased $50.1 million compared to 1999. The decrease is
attributable to the near completion of the retrofit construction activity
mandated by the Clean Air Act Amendments of 1990, the decision to wind down
activities in the civil construction business and the completion of a wastewater
project in 2000.
Other sales - net decreased $9.7 million due mainly to reduced activity in the
operations of Datacom associated with the Chapter 11 bankruptcy filing in March
2000 of Genicom Corporation (Genicom), its major customer.
Other revenues-net decreased $9.9 million from 1999. Other revenues in 2000
included $12.2 million and in 1999 included $7.8 million of insurance
settlements relating to the Lawrence, Massachusetts facility. 1999 also included
a gain on the sale of an investment of $5.1 million and a $9.2 million gain on
the termination and restructuring of the Tulsa, Oklahoma facility's operating
contract.
Net gain (loss) on sale of businesses in 2000 includes a $1.1 million loss on
the sale of ADTI. 1999 includes a $5.7 million gain on the sale of a joint
venture interest.
Total costs and expenses increased by $65.6 million in 2000 compared to 1999.
The increase reflects an increase in the Energy segment of $10.0 million and an
aggregate increase in Corporate and the Other segment of $55.6 million.
The Energy segment's plant operating expenses increased by $54.1 million in 2000
compared to 1999 due primarily to a full year of consolidated operations in 2000
related to the acquisition of the remaining interest in a California plant and a
full year of operations in 2000 of plants in the Philippines and Thailand, both
of which commenced commercial operations during the second quarter of 1999.
Construction costs decreased by $46.5 million in 2000 compared to 1999. This
decrease is due in part to the decline in the civil construction business, which
business management anticipates will cease in 2001, the near completion of the
retrofit construction activity mandated by the Clean Air Act Amendments of 1990
and the completion of a wastewater project in 2000.
Depreciation and amortization expense increased by $8.9 million in 2000 compared
to 1999. This increase is primarily related to an increase in Corporate
depreciation and amortization of $6.2 million due mainly to the accelerated
amortization of a new data processing system. Also, the Energy segment's
depreciation and amortization increased $2.6 million compared to 1999 primarily
due to a full year of operating results in 2000 (versus a partial year in 1999)
at the plant in California and the commencement of operations of the plants in
the Philippines and Thailand.
Debt service charges decreased $3.7 million in 2000 compared to 1999. This
amount includes a $6.9 million decrease due to lower project debt outstanding on
various facilities caused by redemption and maturity of bonds, partially offset
by an increase of $3.2 million due to a full year of expense related to
commencement of operations of the plants in the Philippines and Thailand that
began operations during 1999. The Energy segment had one interest rate swap
agreement outstanding that resulted in additional debt service expense of $1.1
million and $1.7 million for 2000 and 1999, respectively. The effect of this
swap on the weighted-average interest rate of project debt was not significant.
Other operating costs and expenses decreased $.9 million from 2000 due to
activity in the Other segment. This decrease was mainly associated with lessened
activity at ADTI of $1.7 million as a result of its sale and the write-off of
goodwill related to ADTI in 1999 of $7.8 million. In addition, operating costs
and expenses at Datacom decreased by $4.0 million primarily due to write-downs
in 1999 of obsolete inventory, receivables and other assets totaling $15.2
million, partially offset by a write-down of receivables in 2000 of $6.5 million
and higher costs related to the bankruptcy of Genicom. These decreases were
partially offset by $8.7 million of accruals for workers' compensation insurance
related to other sold businesses.
Costs of goods sold decreased $23.7 million compared to 1999 due in part to
activity in the Other segment. Costs of goods sold at ADTI decreased $12.6
million because of its sale in 2000. Datacom's costs of goods sold decreased
$10.7 million due mainly to lessened activity caused by the Genicom bankruptcy
filing.
Selling, administrative and general expenses decreased $23.2 million compared to
1999 mainly due to unallocated corporate overhead expenses. This decrease is
fundamentally the result of a decrease in Corporate severance and an employment
contract termination settlement together totaling $33.0 million and a decrease
in most other overhead costs due to the wind down of the New York headquarters
office. These decreases were partially offset by an increase in professional
fees relating to the sale of non-core business and related issues of $5.1
million. Selling, administrative and general expenses for the Energy and Other
segments remained relatively constant.
Project development expenses increased $1.2 million from 1999. The overall
increase is due primarily to increased development activities in domestic and
European markets during 2000.
Other expenses - net increased $22.2 million compared to 1999, including an
increase in the Energy segment of $.7 million and an increase in Corporate of
$21.5 million. In 2000, other expenses - net in the Energy segment included a
charge of approximately $16.6 million related to the cost reduction plan
approved and effected in December 2000, whereby the Company decided to
reorganize its operating structure and to redirect its development spending
program away from the Asian markets. This has resulted in overhead reductions
both domestically and internationally and the announced closure of the Company's
Hong Kong headquarters. In addition, in 2000 an impairment write-off was taken
of approximately $2.8 million related to one project in China. The 1999 amount
includes asset impairment charges of approximately $28.4 million related to the
environmental consulting and engineering business that was sold in November 2000
at approximately its revised carrying value. In late 1999, the Company approved
a plan for disposition of its subsidiary, Ogden Environmental and Energy
Services Company, Inc. (OEES). OEES consisted of a construction business, an
environmental consulting and engineering business, and a separate Spanish
environmental construction and engineering business. Since no potential buyer
could be found for the entire OEES business, the Company decided to dispose of
each part of the OEES business separately. As such, the Company performed tests
for impairment in accordance with Statement of Financial Accounting Standards
(SFAS) No. 121 of each business and, based on the estimated sale prices of those
businesses, determined that goodwill related to the U.S. construction business
and the U.S. environmental consulting and engineering business should be written
down to zero, resulting in a $20.0 million charge. The fixed assets of those
businesses were also written down by $1.8 million based on the same rationale.
The Company also received an offer from a potential buyer of the Spanish
business and, therefore, based on the estimated net realizable value indicated
by that offer, wrote down goodwill related to that business and fixed assets of
that business by $3.0 million and $1.6 million, respectively. Covanta also
estimated $2.0 million for costs to sell all three parts of the business in
determining their net realizable value. That was partially offset by income of
$9.0 million related to the reversal of allowances for doubtful accounts
previously established that were no longer required because the Company
purchased the previously unowned interest in the power plant to which these
reserves related. As a result of that purchase, the Company was able to control
certain leased assets of the power plant, which ultimately made payment by the
power plant of those related receivables likely. Other expenses - net at
Corporate in 2000 include $18.0 million of creditors' fees and expenses and $4.8
million representing fees and expenses incurred in connection with financing
efforts to support the Company's balance sheet recapitalization plan (see
Liquidity/Cash Flow below).
Write-down of net assets held for sale of $77.2 million represents the
write-down to estimated fair value (less costs to sell) of the non-core
businesses previously included in the Entertainment segment. The Company applied
the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" to all the net assets held
for sale. SFAS No. 121 requires assets held for sale be valued on an asset by
asset basis at the lower of carrying amount or fair value less costs to sell. In
applying those provisions, the Company considered recent appraisals, valuations,
offers and bids, and in some cases, its estimate of future cash flows related to
those businesses.
Interest expense - net increased $4.7 million from 1999. The Energy segment's
interest expense - net increased $4.9 million from 1999 due to higher average
debt outstanding. Corporate interest expense - net decreased $.7 million
compared to 1999. Corporate interest expense in 2000 increased $3.4 million due
primarily to increased borrowing on the Company's revolving line of credit, and
higher rates on adjustable rate debt. Corporate interest income in 2000
increased $4.1 million due mainly to interest earned on proceeds from sales of
assets partially offset by interest earned in 1999 on proceeds from an energy
contract repayment.
The effective tax rate for 2000 was 29.7% compared with 18.7% for 1999. This
increase of 11.0% representing tax benefits was primarily due to the write-off
in 1999 of goodwill for which the Company did not have any tax basis, lower
foreign taxes and lower non-deductible foreign losses in 2000, partially offset
in 2000 by a valuation allowance relating to tax assets resulting from the
write-down of assets held for sale. Note 23 to the Consolidated Financial
Statements contains a more detailed reconciliation of variances from the Federal
statutory income tax rate.
Discontinued Operations: Losses from discontinued operations for 2000 were
$143.7 million, representing a decrease in earnings of $101.8 million from the
comparable period of 1999. Loss before interest and taxes from discontinued
operations was $169.5 million in 2000 compared to $37.2 million in 1999. This
$132.3 million decrease in income was primarily associated with losses on the
sales of businesses in 2000 of $97.0 million compared to the gains on the sales
of businesses in 1999 of $16.8 million. Businesses sold include Entertainment's
Food and Beverage/Venue Management business, and the Themed Attractions/Parks
business, and Aviation's Ground Handling business and Fixed Based Operations
business. In addition, Aviation's operations, exclusive of sales of businesses,
decreased $22.2 million primarily due to increased overhead costs of $9.2
million representing mainly professional fees relating to the sale of
businesses, decreases in the fueling business of $4.9 million representing
higher insurance costs and lower activity at certain locations, decreases in the
ground services business of $16.7 million caused mainly by lower results in
Europe, Asia and domestic operations and an increase in workers' compensation
expense of $6.1 million, partially offset by a decrease in severance charges of
$13.7 million. Entertainment's operations, exclusive of sales of businesses,
decreased $3.6 million compared to 1999. This is primarily due to decreases in
the Food and Beverage/Venue Management business of $10.4 million and the Themed
Attractions/Parks business of $16.6 million primarily as a result of those
businesses being sold. The decrease also includes increased overhead costs of
$3.6 million representing mainly professional fees relating to the sale of
businesses, an increase in workers' compensation expense of $3.7 million and in
1999 a $7.2 million gain on a series of food and beverage/venue management
contract buyouts. These decreases are partially offset by a decrease in
severance charges of $12.1 million and in 1999 a charge of $10.5 million
relating to a non-refundable deposit and related expenditures for the proposed
purchase of Volume Services America ("VSA"). In addition, in 1999, the Company
reached agreements to sell its interest in the Grizzly Nature Center and its
interest in a casino operation in Aruba, resulting in losses of $4.0 million and
$2.5 million, respectively. In 1999, the Company also wrote off unrecoverable
contract acquisition costs at two sport facilities, $5.0 million related to the
Great Western Forum and $1.5 million related to the U.S. Air Arena, both of
which had ceased to be utilized by professional sports teams. The Company also
abandoned its casino development activities in South Africa resulting in charges
of $7.3 million.
In addition to the Energy segment's swap, the Company had three interest rate
swap agreements covering notional amounts of $1.6 million (decreasing to zero),
$2.7 million and $2.8 million (both amortizing to $2.1 million on their
termination dates) during 2000. The first swap agreement expired in November
2000 and was entered into to convert Entertainment's $1.6 million variable rate
debt to a fixed rate. The other swap agreements, which were denominated in Hong
Kong dollars and were terminated in November 2000, were entered into to convert
Aviation's $7.5 million variable rate debt to a fixed rate. During 1999 the
Company also had three other interest rate swaps outstanding with a total
notional amount of $3.5 million which expired in September and October 1999.
These agreements resulted in additional interest expense in 2000 and 1999 of $.4
million and $.5 million, respectively, including $.2 million in 2000 for
terminating those swaps. These amounts were included in discontinued operations.
The effect of these swap agreements on the weighted average interest rate was
not significant.
CAPITAL INVESTMENTS AND COMMITMENTS: For the year ended December 31, 2001,
capital investments for continuing operations amounted to $61.5 million,
substantially all of which was for Energy.
At December 31, 2001, capital commitments for continuing operations amounted to
$7.0 million for normal replacement and growth in Energy. Other capital
commitments for Energy as of December 31, 2001 amounted to approximately $12.9
million. This amount includes a commitment to pay, in 2008, $10.6 million for a
service contract extension at an energy facility. In addition, this amount
includes $2.3 million for an oil-fired project in India, which commenced
operations in September 2001.
The Company's contractual obligations, including debt and leases, as of December
31, 2001 are as follows (expressed in thousands of dollars):
Payments Due by Period
----------------------
Less than 4 to 5 After
Total one year 1 to 3 years years 5 years
----- -------- ------------ ------- -------
Total Long-Term Debt $1,727,184 $126,201 $262,910 $241,997 $1,096,076
Less: Non-Recourse Long-Term Debt (1,415,493) (113,112) (240,581) (241,527) (820,273)
Convertible Subordinated Debentures 148,650 148,650
Total Operating Leases 548,468 43,333 74,492 61,562 369,081
Less: Non-Recourse Operating Leases (420,277) (36,298) (62,382) (46,979) (274,618)
Obligations Related to Net Assets held 198,000 198,000
for Sale
Other Long-Term Obligations 170,785 93,555 10,807 66,423
-------- -------- -------- ------- --------
Total Contractual Obligations $957,317 $366,774 $127,994 $25,860 $436,689
======== ======== ======== ======= ========
The Company's other commitments as of December 31, 2001 are as follows
(expressed in thousands of dollars):
Commitments Expiring by Period
------------------------------
Less than More than
Total one year one year
----- -------- --------
Standby Letters of Credit $279,216 $279,216 $
Surety Bonds 166,270 83,754 82,516
Guarantees 162,946 113,374 49,572
-------- -------- --------
Total Other Commitments $608,432 $476,344 $132,088
======== ======== ========
See below, Liquidity/Cash Flow and the Notes to the Consolidated Financial
Statements for a description of the Company's contractual and other commitments
as of December 31, 2001.
In addition, Covanta and certain of its subsidiaries have issued or are party to
performance bonds and guarantees and related contractual obligations undertaken
mainly pursuant to agreements to construct and operate certain energy,
entertainment and other facilities. In the normal course of business, they also
are involved in legal proceedings in which damages and other remedies are
sought. (See Liquidity/Cash Flow below.)
The Company is engaged in ongoing investigation and remediation actions with
respect to three airports where it provides aviation fueling services on a
cost-plus basis pursuant to contracts with individual airlines, consortia of
airlines and operators of airports. The Company currently estimates the costs of
those ongoing actions will be approximately $1.0 million (over several years),
and that airlines, airports and others should reimburse it for substantially all
these costs. To date, the Company's right to reimbursement for remedial costs
has been challenged successfully in one prior case in which the court found that
the cost-plus contract in question did not provide for recovery of costs
resulting from the Company's own negligence. That case did not relate to any of
the airports described above. Except in that instance and one other, the Company
has not been alleged to have acted with negligence. The Company has also agreed
to indemnify various transferees of its divested airport operations with respect
to certain known and potential liabilities that may arise out of such operations
and in certain instances has agreed to remain liable for certain potential
liabilities that were not assumed by the transferee. Accordingly, the Company
may in the future incur liability arising out of investigation and remediation
actions with respect to airports served by such divested operations to the
extent the purchaser of these operations is unable to obtain reimbursement of
such costs from airlines, airports or others. To date such indemnification has
been sought with respect to one airport. Because the Company did not provide
fueling services at that airport, it does not believe it will have significant
obligations with respect to this matter. The Company is currently reviewing the
potential impact of its filing under Chapter 11 on its exposure for these
liabilities.
LIQUIDITY/CASH FLOW: Net cash provided by operating activities for 2001 was
$87.0 million compared to cash used in operating activities in 2000 of $58.7
million, resulting in an increase of $145.7 million due to changes in working
capital and other liabilities.
Net cash used in investing activities of continuing operations was $28.8 million
lower than 2000 primarily relating to an increase in proceeds from the sales of
businesses and other of $15.6 million, and a decrease in investments in and
advances to joint ventures of $15.5 million and an increase in distributions
from investees and joint ventures of $21.7 million. These decreases in cash used
in investing activities were partially offset by a decrease in proceeds from the
sales of marketable securities of $6.6 million, a decrease in proceeds from the
sale of property, plant and equipment of $8.9 million, and an increase in
capital expenditures of $6.5 million.
Net cash used in financing activities was $69.8 million in 2001 compared to cash
used in financing activities of $268.2 million in 2000. This decrease of $198.4
million in cash used is due primarily to cash released from restricted cash of
$194.1 million in 2001. That increase is partially offset by an increase in net
debt payments of $166.5 million, and an increase of $23.9 million in funds held
in trust.
In addition, cash provided from discontinued operations totaled $346.4 million
in 2000 representing mainly proceeds from the sales of Aviation and
Entertainment businesses partially offset by operating losses of discontinued
operations. During the years ended December 31, 2001 and 2000, the Company
substantially completed the sales of its Aviation and Entertainment businesses.
The following is a list of Aviation and Entertainment businesses sold in 2001
and 2000 and the gross cash proceeds from those sales:
Description of Business Gross Proceeds
(In millions)
-------------
2001
----
Non-Port Authority Fueling $ 15
Colombia Airport Privatization 10
Rome, Italy Aviation Ground Operations 10
Spain Aviation Ground Operations 2
Aviation Fixed Base Operations 2
====
Total 2001 Gross Proceeds $ 39
====
2000
----
Food and Beverage/Venue Management $223
Aviation Ground Handling 96
Parks and Themed Attractions 38
Argentina Airport Privatization 27
Aviation Fixed Base Operations 16
Fairmount Racetrack 15
Dominican Republic Airport Privatization 3
Other Businesses 4
----
Total 2000 Gross Proceeds $422
====
In connection with the above sales, the Company also reduced its debt by
approximately $120 million. The Company also incurred $11.0 million in costs
associated with disposing of certain other assets.
The Company also sold certain other businesses. In 2001, the Company sold
Datacom and its Australian venue management businesses, but received no
proceeds.
The following is a list of other businesses sold in 2000 and the gross cash
proceeds from those sales:
Gross Proceeds
(In millions)
--------------
Environmental Consulting and Engineering (OEES) $15
Applied Data Technology, Inc. 5
---
Total Gross Proceeds $20
===
In connection with several of the above sales, the Company is also entitled to
certain deferred payments, subject to certain contingencies. In addition, the
Company has contingent obligations under most of the related sale agreements in
respect to liabilities arising before and, in some cases, after the consummation
of the sale, for environmental, personal injury, contractual claims and similar
matters.
At December 31, 2001, the Company had approximately $88.9 million in cash and
cash equivalents, of which
$2.1 million related to net assets held for sale and $22.2 million related to
cash held in foreign bank accounts and that could be difficult to transfer to
the U.S.
As previously reported, the Company entered into a revolving credit and
participation agreement (the "Master Credit Facility") on March 14, 2001. The
Master Credit Facility is secured by substantially all of the Company's assets
and matured on May 31, 2002 without being fully discharged by the DIP Credit
Facility discussed below. This, along with non-compliance with certain required
financial ratios also discussed below and possible other items, has caused the
Company to be in default of its Master Credit Facility. However, on April 1,
2002, the Company and 123 of its subsidiaries each filed a voluntary petition
for relief under Chapter 11 of the Bankruptcy Code that, among other things,
will address these events of default.
In connection with that action, the Company and most of its subsidiaries,
including some that have not filed for relief under Chapter 11, have entered
into a Debtor In Possession Credit Agreement (as amended, the "DIP Credit
Facility") with the lenders who provided the revolving credit facility under the
Master Credit Facility. On April 5, 2002, the Bankruptcy Court issued its
interim order approving the debtor in possession financing which was confirmed
in a final order dated May 15, 2002, subject to the objection of holders of
limited interests in two joint venture partnerships who are dispute the
inclusion of those companies in the DIP Credit Facility. The bankruptcy court
has taken these objections under advisement and has not indicated when it will
render a decision. The DIP Credit Facility terms are described below.
The DIP Credit Facility, which provides for the continuation of approximately
$240.0 million of letters of credit previously provided under the Master Credit
Facility and a $48.2 million liquidity facility, is secured by all of the
Company's domestic assets not subject to liens of others and generally 65% of
the stock of certain of its foreign subsidiaries. Obligations under the DIP
Credit Facility will have senior status to other prepetition secured claims and
the DIP Credit Facility is now the operative debt agreement with the Company's
banks. The Master Credit Facility remains in effect to determine the rights of
the lenders who are a party to it with respect to obligations not continued
under the DIP Credit Facility.
As of December 31, 2001, letters of credit had been issued in the ordinary
course of business under the Master Credit Facility for the Company's benefit
using up most of the available line. The Master Credit Facility also provided
for the coordinated administration of certain letters of credit issued in the
normal course of business to secure performance under certain energy contracts
(totaling $208 million), letters of credit issued to secure obligations relating
to the Entertainment businesses (totaling $267 million) largely with respect to
the Anaheim and Corel projects described above under "Capital Investments and
Commitments," letters of credit issued in connection with the Company's
insurance program (totaling $40 million), and letters of credit used for credit
support of the Company's equity bonds (totaling $127 million). Of these letters
of credit, approximately $361 million secured indebtedness included in the
Company's balance sheet and $87 million relate to other obligations that are
reflected in the Notes to the financial statements. These letters of credit are
generally available for drawing upon if the Company defaults on the obligations
secured by the letters of credit or fails to provide replacement letters of
credit as the current ones expire. The balance of $194 million relates
principally to the Company's obligation under Energy contracts to pay damages.
Letters of credit supporting liabilities with respect to the Corel Centre and
Ottawa Senators team were drawn for a total amount of approximately $105.2 in
March 2002.
Beginning in April 2002 and pursuant to the Company's Chapter 11 filing,
Trustees for the Company's adjustable rate revenue bonds declared the principal
and accrued interest on such bonds due and payable immediately. Accordingly,
letters of credit supporting these bonds have been drawn in the amount of $125.1
million and the Company is presently not able to reissue these bonds.
The financial covenants of the Master Credit Facility provide limits on (I)
the ratio of (a) the sum of Consolidated Operating Income (as shown in the
Consolidated Statements of Operations), plus LOC Fees (defined in the Master
Credit Facility as letter of credit fees, commitment fees, and amortization of
agency and termination fees) to the extent included in Operating Income, and
Minority Interest (as shown on the Consolidated Statement of Operations and
Comprehensive Loss) to (b) the total interest expense on the Company's
indebtedness, plus LOC Fees, less interest income. (II) the ratio of the
Company's net indebtedness to adjusted Earnings Before Interest and Taxes
("EBIT") as defined, for the four quarters ended December 31, 2001, and (III)
the sum of capital stock, capital surplus and earned surplus as shown on the
Company's Consolidated Balance Sheets. The Master Credit Facility provided that
for the first quarter of 2001, consolidated net worth must exceed the amount of
consolidated net worth shown on the Company's Consolidated Balance Sheet as of
December 31, 2000. For each succeeding quarter, the permitted minimum net worth
is increased by 75% of the Company's consolidated net income (but not net loss)
for such quarter.
At the time the Master Credit Facility was executed, the Company had believed
that it would be able to meet the liquidity covenants in the Master Credit
Facility, timely discharge its obligations on maturity of the Master Credit
Facility and repay or refinance its convertible subordinated debentures from
cash generated by operations, the proceeds from the sale of its non-core
businesses and access to the capital markets. However, a number of factors in
2001 and 2002 affected these plans, including:
(1) The sale of non-core assets took longer and yielded substantially
less proceeds than anticipated;
(2) The power crisis in California substantially reduced the Company's
liquidity in 2001 as a result of California utilities' failures to
pay timely for power purchased from the company; and
(3) A general economic downturn during 2001 and a tightening of credit
and capital markets, particularly for energy companies which were
substantially exacerbated by the bankruptcy of Enron Corporation.
(See ENERGY INDUSTRY CONDITIONS under MARKETS, COMPETITION AND
GENERAL BUSINESS CONDITIONS)
As a result of a combination of these factors in 2001 and early 2002, the
Company was forced to obtain seven amendments to the Master Credit Facility.
Also, because of the California energy crisis, analyses raising doubt about the
financial viability of the independent power industry, the Enron crisis, the
decline in financial markets as a result of the events of September 11, 2001 and
the drop in the demand for securities of independent power companies, the
Company was unable to access capital markets.
In 2001, the Company also began a wide-ranging review of strategic alternatives
given the very substantial maturities in 2002, which far exceed the Company's
cash resources. In this connection, throughout the last six months of 2001 and
the first quarter of 2002, the Company sought potential minority equity
investors, conducted a broad-based solicitation for indications of interest in
acquiring the Company among potential strategic and financial buyers and
investigated a combined private and public placement of equity securities. On
December 21, 2001, in connection with a further amendment to the Master Credit
Facility, the Company issued a press release stating its need for further
covenant waivers and for access to short term liquidity. Following this release,
the Company's debt rating by Moody's and Standard & Poor's was reduced below
investment grade on December 27, 2001 and January 16, 2002, respectively. These
downgrades further adversely impacted the Company's access to capital markets
and triggered the Company's commitments to provide $100 million in additional
letters of credit in connection with two waste-to-energy projects and the draws
during March of 2002 of approximately $105.2 million in letters of credit
related to the Corel Centre and Ottawa Senators. Despite the Company's
wide-range search for alternatives, ultimately the Company was unable to
identify any option which satisfied its obligations outside the Chapter 11
process. On March 1, 2002, the Company availed itself of the 30-day grace period
provided under the terms of its 9.25% debentures due March 2022, and did not
make the interest payment due March 1, 2002 at that time.
On April 1, 2002 the Company publicly announced that as a result of the review
the Company:
(1) Determined that reorganization under the Bankruptcy Code
represents the only viable venue to reorganize the Company's
capital structure, complete the disposition of its remaining
non-core entertainment and aviation assets, and protect the value
of the energy and water franchise;
(2) Entered into a non-binding Letter of Intent with the investment
firm of Kohlberg Kravis Roberts & Co. ("KKR") for a $225 million
equity investment under which a KKR affiliate would acquire the
Company upon emergence from Chapter 11; and
(3) Announced a strategic restructuring program to focus on the U.S.
energy and water market, expedite the disposition of non-core
assets and, as a result, reduce overhead costs.
On April 1, 2002, Covanta Energy Corporation and 123 of its subsidiaries, each a
debtor in possession (the "Debtors"), filed for protection under the Bankruptcy
Code and accordingly did not make the interest payment on the 9.25% debentures
due at that time.
The rights of Covanta's creditors will be determined as part of the Chapter 11
process. Existing common equity and preferred shareholders are not expected to
participate in the new capital structure or realize any value.
In connection with its bankruptcy filing, the Company entered into DIP Credit
Facility, as amended.
The DIP Credit Facility comprises two tranches. The Tranche A Facility provides
the Company with a credit line of approximately $48.2 million, divided into $34
million commitments for cash borrowings under a revolving credit line and $14.2
million commitments for the issuance of certain letters of credit. The Tranche B
Facility consists of approximately $240 million commitments solely for the
extension of, or issuance of letters of credit to replace certain existing
letters of credit.
Amounts available for cash borrowing under the Tranche A Facility are subject to
monthly and budget limits. The Company may utilize the amount available for cash
borrowings under the Tranche A Facility to reimburse the issuers of letters of
credit issued under the Tranche A Facility if and when such letters of credits
are drawn, to fund working capital requirements and general corporate purposes
of the Company relating to the Company's post-petition operations and other
expenditures in accordance with a monthly budget and applicable restrictions
typical for a Chapter 11 debtor in possession financing.
Under the DIP Credit Facility, the Company will pay a one-time facility fee
equal to 2% of the amount of Tranche A commitments.
In addition, the Company will pay a commitment fee varying depending on
utilization, between .50% and 1% of the unused Tranche A commitments. The
Company will also pay a fronting fee for each Tranche A and Tranche B letter of
credit equal to the greater of $500 and 0.25% of the daily amount available to
be drawn under such letter of credit, as well as letter of credit fees of 3.25%
on Tranche A letters of credit, and 2.50% on Tranche B letters of credit fee,
calculated over the daily amount available for drawings thereunder.
Outstanding loans under the Tranche A Facility and the Tranche B Facility bear
interest at the Company's option at either the prime rate plus 2.50% or the
Eurodollar rate plus 3.50%.
The DIP Credit Facility contains covenants, which restrict (1) the incurrence of
additional debt, (2) the creation of liens, (3) investments and acquisitions,
(4) contingent obligations and performance guarantees and (5) disposition of
assets. In addition, the Company must comply with certain specified levels of
budget, financial and reporting covenants. The Company is currently in
compliance with these covenants, other than certain reporting requirements.
The DIP Credit Facility matures on April 1, 2003, but may, with the consent of
DIP Lenders holding more than 66-2/3% of the Tranche A Facility, be extended for
two additional periods of six months each. There are no assurances that the DIP
lenders will agree to an extension. At maturity, all outstanding loans under the
DIP Credit Facility must be repaid, outstanding letters of credit must be
discharged or cash-collateralized, and all other obligations must be satisfied
or released.
The Company believes that the DIP Credit Facility, when taken together with the
Company's own funds, provide it sufficient liquidity to continue to operate its
core businesses during the Chapter 11 proceeding. Moreover, the legal provisions
relating to Chapter 11 proceedings are expected to provide a legal basis for
maintaining the Company's business intact while it is being reorganized.
However, the outcome of the Chapter 11 proceedings and, if necessary, the
renewal of the DIP Credit are not within the Company's control and no assurances
can be made with respect to the outcome of these efforts.
In the Chapter 11 Cases, the Debtors obtained several orders from the Bankruptcy
Court which were intended to enable the Debtors to operate in the normal course
of business during the Chapter 11 Cases. These orders (i) permit the Debtors to
operate their consolidated cash management system during the Chapter 11 Cases in
substantially the same manner as it was operated prior to the commencement of
the Chapter 11 Cases, (ii) authorize payment of certain pre-petition employee
salaries, wages, health and welfare benefits, retirement benefits and other
employee obligations, (iii) authorize payment of pre-petition obligations to
certain critical vendors to aid the Debtors in maintaining the operation of
their businesses, (iv) authorize the use of cash collateral and grant adequate
protection in connection with such use, and (v) authorize post-petition
financing.
The Company executed an agreement for sale of the Aviation fueling business in
July 2001. The Company completed the sale of the Non-Port Authority portion of
its Aviation fueling business in December 2001. The successful completion of the
sales processes for remaining non-core assets and the actual amounts received
may be impacted by general economic conditions in the markets in which these
assets must be sold and necessary regulatory and third party consents.
On March 28, 2002, following approval from the Master Credit Facility lenders,
three of the Company's subsidiaries sold their interests in two power plants and
an operating and maintenance contractor based in Thailand. The total sale price
for all three interests of approximately $35.0 million is less than the net
carrying value of the interests of approximately $57.7 million. The Company,
therefore, expects to realize a net loss of approximately $23.6 million on this
sale, after deducting costs relating to the sale.
At December 31, 2001, the Company had no intention of selling these Thai assets
or any other Asian Energy assets. Subsequently, a determination was made to sell
the Thai assets to generate liquidity. The Company may consider a variety of
different strategies as the Bankruptcy process proceeds.If the Company were to
adopt a formal plan to sell its remaining Asian portfolio in the current market
environment, there would be an impairment charge, currently not determinable,
for a significant portion of the $255.1 million net book value at December 31,
2001. The ultimate sale of these assets, if any, would be subject to approval by
the DIP Credit Facility lenders and the Bankruptcy Court.
Receivables from California Utilities:
Events in the California energy markets affected the state's two largest
utilities and resulted in delayed payments for energy delivered by the Company's
facilities in late 2000 and early 2001. Pacific Gas & Electric Company ("PG&E")
and Southern California Edison Company ("SCE") both suspended payments under
long term power purchase agreements in the beginning of 2001.
On March 26, 2001 the California Public Utilities Commission ("CPUC") approved a
substantial rate increase and directed the utilities to make payments to
suppliers for current energy deliveries. SCE has made payments for energy
delivered since March 26, 2001. On April 6, 2001, PG&E filed for protection
under Chapter 11 of the U.S. Bankruptcy Code. Since that time PG&E is also in
compliance with the CPUC order and is making payments for current energy
deliveries.
In mid-June the CPUC issued an order declaring as reasonable and prudent any
power purchase amendment at a certain fixed-price for a five-year term. On June
18, 2001 and July 31, 2001 the Company entered into several agreements and
amendments to power purchase agreements with SCE which contained the CPUC
approved pricing for a term of five years, to commence upon the occurrence of
events relating to improvements in SCE's financial condition. In addition, in
June 2001, SCE paid 10% of the outstanding receivables and agreed to a timetable
by which the remaining 90% would be paid, which outstanding amount will earn
interest.
The agreements with SCE contemplated the passage of legislation by the
California State Legislature or other actions that would trigger payment to the
Company. In late October 2001, SCE reached a settlement of a lawsuit brought
against the CPUC concerning the CPUC's failure to allow SCE to pass cost
increases through to its ratepayers. The settlement achieved the same goals as
the proposed legislation, which was to provide a path for SCE to achieve
creditworthiness. The SCE agreements are not impacted by the settlement except
for the timing of the payment of past due amounts and the start of the fixed
price period for energy sales. The settlement was approved by the Federal Court.
A consumer group requested a stay pending an appeal, which request was denied.
In July 2001, the Company also entered into agreements with similar terms with
PG&E. These agreements also contain the CPUC approved price and term, both of
which were effective immediately. Unlike SCE, PG&E made no cash payments but did
agree that the amount owed to the Company will earn interest at a rate to be
determined by the Bankruptcy Court. PG&E agreed to assume the Company's power
purchase agreements and elevate the outstanding payables to priority
administrative claim status. The Bankruptcy Court approved the agreements, the
power purchase agreements and the assumption of the contracts on July 13, 2001.
On October 30, 2001, the Company transferred $14.9 million of the outstanding
PG&E receivables for $13.4 million to a financial institution. Of this amount,
$8.5 million (which related to receivables not subject to pricing disputes with
PG&E) was paid immediately cash. The balance, $4.9 million (which related to
receivables to which there are pricing disputes) was placed in escrow until the
resolution of those disputes, the payment of the receivables by PG&E, or the
conclusion of the PG&E bankruptcy. The remaining of $1.5 million represents the
10% discount charged by the financial institution.
On December 6, 2001, the Company transferred $30.9 million of outstanding SCE
receivables for $28.8 million to a financial institution. Of this amount $21.7
million (which related to receivables not subject to pricing disputes with SCE)
was paid in immediate cash. The balance (which related to receivables to which
there are pricing disputes) was placed in escrow until the earlier of the
resolution of the pricing disputes or the achievement by SCE of credit
worthiness. The remaining $2.1 million represents the 6.75% discount charged by
the financial institution. On March 1, 2002, after securing certain financing,
SCE paid all outstanding receivables due to the Company. The $7.1 million in
escrow was also released to the Company on March 1, 2002. All Company litigation
pending against SCE in connection with past due receivables has been withdrawn.
On January 31, 2002, all but one of the Company's facilities in the PG&E service
territory entered into Supplemental Agreements with PG&E whereby PG&E agreed to
the amount of the prepetition payable owed to each facility, the rate of
interest borne by the payable and a payment schedule. PG&E agreed to make twelve
monthly installments commencing on February 28, 2002. The Bankruptcy Court
approved the Supplemental Agreements and the first five installments have been
received by the Company between February 28, 2002 and June 28, 2002. The
escrowed amount of $4.9 million will remain in escrow until the financial
institution is paid in full.
SCE paid 100% of their past due receivables on March 1, 2002, and PG&E has paid
five-twelfths of their past due receivables through June 28, 2002, in accordance
with an agreed-upon twelve-month payment schedule. The Company believes it will
ultimately receive payment of all these outstanding receivables. Therefore, at
December 31, 2001, the Company reversed approximately $15.8 million of the
reserves leaving $3.6 million. That remaining reserve applies to the discount
incurred by the Company in transferring the receivables since that amount of the
receivables will not be collected. Upon receipt of those payments from SCE and
PG&E, the Company also reversed $27.9 million of the liabilities recorded upon
the transfer of the receivables, leaving a liability balance of $2.3 million on
June 30, 2002. As of December 31, 2001, the Company had outstanding gross
receivables from these two utilities of approximately $71.6 million (including
the Company's 50% interest in several partnerships). The Company believes it
will ultimately receive payments in full of the net amount of these receivables.
During 2001, the Company received all of the principal permits necessary to
commence construction on a 500 MW gas-fired project in California. However, due
to the significant changes in the California energy markets as well as in its
own financial situation, in late December 2001 the Company decided to delay
project implementation until California market conditions improve and wrote-off,
as project development expenses in the Statement of Consolidated Operations and
Comprehensive Loss, approximately $24.5 million of costs associated with this
project. These costs primarily related to turbine purchase deposits and related
termination fees, permit, viability, other development costs, and other assets
under construction.
Other:
In 1998, the Company's Board of Directors increased the authorization to
purchase shares of the Company's common stock up to a total of $200 million.
Through December 31, 2001, 2.2 million shares of common stock were purchased for
a total cost of $58.9 million. No shares were purchased during 2001 or 2000.
In addition, the Company suspended its common stock dividend in the third
quarter of 1999.
The Company adopted Statement of Position ("SOP") 98-5 "Reporting on the Costs
of Start-Up Activities" on January 1, 1999. This SOP established accounting
standards for these costs and requires that they generally be expensed as
incurred. The effect of adopting the SOP is shown as a cumulative effect of a
change in accounting principle and is reflected as a net charge to income of
$3.8 million in 1999.
On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended and interpreted,
establishes accounting and reporting standards for derivative instruments,
including certain derivatives embedded in other contracts, and for hedging
activities. All derivatives are required to be recorded in the balance sheet as
either an asset or liability measured at fair value, with changes in fair value
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows derivative gains and losses
to offset related results on the hedged item in the Statement of Consolidated
Operations and Comprehensive Loss, and require that a company must formally
document, designate and assess the effectiveness of derivatives that receive
hedge accounting.
The Company's policy is to enter into derivatives to protect the Company against
fluctuations in interest rates and foreign currency exchange rates as they
relate to specific assets and liabilities. The Company's policy is to not enter
into derivative instruments for speculative purposes.
The Company identified all derivatives within the scope of SFAS No. 133. The
adoption of SFAS No. 133 did not have a material impact on the results of
operations of the Company and increased both assets and liabilities recorded on
the balance sheet by approximately $12.3 million. The $12.3 million relates to
the Company's interest rate swap agreement that economically fixes the interest
rate on certain adjustable rate revenue bonds reported in the Project Debt
category "Revenue Bonds Issued by and Prime Responsibility of Municipalities."
The asset and liability recorded on January 1, 2001 were increased by $.9
million during the year ended December 31, 2001, to adjust for an increase in
the swap's fair value to $13.2 million at December 31, 2001. The swap agreement
was entered into in September 1995 and expires in January 2019. Any payments
made or received under the swap agreement, including fair value amounts upon
termination, are included as an explicit component of the client community's
obligation under the related service agreement. Accordingly, all payments under
the swap agreement are a pass-through to the client community.
Under the swap agreement, the Company will pay an average fixed rate of 9.8% for
2001 through January 2005 and 5.18% thereafter through January 2019, and will
receive a floating rate based on current municipal interest rates, similar to
the rate on the adjustable-rate revenue bonds, unless certain triggering events
occur (primarily credit events), which result in the floating rate converting to
either a set percentage of LIBOR or a set percentage of the BMA Municipal Swap
Index, at the option of the swap counterparty. In the event the Company
terminates the swap prior to its maturity, the floating rate used for
determination of settling the fair value of the swap would also be based on a
set percentage of one of these two rates at the option of the counterparty. For
the years ended December 31, 2001 and 2000, the floating rates on the swap
averaged 2.46% and 4.09%, respectively. The notional amount of the swap at
December 31, 2001 and 2000 was $80.2 million and is reduced in accordance with
the scheduled repayments of the applicable revenue bonds.
An energy client community and the Company have several commercial disputes
between them. Among these is a January 16, 2002 demand by the client community
to provide a credit enhancement to a service agreement in the form of a $50
million letter of credit or a guarantee, following rating downgrades of the
Company's unsecured corporate debt. On February 22, 2002, the client community
issued a notice purporting to terminate its contract with the Company effective
May 30, 2002 if such a credit enhancement was not provided, and also demanded an
immediate payment of $2.0 million under the terms of the agreement. The Company
believes such notice was improper and has commenced a lawsuit in state court
with respect to such disputes, as well as the client community's right to
terminate. This matter has been removed to Federal court. The client community
has moved to have the case remanded to State Court and the Company has moved to
have the action transferred to the Bankruptcy Court. These matters have been
taken under advisement by the court.
The Company's agreement with another energy client also provides that following
these rating downgrades of the Company's unsecured corporate debt, the client
may, if it does not receive from the Company a $50.0 million letter of credit by
January 31, 2003, either terminate the agreement or receive a $1.0 million
reduction of its annual service fee obligation. The bankruptcy proceeding
described above stays the client's right to terminate under the agreement.
Off Balance Sheet Arrangements:
The Company currently is party to several lease arrangements with unrelated
parties under which it rents energy generating facilities, including a
sale-leaseback. The Company uses operating lease treatment for these
arrangements. See Notes 12, 24 and 30 to the Consolidated Financial Statements
for additional information regarding these leases.
The Company has investments in several equity method investees and joint
ventures and does not consolidate the financial information of those companies.
See Note 4 to the Consolidated Financial Statements for summarized financial
information for those investees and joint ventures.
Significant Accounting Policies:
The Company prepares its Consolidated Financial Statements in accordance with
accounting principles generally accepted in the United States of America. In
preparing those financial statements, the Company must make certain assumptions
and estimates that it believes reasonable based on available information. Those
assumptions and estimates affect the reported amounts in the Consolidated
Financial Statements. The significant accounting policies, which the Company
believes are most critical to understanding and evaluating its reported
financial results include Net Assets Held for Sale, and Related Obligations,
Revenue Recognition, Long-Lived Assets, and Property, Plant and Equipment.
The Company evaluates net assets held for sale based on its estimate of their
fair value less costs to sell. That fair value is based on estimated sales
prices derived from signed sales contracts, the status of current negotiations
for the sale of such assets and recent appraisals. The actual ultimate amount of
sale proceeds realized might be less than the currently estimated sales prices
and could have a material adverse effect on the carrying value of those assets
and on the Company's operating results and financial condition.
The Company recognizes revenues generally under contractual arrangements.
Service revenues primarily include fees for cost-plus contracts and other types
of contracts. Subsidiaries engaged in governmental contracting recognize
revenues from cost-plus-fixed-fee contracts on the basis of direct costs
incurred plus indirect expenses and the allocable portion of the fixed fee.
Revenues under time and material contracts are recorded at the contracted rates
as the labor hours and other direct costs are incurred. Revenues under
fixed-price contracts are recognized on the basis of the estimated percentage of
completion of services rendered. Service revenues also include the fees earned
under contracts to operate and maintain energy facilities and to service the
facilities' debt, with additional fees earned based on excess tonnage processed
and energy generation. Service revenues also represent fees for environmental
consulting and engineering services rendered under various contracts and the
operation and maintenance of water and wastewater facilities. Revenue from the
sale of electricity and steam are earned at energy facilities and are recorded
based upon output delivered and capacity provided at rates specified under
contract terms or prevailing market rates. Long-term unbilled service
receivables related to energy operations are discounted in recognizing the
present value for services performed currently. Subsidiaries engaged in
long-term construction contracting record income on the percentage-of-completion
method of accounting and recognize income as the work progresses. Anticipated
losses on contracts are recognized as soon as they become known. Sales of
product are recognized when goods are shipped to customers and title to such
goods passes to customers. A significant change in those revenue recognition
policies, or a change in accounting principles generally accepted in the United
States could have a material impact on the Company's recorded operating results
and financial condition.
The Company evaluates long-lived assets based on its projection of undiscounted
cash flows whenever events or changes in circumstances indicate that their
carrying amounts may not be recoverable. The projection of future undiscounted
cash flows used to test recoverability of long-lived assets is based on expected
cash flows from the use and eventual disposition of those long-lived assets. If
the carrying value of such assets is greater than the future undiscounted cash
flows of those assets, the Company would measure the impairment amount as the
difference between the carrying value of the assets and the discounted present
value of the cash flows to be generated by those assets. Long-lived assets to be
disposed of are evaluated in relation to the estimated fair value of such assets
less costs to sell. A significant reduction in actual cash flows and estimated
cash flows could have a material adverse effect on the carrying value of those
assets and on the Company's operating results and financial condition.
Property, plant and equipment is recorded at cost and is depreciated over its
estimated useful life. The estimated useful life of the Company's energy
generation facilities is up to 50 years. A significant decrease in the estimated
useful life of any individual facility or group of facilities could have a
material adverse impact on the Company's operating results in the period in
which the estimated useful life is revised and subsequent periods.
Changes in Accounting Principles:
The Company implemented SFAS No. 133 based on the current rules and guidance in
place as of January 1, 2001 and has applied the guidance issued since then by
the Derivative Implementation Group of the Financial Accounting Standards Board
("FASB").
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB No.101 provides guidance on the recognition, presentation, and
disclosure of revenue, and was implemented by the Company in the quarter ending
December 31, 2000. There was no impact from adoption of SAB No.101 on the
Company's financial position or results of operations.
New Accounting Pronouncements:
In June 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS No.
141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and prohibits use of the pooling-of-interests
method. The adoption of SFAS No. 141 had no impact on the Company's financial
position and results of operation.
In June 2001, the FASB also issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which is effective January 1, 2002. SFAS No. 142 requires upon adoption
the discontinuance of goodwill amortization, which the Company estimates would
have been $.8 million in the year ending December 31, 2002. In addition, the
standard includes provisions for the reclassification of certain existing
recognized intangibles as goodwill, reassessment of the useful lives of existing
recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the identification of reporting units for
purposes of assessing potential future impairments of goodwill. SFAS No. 142
also requires the Company to complete a transitional goodwill impairment test
within six months of the date of adoption and to evaluate for impairment the
carrying value of goodwill on an annual basis thereafter. The Company is in the
process of performing that test and has not yet determined the effect of that
requirement upon adoption of SFAS No. 142 on its financial position and results
of operations. Identifiable intangible assets with finite lives will continue to
be amortized over their useful lives and reviewed for impairment in accordance
with SFAS No.144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," discussed below.
Also in June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which is effective for the Company on January 1, 2003.
SFAS No. 143 requires that a liability for asset retirement obligations be
recognized in the period in which it is incurred if it can be reasonably
estimated. It also requires such costs to be capitalized as part of the related
asset and amortized over such asset's remaining useful life. The Company is
currently assessing, but has not yet determined, the effect of adoption of SFAS
Nos. 143 on its financial position and results of operations.
In August 2001, the FASB issued SFAS No. 144. The Company adopted SFAS No. 144
on January 1, 2002. SFAS No. 144 replaces SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
and establishes accounting and reporting standards for long-lived assets to be
disposed of by sale. SFAS No. 144 applies to all long-lived assets, including
discontinued operations. SFAS No. 144 requires that those assets be measured at
lower of carrying amount or fair value less cost to sell. It also broadens the
reporting of discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity that will be
eliminated from the ongoing operations of the entity in a disposal transaction.
The adoption of SFAS No. 144 did not have a material effect on its financial
position and results of operations.
Any statements in this communication, which may be considered to be
"forward-looking statements," as that term is defined in the Private Securities
Litigation Reform Act of 1995, are subject to certain risk and uncertainties.
The factors that could cause actual results to differ materially from those
suggested by any such statements include, but are not limited to, those
discussed or identified from time to time in the Company's public filings with
the Securities and Exchange Commission and more generally, general economic
conditions, including changes in interest rates and the performance of the
financial markets; changes in domestic and foreign laws, regulations, and taxes;
changes in competition and pricing environments; and regional or general changes
in asset valuations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the Company is party to financial instruments
that are subject to market risks arising from changes in interest rates, foreign
currency exchange rates, and commodity prices. The Company's use of derivative
instruments is very limited and it does not enter into derivative instruments
for trading purposes. The following analysis provides quantitative information
regarding the Company's exposure to financial instruments with market risks.
Covanta uses a model to evaluate the sensitivity of the fair value or cash flows
of financial instruments with exposure to market risk that assumes
instantaneous, parallel shifts in exchange rates and interest rate yield curves.
There are certain limitations inherent in the sensitivity analysis presented,
primarily due to the assumption that exchange rates change in a parallel manner
and that interest rates change instantaneously. In addition, the fair value
estimates presented herein are based on pertinent information available to
management as of December 31, 2001. Since December 31, 2001, the Company's
credit rating has deteriorated. However, the sensitivity analyses presented do
not reflect any changes due to the deterioration in that credit rating, and
therefore, the interest rate spreads and discount rates used to determine the
cash flows and fair values of the Company's debt may differ significantly from
those that would be used based on current information. Further information is
included in Note 30 "Fair Value of Financial Instruments" to the Consolidated
Financial Statements.
Interest Rate Risk
The Company has long-term debt and project debt outstanding that subject it to
the risk of increased interest expense due to rising market interest rates on
floating rate debt, or an adverse change in fair value due to declining interest
rates on fixed rate debt. Of the Company's total long-term debt, approximately
$150 million was floating rate at December 31, 2001. Of the project debt,
approximately $330 million was floating rate at December 31, 2001. However, of
that floating rate project debt, $130 million related to waste-to-energy
projects where, because of their contractual structure, interest rate risk is
borne by our Client Communities since debt service is passed through to those
clients. Although the Company has from time to time entered into financial
instruments to reduce the impact of changes in interest rates, the Company had
only one interest rate swap outstanding at December 31, 2001 in the notional
amount of $80 million related to floating rate project debt. Gains and losses on
this swap are for the account of the client community.
For floating rate debt, a hypothetical increase in December 31, 2001 market
interest rates of 20 percent would result in a potential loss to twelve month
future earnings of $3 million. For fixed rate debt, the potential loss in fair
value from a hypothetical decrease in December 31, 2001 market interest rates of
20 percent would be approximately $50 million. The fair value of the Company's
fixed rate debt (excluding $750 million in fixed rate debt related to revenue
bonds in which debt service is an explicit component of the service fees billed
to the client communities) was $700 million at December 31, 2001, and was
determined using average market quotations of price and yields provided by
investment banks.
Foreign Currency Exchange Rate Risk
The Company has investments in Energy projects in various foreign countries,
including the Philippines, China, India, Thailand, and Bangladesh, and to a much
lesser degree, Italy, Spain, Bolivia and Costa Rica. The Company does not enter
into currency transactions to hedge its exposure to fluctuations in currency
exchange rates. Instead, the Company attempts to mitigate its currency risks by
structuring its project contracts so that its revenues and fuel costs are
denominated in U.S. dollars, or so that its revenues are indexed to the U.S.
dollar. This leads the Company to treat the U.S. dollar as the functional
currency at most of its international projects. Therefore, only local operating
expenses are exposed to currency risks.
Certain exceptions to this exist. At December 31, 2001, the Company has $36
million of project debt denominated in Thai Baht in connection with the
Sahacogen project in Thailand. Exchange rate fluctuations related to this debt
are recorded as adjustments to the recorded amount of the debt and as foreign
currency gains and losses included in net income. At December 31, 2001, the
Company also has $91 million of project debt denominated in India Rupee related
to two diesel-fired projects in India. Exchange rate fluctuations on $26 million
of the debt (related to a project whose functional currency in the US Dollar)
are recorded as adjustments to the recorded amount of the debt and as foreign
currency gains and losses included in net income. For the remaining $65 million
(related to a project whose functional currency is the India Rupee), exchange
rate fluctuations are recorded as adjustments to the recorded amount of the debt
and as adjustments to the cumulative translation adjustment account within
stockholders' equity on the Company's Consolidated Balance Sheet. These are the
only significant debt denominated in foreign currencies.
The potential loss in fair value for such financial instruments from a 10%
adverse change in December 31, 2001 quoted foreign currency exchange rates would
be approximately $14 million.
At December 31, 2001, the Company also had net investments in foreign
subsidiaries and projects. Since the Company viewed these investments as long
term at December 31, 2001, the Company would not expect any gain or loss to be
realized in the near term.
Commodity Price Risk
The Company has not entered into futures, forward contracts, swaps or options to
hedge purchase and sale commitments, fuel requirements, inventories or other
commodities. The Company attempts to mitigate the risk of market fluctuations of
energy and fuel by structuring contracts related to its Energy projects as fixed
price contracts so that energy sales and fuel costs are "locked in" for the same
term. Certain power sales agreements related to domestic projects provide for
energy sales prices linked to the "avoided costs" of producing such energy and,
therefore, fluctuate with various economic factors. The Company is exposed to
commodity price risk at those projects. At other plants, fuel costs are
contractually included in our electricity revenues, or fuel is provided by our
customers. Also, at most of our waste-to-energy facilities, commodity price risk
is mitigated in that either most commodity costs used in the operation of those
facilities are borne by our client communities, or our service revenues are
adjusted to reflect fluctuations in various price indices which are indicative
of, in part, changes in prices of natural gas, electricity, auxiliary fuel, and
the cost of certain commodities used in the operation of those facilities.
Generally, the Company is protected against fluctuations in the cost of waste
disposal (i.e., tip fees) through long term disposal contracts at its
waste-to-energy facilities. At three owned waste-to-energy facilities, differing
amounts of waste disposal capacity are not subject to long-term contracts and,
therefore, the Company is exposed to the risk of fluctuations in tip fees.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX
Statements of Consolidated Operations and Comprehensive Loss
for the Years ended December 31, 2001, 2000, and 1999
Consolidated Balance Sheets - December 31, 2001 and 2000
Statements of Shareholders' Equity for the Years
ended December 31, 2001, 2000, and 1999
Statements of Consolidated Cash Flows
for the Years ended December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements
Independent Auditors' Report
Report of Management
Quarterly Results of Operations
Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
for the Years ended December 31, 2001, 2000 and 1999
All other schedules are omitted because they are not applicable or not
required, or because the required information is included in the
consolidated financial statements or notes thereto.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
Covanta Energy Corporation (Debtor in Possession) and Subsidiaries
STATEMENTS OF CONSOLIDATED OPERATIONS
AND COMPREHENSIVE LOSS
- ------------------------------------------------------------------------------------------------------------
For the years ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------
(In Thousands of Dollars, Except Per Share Amounts)
Service revenues.......................................... $ 583,727 $ 577,564 $ 590,924
Electricity and steam sales............................... 358,871 292,514 221,476
Equity in income from unconsolidated investments.......... 17,665 24,088 13,005
Construction revenues..................................... 63,052 69,341 119,455
Other sales-net........................................... 31,343 45,329 54,997
Other-net................................................. 30,877 12,233 22,171
Net gain (loss) on sale of businesses..................... (2,768) (1,067) 5,665
---------- ---------- ----------
Total revenues............................................ 1,082,767 1,020,002 1,027,693
---------- ---------- ----------
Plant operating expenses.................................. 520,021 539,482 485,406
Construction costs........................................ 70,124 74,271 120,757
Depreciation and amortization............................. 102,065 110,325 101,470
Debt service charges-net.................................. 87,120 84,727 88,439
Other operating costs and expenses........................ 72,575 29,446 30,317
Costs of goods sold....................................... 37,173 41,809 65,460
Selling, administrative and general expenses.............. 83,624 74,416 97,658
Project development expenses.............................. 33,326 24,483 23,300
Other-net................................................. 26,086 43,445 21,220
Write-down of and obligations related to net assets
held for sale........................................ 260,866 77,240
---------- ---------- ----------
Total costs and expenses.................................. 1,292,980 1,099,644 1,034,027
---------- ---------- ----------
Consolidated operating loss............................... (210,213) (79,642) (6,334)
Interest expense (net of interest income of
$8,164, $9,496, and $4,790, respectively)............ (30,246) (35,347) (30,697)
---------- ---------- ----------
Loss from continuing operations before income taxes,
minority interests and the cumulative effect of
change in accounting principle....................... (240,459) (114,989) (37,031)
Income taxes.............................................. 17,030 34,149 6,917
Minority interests........................................ (7,598) (4,781) (6,176)
---------- ---------- ----------
Loss from continuing operations........................... (231,027) (85,621) (36,290)
Loss from discontinued operations (net of income
taxes of: 2000, ($29,263); and 1999, $6)............. (143,664) (41,851)
Cumulative effect of change in accounting principle
(net of income taxes of $1,313)...................... (3,820)
---------- ---------- ----------
Net loss.................................................. (231,027) (229,285) (81,961)
---------- ---------- ----------
Other Comprehensive Income (Loss), Net of Income Tax:
Foreign currency translation adjustments (net of
income taxes of: ($1,443), $1,858 and zero,
respectively)........................................ (3,976) (8,015) (4,631)
Less: reclassification adjustment for translation adjustments
included in: loss from continuing operations......... 7,048
loss from discontinued operations....... 25,323
Unrealized Gains (Losses) on Securities:
Unrealized holding losses arising during period........... (60)
Less: reclassification adjustment for losses (gains)
included in net loss................................. (150) 275
Minimum pension liability adjustment...................... 409 (102) 409
---------- ---------- ----------
Other comprehensive income (loss)......................... 3,481 17,056 (4,007)
---------- ---------- ----------
Comprehensive loss........................................ $ (227,546) $ (212,229) $ (85,968)
========== ========== ==========
Basic Loss Per Share:
Loss from continuing operations........................... $ (4.65) $ (1.73) $ (0.74)
Loss from discontinued operations......................... (2.90) (0.85)
Cumulative effect of change in accounting principle....... (0.08)
---------- ---------- ----------
Net Loss.................................................. $ (4.65) $ (4.63) $ (1.67)
========== ========== ==========
Diluted Loss Per Share:...................................
Loss from continuing operations........................... $ (4.65) $ (1.73) $ (0.74)
Loss from discontinued operations......................... (2.90) (0.85)
Cumulative effect of change in accounting principle....... (0.08)
---------- ---------- ----------
Net Loss.................................................. $ (4.65) $ (4.63) $ (1.67)
========== ========== ==========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Covanta Energy Corporation (Debtor in Possession) and Subsidiaries
CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------------
ASSETS December 31, 2001 2000
- ---------------------------------------------------------------------------------------------------------
(In Thousands of Dollars, Except Share and Per Share Amounts)
Current Assets:
Cash and cash equivalents................................................ $ 86,773 $ 80,643
Restricted cash.......................................................... 194,118
Restricted funds held in trust........................................... 93,219 96,280
Receivables (less allowances: 2001, $16,444 and 2000, $19,234)........... 306,712 247,914
Deferred income taxes.................................................... 27,500 36,514
Prepaid expenses and other current assets................................ 102,470 77,239
Net assets held for sale................................................. 6,622 70,614
---------- ----------
Total current assets..................................................... 623,296 803,322
Property, plant and equipment-net........................................ 1,901,311 1,789,430
Restricted funds held in trust........................................... 167,009 157,061
Unbilled service and other receivables................................... 150,825 155,210
Unamortized contract acquisition costs-net............................... 82,325 88,702
Goodwill and other intangible assets-net................................. 18,317 14,944
Investments in and advances to investees and joint ventures.............. 183,231 223,435
Other assets............................................................. 59,512 66,724
---------- ----------
Total Assets............................................................. $3,185,826 $3,298,828
========== ==========
Liabilities and Shareholders' Equity
Liabilities:
Current Liabilities:
Current portion of long-term debt........................................ $ 13,089 $ 145,289
Current portion of project debt.......................................... 113,112 99,875
Convertible subordinated debentures...................................... 148,650
Accounts payable......................................................... 37,142 41,106
Federal and foreign income taxes payable................................. 5,955
Accrued expenses......................................................... 362,388 308,681
Obligations related to net assets held for sale.......................... 155,880
Deferred income.......................................................... 42,694 38,517
---------- ----------
Total current liabilities................................................ 878,910 633,468
Long-term debt........................................................... 298,602 310,126
Project debt............................................................. 1,302,381 1,290,388
Deferred income taxes.................................................... 323,669 315,931
Deferred income.......................................................... 161,525 172,050
Other liabilities........................................................ 174,345 162,369
Minority interests....................................................... 40,150 34,290
Convertible subordinated debentures...................................... 148,650
---------- ----------
Total Liabilities........................................................ 3,179,582 3,067,272
---------- ----------
Shareholders' Equity:
Serial cumulative convertible preferred stock, par value $1.00 per share,
authorized, 4,000,000 shares; shares outstanding: 33,480 in 2001 and
35,582 in 2000, net of treasury shares of 29,820 in 2001 and 2000........ 34 36
Common stock, par value $.50 per share; authorized, 80,000,000 shares;
outstanding: 49,835,076 in 2001 and 49,645,459 in 2000, net of treasury
shares of 4,111,950 and 4,265,115, respectively.......................... 24,918 24,823
Capital surplus.......................................................... 188,371 185,681
Notes receivable from key employees for common stock issuance............ (870) (1,049)
Unearned restricted stock compensation................................... (664)
Earned surplus (deficit)................................................. (205,262) 25,829
Accumulated other comprehensive loss..................................... (283) (3,764)
---------- ----------
Total Shareholders' Equity............................................... 6,244 231,556
---------- ----------
Total Liabilities and Shareholders' Equity............................... $3,185,826 $3,298,828
========== ==========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Covanta Energy Corporation (Debtor in Possession) and Subsidiaries
STATEMENTS OF SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------------
(In Thousands of Dollars, Except Share and
Per Share Amounts) SHARES AMOUNTS SHARES AMOUNTS SHARES AMOUNTS
SERIAL CUMULATIVE CONVERTIBLE
PREFERRED STOCK, PAR VALUE $1.00
PER SHARE; AUTHORIZED, 4,000,000 SHARES
Balance at beginning of year............... 65,402 $ 66 69,066 $ 69 72,038 $ 73
Shares converted into common stock......... (2,102) (2) (3,664) (3) (2,972) (4)
---------- ------- ---------- ------- ---------- -------
Total...................................... 63,300 64 65,402 66 69,066 69
Treasury shares............................ (29,820) (30) (29,820) (30) (29,820) (30)
---------- ------- ---------- ------- ---------- -------
Balance at end of year (aggregate
involuntary liquidation value--2001, $675). 33,480 34 35,582 36 39,246 39
---------- ------- ---------- ------- ---------- -------
COMMON STOCK, PAR VALUE $.50 PER
SHARE; AUTHORIZED, 80,000,000 SHARES:
Balance at beginning of year............... 53,910,574 26,956 53,873,298 26,937 53,507,952 26,754
Exercise of stock options.................. 23,898 12 155,801 78
Shares issued for acquisition.............. 15,390 8 191,800 96
Conversion of preferred shares............. 12,554 6 21,886 11 17,745 9
---------- ------- ---------- ------- ---------- -------
Total...................................... 53,947,026 26,974 53,910,574 26,956 53,873,298 26,937
---------- ------- ---------- ------- ---------- -------
Treasury shares at beginning of year ...... 4,265,115 2,133 4,405,103 2,203 4,561,963 2,281
Purchase of treasury shares................ 102,000 51
Issuance of restricted stock............... (114,199) (57) (139,988) (70)
Exercise of stock options.................. (38,966) (20) (258,860) (129)
---------- ------- ---------- ------- ---------- -------
Treasury shares at end of year............. 4,111,950 2,056 4,265,115 2,133 4,405,103 2,203
---------- ------- ---------- ------- ---------- -------
Balance at end of year..................... 49,835,076 24,918 49,645,459 24,823 49,468,195 24,734
---------- ------- ---------- ------- ---------- -------
CAPITAL SURPLUS:
Balance at beginning of year............... 185,681 183,915 173,413
Exercise of stock options.................. 776 8,061
Issuance of restricted stock............... 1,918 1,602
Shares issued for acquisition.............. 172 4,904
Purchase of treasury shares................ (2,458)
Conversion of preferred shares............. (4) (8) (5)
------- -------- --------
Balance at end of year..................... 188,371 185,681 183,915
------- -------- --------
NOTES RECEIVABLE FROM KEY EMPLOYEES FOR
COMMON STOCK ISSUANCE...................... (870) (1,049) (1,049)
------- -------- --------
UNEARNED RESTRICTED STOCK COMPENSATION:
Issuance of restricted common stock........ (1,567)
Amortization of unearned restricted stock
compensation............................... 903
------- -------- --------
Balance at end of year..................... (664)
------- -------- --------
EARNED SURPLUS (DEFICIT):
Balance at beginning of year............... 25,829 255,182 367,984
Net loss................................... (231,027) (229,285) (81,961)
------- -------- --------
Total...................................... (205,198) 25,897 286,023
------- -------- --------
Preferred dividends-per share 2001 and 2000,
$1.875; 1999, $3.35........................ 64 68 137
Common Dividends-per share 2001 and 2000,
zero; 1999, $.625.......................... 30,704
------- -------- --------
Total dividends............................ 64 68 30,841
------- -------- --------
Balance at end of year..................... (205,262) 25,829 255,182
------- -------- --------
CUMULATIVE TRANSLATION
ADJUSTMENT-NET............................. (283) (3,355) (20,663)
------- -------- --------
MINIMUM PENSION LIABILITY ADJUSTMENT....... (409) (307)
------- -------- --------
NET UNREALIZED GAIN ON
SECURITIES AVAILABLE FOR SALE.............. 150
------- -------- --------
TOTAL SHAREHOLDERS' EQUITY................. $ 6,244 $231,556 $442,001
======= ======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Covanta Energy Corporation (Debtor in Possession) and Subsidiaries
STATEMENTS OF CONSOLIDATED CASH FLOWS
- ----------------------------------------------------------------------------------------------------------
For the years ended December 31, 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------
(In Thousands of Dollars)
Cash Flows From Operating Activities:
Net loss.................................................... $(231,027) $(229,285) $ (81,961)
Adjustments to Reconcile Net Loss to Net Cash
Provided by (Used in) Operating Activities of Continuing
Operations:
Loss from discontinued operations........................... 143,664 41,851
Depreciation and amortization............................... 102,065 110,325 101,470
Deferred income taxes....................................... (29,544) (37,868) (16,944)
Cumulative effect of change in accounting principle......... 3,820
Write-down of assets........................................ 260,866 77,240 36,150
Provision for doubtful accounts............................. 14,212 15,598 5,130
Severance and other employment charges...................... 10,271 32,602
Other....................................................... 12,800 (13,412) (3,395)
Management of Operating Assets and Liabilities:
Decrease (Increase) in Assets:
Receivables................................................. (56,207) (3,947) (30,495)
Inventories................................................. (722) 2,208
Other assets................................................ (19,503) (5,309) 18,834
Increase (Decrease) in Liabilities:
Accounts payable............................................ (15,749) (27,082) 19,572
Accrued expenses............................................ 46,919 (47,925) 35,921
Deferred income............................................. (15,349) (8,901) (3,698)
Other liabilities........................................... 17,495 (41,386) (51,214)
--------- --------- ---------
Net cash provided by (used in) operating activities
of continuing operations............................... 86,978 (58,739) 109,851
--------- --------- ---------
Cash Flows From Investing Activities:
Entities purchased, net of cash acquired.................... (59,436)
Proceeds from sale of marketable securities available
for sale............................................... 6,560 66,355
Net proceeds from sale of businesses and other.............. 34,904 19,354 10,560
Proceeds from sale of property, plant, and equipment........ 915 9,814 1,175
Proceeds from sale of investment............................ 5,138
Investments in facilities .................................. (51,951) (30,051) (50,749)
Other capital expenditures.................................. (9,502) (24,914) (15,048)
Decrease in other receivables............................... 2,011 3,963 820
Investments in marketable securities available for sale..... (1,815)
Distributions from investees and joint ventures............. 31,182 9,459 12,459
Increase in investments in and advances to investees
and joint ventures..................................... (18,576) (34,032) (43,997)
--------- --------- ---------
Net cash used in investing activities of continuing
operations............................................. (11,017) (39,847) (74,538)
--------- --------- ---------
Cash Flows From Financing Activities:
Borrowings for Energy facilities............................ 92,643 150,894
Other new debt.............................................. 18,174 2,378 90,508
Payment of debt............................................. (271,867) (182,228) (205,089)
Dividends paid.............................................. (64) (68) (46,241)
Purchase of treasury shares................................. (2,509)
(Increase) Decrease in funds held in trust.................. (6,925) 16,991 21,019
Decrease (Increase) in restricted cash...................... 194,118 (194,118)
Proceeds from exercise of stock options..................... 808 8,268
Other....................................................... (4,075) (3,800) (4,412)
--------- --------- ---------
Net cash (used in) provided by financing activities
of continuing operations............................... (69,831) (268,202) 12,438
--------- --------- ---------
Net cash provided by (used in) discontinued operations...... 346,411 (127,900)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................................. 6,130 (20,377) (80,149)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 80,643 101,020 181,169
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 86,773 $ 80,643 $ 101,020
========= ========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Covanta Energy Corporation (Debtor in Possession) and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Principles of Consolidation: The Consolidated Financial Statements include the
accounts of Covanta Energy Corporation (Debtor in Possession) and its
Subsidiaries ("Covanta" or "the Company"). In March 2001, the Company changed
its name from Ogden Corporation to Covanta Energy Corporation. Covanta is
engaged in developing, owning and operating international power generation
projects and provides related infrastructure services. The Company also offers
single source design/build/operate capabilities for water and wastewater
treatment infrastructures. Companies in which Covanta has equity investments of
20% to 50% are accounted for using the equity method since Covanta has the
ability to exercise significant influence over their operating and financial
policies. Those companies in which Covanta owns less than 20% are accounted for
using the cost method, except for two companies in which Covanta owns less than
20% but has significant influence over the operations of these companies through
significant representation on the Boards of Directors, significant shareholder
rights, and significant ownership in the operators of the energy facilities
owned. All intercompany transactions and balances have been eliminated.
Basis of Accounting: On April 1, 2002 ("Petition Date"), Covanta Energy
Corporation and 123 of its domestic subsidiaries filed voluntary petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the Southern
District of New York (the "Bankruptcy Court"). The pending Chapter 11 Cases (the
"Chapter 11 Cases") are being jointly administered for procedural purposes only.
International operations, and certain other subsidiaries and joint venture
partnerships were not included in the filing. See Note 32 to the Consolidated
Financial Statements for a more detailed discussion of these Chapter 11 Cases.
The Company's Consolidated Financial Statements have been prepared on a "going
concern" basis in accordance with accounting principles generally accepted in
the United States of America. The "going concern" basis of presentation assumes
that the Company will continue in operation for the foreseeable future and will
be able to realize its assets and discharge its liabilities in the normal course
of business. Because of the Chapter 11 Cases and the circumstances leading to
the filing thereof, the Company's ability to continue as a "going concern" is
subject to substantial doubt and is dependent upon, among other things,
confirmation of a plan of reorganization, the Company's ability to comply with,
and if necessary renew, the terms of the Debtor in Possession Financing Facility
(see Notes 15 and 32 to the Company's Consolidated Financial Statements), and
the Company's ability to generate sufficient cash flows from operations, asset
sales and financing arrangements to meet its obligations. There can be no
assurances this can be accomplished and if it were not, the Company's ability to
realize the carrying value of its assets and discharge its liabilities would be
subject to substantial uncertainty. Therefore, if the "going concern" basis were
not used for the Company's Consolidated Financial Statements, then significant
adjustments could be necessary to the carrying value of assets and liabilities,
the revenues and expenses reported, and the balance sheet classifications used.
The Company's Consolidated Financial Statements do not reflect adjustments that
may occur in accordance with the American Institute of Certified Public
Accountant's Statement of Position No. 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" ("SOP 90-7"), which the Company will
adopt for its financial reporting in periods ending after April 1, 2002 assuming
that the Company will continue as a "going concern". In the Chapter 11 Cases,
all or substantially all of the unsecured liabilities as of the Petition Date
are subject to compromise or other treatment under a plan of reorganization
which must be confirmed by the Bankruptcy Court after submission to all required
parties for approval pursuant to the relevant provisions of the Bankruptcy Code.
For financial reporting purposes, those liabilities and obligations whose
treatment and satisfaction is dependent on the outcome of the Chapter 11 Cases
will be segregated and classified as Liabilities Subject to Compromise in the
Consolidated Balance Sheets under SOP 90-7.
Generally, the filing of the Chapter 11 Cases imposed an automatic stay on all
actions to enforce or otherwise effect payment of liabilities arising prior to
the Petition Date, including all pending litigation against the Debtors. The
ultimate amount of, and settlement terms for, such liabilities are subject to a
confirmed plan of reorganization and, accordingly, are not presently
determinable. Pursuant to SOP 90-7, professional fees associated with the
Chapter 11 Cases will be expensed as incurred and reported as reorganization
costs. Also, interest expense will be reported only to the extent that it will
be paid during the Chapter 11 Cases or that it is probable that it will be an
allowed claim.
Under the applicable provisions of the Bankruptcy Code, the Debtors may elect to
assume or reject real estate leases, employment contracts, personal property
leases, service contracts and other unexpired pre-petition executory contracts,
subject to Bankruptcy Court approval. The Debtors are continuing to review all
unexpired leases and executory contracts to determine, in their business
judgement, whether to seek the assumption or rejection of such leases and
contracts. Assumption of such leases and contracts would generally require the
Debtors to cure existing defaults, and rejection of such leases or contracts
could result in additional liabilities subject to compromise.
On September 17, 1999, the Company announced that it intended to sell its
Aviation and Entertainment businesses and on September 29, 1999, the Board of
Directors of the Company formally adopted a plan to sell the operations of its
Aviation and Entertainment units which were previously reported as separate
business segments. As a result of the adoption of this plan, these operations
have been presented as discontinued operations (see Note 2).
At December 31, 2000, the Company had substantially completed its sales of the
discontinued operations and classified the remaining unsold Aviation and
Entertainment businesses as net assets held for sale in the December 31, 2000
Consolidated Financial Statements. These non-core businesses are reported in the
Other segment at December 31, 2000 and for the year ended December 31, 2001. In
addition at December 31, 2000, the Company classified its other non-core
subsidiaries, Datacom, Inc. (Datacom), a contract manufacturing company located
in Mexico, and Compania General de Sondeos, S.A. ("CGS"), an environmental and
infrastructure company in Spain, in net assets held for sale. Datacom and CGS
are reported in the Other segment and the Energy segment, respectively. During
2000, the Company sold other non-core businesses including Applied Data
Technology, Inc. ("ADTI") and its environmental consulting subsidiary. During
2001, the Company sold Datacom.
In 1999, in transactions accounted for as purchases, Covanta acquired the shares
of a Philippine diesel-fired power plant, a 74% interest in a Thailand gas-fired
facility, a 90% interest in a Thailand company that operates and maintains
several power plant facilities, the unowned 50% partnership interests in the
Heber Geothermal Company, which owns a geothermal power plant in California, and
Heber Field Company in California for a total cost of $58.5 million. In March
2002, the Company sold its entire interest in those two Thailand Companies (see
Note 32). The operations of these companies have been included in the
Consolidated Financial Statements from the dates of acquisition. If Covanta had
acquired these companies on January 1, 1999, consolidated revenues, net loss and
diluted loss per share would have been approximately $1 billion, $85.6 million
and $1.74 for 1999.
Use of Estimates: The preparation of Consolidated Financial Statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the Consolidated Financial Statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Significant estimates include
management's estimate of the carrying values of its discontinued operations and
net assets held for sale, estimated useful lives of long-lived assets,
allowances for doubtful accounts receivable, and liabilities for workers
compensation, severance, restructuring and certain litigation.
Cash and Cash Equivalents: Cash and cash equivalents include all cash balances
and highly liquid investments having original maturities of three months or
less.
Restricted Cash: In accordance with the Company's revolving credit agreement in
effect at December 31, 2000, certain amounts of cash at December 31, 2000 raised
from asset sales were restricted as to their use. These funds were restricted
primarily to repay current debt or repay certain other financial obligations. In
March 2001, the Company entered into a new Revolving Credit and Participation
Agreement (see Note 15). In connection with that Agreement, the Company was
required to pay down certain debt totaling approximately $157.0 million
(including approximately $26.0 million classified in net assets held for sale on
the December 31, 2000 Consolidated Balance Sheet, see Note 3) using this
restricted cash.
Marketable Securities: Marketable securities are classified as available for
sale and recorded at current market value. Net unrealized gains and losses on
marketable securities available for sale are credited or charged to Other
Comprehensive Loss.
Contracts and Revenue Recognition: Service revenues primarily include only the
fees for cost-plus contracts and other types of contracts. Subsidiaries engaged
in governmental contracting recognize revenues from cost-plus-fixed-fee
contracts on the basis of direct costs incurred plus indirect expenses and the
allocable portion of the fixed fee. Revenues under time and material contracts
are recorded at the contracted rates as the labor hours and other direct costs
are incurred. Revenues under fixed-price contracts, including construction
contracts, are recognized on the basis of the estimated percentage of completion
of services rendered. Service revenues also include the fees earned under
contracts to operate and maintain energy facilities and to service the
facilities' debt, with additional fees earned based on excess tonnage processed
and energy generation. Service revenues also represent fees for environmental
consulting and engineering services rendered under various contracts and the
operation and maintenance of water and wastewater facilities. Revenue from the
sale of electricity and steam are earned at energy facilities and are recorded
based upon output delivered and capacity provided at rates specified under
contract terms or prevailing market rates. A majority of the Company's power
plants rely primarily on one power sales agreement with a single customer for
the majority of their electricity sales revenues.
Long-term unbilled service receivables related to energy operations are
discounted in recognizing the present value for services performed currently.
Such unbilled receivables amounted to $149.6 million and $147.9 million at
December 31, 2001 and 2000, respectively. Subsidiaries engaged in long-term
construction contracting record income on the percentage-of-completion method of
accounting and recognize income as the work progresses. Anticipated losses on
contracts are recognized as soon as they become known.
Other Sales-Net: Other sales-net include the sale of product by subsidiaries,
mainly Datacom, in the Other segment. Sales are recognized when goods are
shipped to customers and title to such goods passes to those customers. No goods
are shipped on consignment.
Other Revenues-Net: Other revenues-net include amounts received related to
insurance proceeds as a result of the settlement of certain legal matters.
Property, Plant and Equipment: Property, plant, and equipment is stated at cost.
For financial reporting purposes, depreciation is provided by the straight-line
method over the estimated useful lives of the assets, which range generally from
three years for computer equipment to 50 years for waste-to-energy facilities.
Accelerated depreciation is generally used for Federal income tax purposes.
Leasehold improvements are amortized by the straight-line method over the terms
of the leases or the estimated useful lives of the improvements as appropriate.
Landfills are amortized based on the quantities deposited into each landfill
compared to the total estimated capacity of such landfill.
Contract Acquisition Costs: Costs associated with the acquisition of specific
contracts are amortized using the effective interest rate method over their
respective contract terms. Contract acquisition costs are presented net of
accumulated amortization of $51.6 million and $44.9 million at December 31, 2001
and 2000, respectively.
Bond Issuance Costs: Costs incurred in connection with the issuance of revenue
bonds are amortized over the terms of the respective debt issues.
Restricted Funds: Restricted funds represent proceeds from the financing and
operations of energy facilities. Funds are held in trust and released as
expenditures are made or upon satisfaction of conditions provided under the
respective trust agreements.
Deferred Financing Costs: Costs incurred in connection with obtaining financing
are capitalized and amortized using the effective interest rate method over the
terms of the related financings.
Project Development Costs: The Company capitalizes project development costs
once it is determined that it is probable that such costs will be realized
through the ultimate construction of a plant. These costs include outside
professional services, permits and other third party costs directly related to
the development of a specific new project. Upon the start-up of plant operations
or the completion of an acquisition, these costs are generally transferred to
property, plant and equipment and are amortized over the estimated useful life
of the related project or charged to construction costs in the case of a
construction contract for a publicly owned facility. Capitalized project
development costs are charged to expense when it is determined that the related
project is impaired.
Goodwill: Goodwill is amortized by the straight-line method over periods ranging
from 15 to 25 years. Goodwill of $8.5 million and $9.4 million at December 31,
2001 and 2000, respectively, is net of accumulated amortization of $2.3 million
and $2.1 million, respectively.
Interest Rate Swap Agreements: Amounts received or paid relating to swap
agreements during the year are credited or charged to interest expense or debt
service charges, as appropriate.
Income Taxes: Covanta files a consolidated Federal income tax return, which
includes all eligible United States subsidiary companies. Foreign subsidiaries
are taxed according to regulations existing in the countries in which they do
business. Provision has not been made for United States income taxes on
distributions, which may be received from foreign subsidiaries that are
considered to be permanently invested overseas.
Long-Lived Assets: Covanta accounts for the impairment of long-lived assets to
be held and used by evaluating the carrying value of its long-lived assets in
relation to the operating performance and future undiscounted cash flows of the
underlying businesses when indications of impairment are present. If the
carrying value of such assets is greater than the future undiscounted cash flows
of those assets, the Company would measure the impairment amount as the
difference between the carrying value of the assets and the discounted present
value of the cash flows to be generated by those assets. Long-lived assets to be
disposed of are evaluated in relation to the estimated fair values of such
assets less costs to sell (see Note 3).
Notes Receivable from Employees: Notes receivable from certain officers to pay
for the exercise price of stock options are included in shareholders' equity. As
settlement of a dispute, such Notes, which totaled $.9 million and $1.0 million
at December 31, 2001 and 2000, respectively, were restructured in late 2001 to
be equal to the market value of the Company's common shares purchased upon
exercise of those stock options. These notes are due upon sale of those shares
which were purchased when those options were exercised (see Note 29).
Foreign Currency Translation: For foreign operations, assets and liabilities are
translated at year-end exchange rates and revenues and expenses are translated
at the average exchange rates during the year. Gains and losses resulting from
foreign currency translation are included as a component of other comprehensive
loss. For subsidiaries whose functional currency is deemed to be other than the
U.S. dollar, translation adjustments are included as a separate component of
other comprehensive loss and shareholders' equity. Currency transaction gains
and losses are recorded in income.
Earnings per Share: Basic Earnings (Loss) per Share is represented by net income
(loss) available to common shareholders divided by the weighted-average number
of common shares outstanding during the period. Diluted earnings (loss) per
share reflects the potential dilution that could occur if securities or stock
options were exercised or converted into common stock during the period, if
dilutive (see Note 25).
Changes in Accounting Principles: The American Institute of Certified Public
Accountants ("AICPA") issued Statement of Position ("SOP") 98-5, "Reporting on
the Costs of Start-Up Activities" in April 1998. This SOP established accounting
standards for these costs and requires that they generally be expensed as
incurred. Covanta adopted SOP 98-5 on January 1, 1999. The effect of adopting
the SOP is shown as a cumulative effect of a change in accounting principle and
is reflected as a net charge to income of $3.8 million in 1999.
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133, as amended and interpreted, establishes accounting
and reporting standards for derivative instruments, including certain
derivatives embedded in other contracts, and for hedging activities. All
derivatives are required to be recorded in the balance sheet as either an asset
or liability measured at fair value, with changes in fair value recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows derivative gains and losses to offset
related results on the hedged items in the Statements of Consolidated Operations
and Comprehensive Loss, and requires that a company must formally document,
designate, and assess the effectiveness of derivatives that receive hedge
accounting.
The Company's policy is to enter into derivatives to protect the Company against
fluctuations in interest rates and foreign currency exchange rates as they
relate to specific assets and liabilities. The Company's policy is to not enter
into derivative instruments for speculative purposes.
The Company identified all derivatives within the scope of SFAS No. 133. The
adoption of SFAS No. 133 did not have a material impact on the results of
operations of the Company and increased both assets and liabilities recorded on
the balance sheet by approximately $12.3 million on January 1, 2001. The $12.3
million relates to the Company's interest rate swap agreement that economically
fixes the interest rate on certain adjustable rate revenue bonds reported in the
Project Debt category "Revenue Bonds Issued by and Prime Responsibility of
Municipalities." The asset and liability recorded on January 1, 2001 were
increased by $.9 million during the year ended December 31, 2001 to adjust for
an increase in the swap's fair value to $13.2 million at December 31, 2001 (see
Notes 9 and 14).
The Company implemented SFAS No. 133 based on the current rules and guidance in
place as of January 1, 2001 and has applied the guidance issued since then by
the Financial Accounting Standards Board (FASB).
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 provides guidance on the recognition, presentation, and
disclosure of revenue, and was implemented by the Company in the quarter ending
December 31, 2000. There was no impact from the adoption of SAB No. 101 on the
Company's financial position or results of operations.
New Accounting Pronouncements: In June 2001, the FASB issued SFAS No. 141,
"Business Combinations." SFAS No. 141 requires the use of the purchase method of
accounting for business combinations initiated after June 30, 2001 and prohibits
the use of the pooling-of-interests method. The adoption of SFAS No. 141 had no
impact on the Company's financial position or results of operations.
In June 2001, the FASB also issued SFAS No. 142, "Goodwill and Other Intangible
Assets." The Company adopted SFAS No. 142 on January 1, 2002. SFAS No. 142
requires upon adoption the discontinuance of goodwill amortization, which the
Company estimates would have been $0.8 million in the year ending December 31,
2002. In addition, the standard includes provisions for the reclassification of
certain existing recognized intangibles as goodwill, reassessment of the useful
lives of existing recognized intangibles, reclassification of certain
intangibles out of previously reported goodwill and the identification of
reporting units for purposes of assessing potential future impairments of
goodwill. SFAS No. 142 also requires the Company to complete a transitional
goodwill impairment test within six months of the date of adoption and to
evaluate for impairment the carrying value of goodwill on an annual basis
thereafter. The Company is in the process of performing that test and has not
yet determined the effect of that requirement upon adoption of SFAS No. 142 on
its financial position and results of operations. Identifiable intangible assets
with finite lives will continue to be amortized over their useful lives and
reviewed for impairment in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," discussed below.
Also in June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirements Obligations," which is effective for the Company on January 1, 2003.
SFAS No. 143 requires that a liability for asset retirement obligations be
recognized in the period in which it is incurred if it can be reasonably
estimated. It also requires such costs to be capitalized as part of the related
asset and amortized over such asset's remaining useful life. The Company is
currently assessing, but has not yet determined, the effect of adoption of SFAS
No. 143 on its financial position and results of operations.
In August 2001, the FASB issued SFAS No. 144. The Company adopted SFAS No. 144
on January 1, 2002. SFAS No. 144 replaces SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
and establishes accounting and reporting standards for long-lived assets to be
disposed of by sale. SFAS No. 144 applies to all long-lived assets, including
discontinued operations. SFAS No. 144 requires that those assets be measured at
the lower of carrying amount or fair value less costs to sell. It also broadens
the reporting of discontinued operations to include all components of an entity
with operations that can be distinguished from the rest of the entity that will
be eliminated from the ongoing operations of the entity in a disposal
transaction. The adoption of SFAS No. 144 did not have a material effect on the
Company's financial position and results of operations but will require certain
balance sheet reclassifications of these assets and liabilities.
Reclassification: Certain prior year amounts, including various revenues and
expenses, have been reclassified in the Consolidated Financial Statements to
conform with the current year presentation.
2. Discontinued Operations
As a result of the adoption of the plan to discontinue the operations of the
Entertainment and Aviation businesses, operating results of those businesses
were reported as discontinued operations until December 31, 2000. Results for
the two segments previously reported under the segment headings "Energy" and
"Other" were reported as continuing operations and will continue to be reported
under those headings.
At December 31, 2000, the Company had substantially completed its sales of the
discontinued operations and reclassified the remaining Aviation and
Entertainment businesses in the December 31, 2000 Consolidated Balance Sheet to
show these businesses as net assets held for sale (see Note 3).
Revenues and loss from discontinued operations (expressed in thousands of
dollars) were as follows:
2000 1999
- ----------------------------------------------------------------------------
Revenues $ 318,252 $ 809,752
--------- ---------
Gain (Loss) on disposal of businesses $ (96,969) $ 17,960
Operating loss (72,186) (53,459)
Interest expense - net (3,465) (4,670)
--------- ---------
Loss Before Income Taxes
and Minority Interests (172,620) (40,169)
Income Tax Provision (Benefit) (29,263) 6
Minority Interests 307 1,676
--------- ---------
Loss from
Discontinued Operations $(143,664) $ (41,851)
========= =========
Gross cash proceeds from the sales of businesses included in discontinued
operations were approximately $422.4 million during 2000 and $29.7 million
during 1999.
The following is a list of Aviation and Entertainment businesses sold in 2000
and 1999, the gross proceeds from those sales and the realized gain or (loss) on
those sales (expressed in thousands of dollars):
Description of Business Gross Proceeds Realized Gain (Loss)
- ----------------------- -------------- --------------------
2000
Food and Beverage/Venue Management $ 222,577 $ 116,437
Aviation Ground Handling 95,728 (31,090)
Parks and Themed Attractions 38,300 (110,610)
Argentina Airport Privatization 27,500 (3,177)
Aviation Fixed Base Operations 15,552 (7,331)
Fairmont Race Track 15,356 (481)
Dominican Republic Airport Privatization 3,175 2,313
Other businesses 4,162 (3,715)
---------- ----------
$ 422,350 $ (37,654)
========== ==========
1999
Anaheim Pond Contract Renegotiation $ 10,050 $ 6,025
Venue management contracts at 2 venues 9,000 7,152
Hong Kong Airport Ground Operations 4,166 4,042
Aruba Airport Ground Operations 2,504 1,360
Spain Airline Catering Operations 1,984 1,984
Grizzly Nature Center 1,700 (4,385)
Aruba Casino 207 (1,607)
Other businesses 49 (111)
---------- ----------
$ 29,660 $ 14,460
========== ==========
In addition, in 2000 the Company closed all but one of its themed restaurants,
disposed of the related assets and negotiated the buyout of the related leases.
The Company recorded charges of $39.4 million related to the disposal of those
fixed assets, and accrued an additional $11.0 million for rent adjustments,
lease buyouts and other costs of disposal. In 2000, the Company also wrote off
its investments in the Isla Magica theme park as a result of the equity and debt
restructuring of that park resulting in a charge of $9.0 million. All of these
charges are included in Loss from Discontinued Operations on the Statement of
Consolidated Operations.
In 1999, the Company also reversed reserves of $3.5 million relating to
contingencies associated with a sale of a business in a prior year resulting in
a gain which is classified in gain (loss) on disposal of business.
3. Net Assets Held for Sale and Related Obligations
All non-core businesses, including remaining Entertainment and Aviation
businesses are classified as net assets held for sale in the Consolidated
Balance Sheet. Those businesses held at December 31, 2001 include: the Company's
interest in certain entertainment assets in Argentina, Anaheim, California and
Ottawa, Canada; its Metropolitan Entertainment subsidiary, a concert promotion
business (Metropolitan); and the Port-Authority related component of its
aviation fueling business. The other non-core business included in net assets
held for sale at December 31, 2001 was CGS, with a zero net asset value
resulting from a $0.4 million write-down in 2001.
The Company sold CGS in January 2002, but received no proceeds. In March 2002,
the Company closed on the sale of Metropolitan and received $3.1 million. In
March 2002, the Company signed a contract for the sale of Casino Iguazu (one of
the entertainment assets in Argentina) for $3.5 million in cash. The Company
expects to sell the remaining businesses during 2002. The successful completion
of the sales processes for remaining non-core assets and the actual amounts
received may be impacted by general economic conditions in the markets in which
these assets must be sold and necessary regulatory and third party consents.
Net assets held for sale at December 31, 2001 and 2000 (expressed in thousands
of dollars) were as follows:
2001 2000
---- ----
Current Assets $15,436 $ 73,237
Property, Plant and Equipment - Net 4,044 19,939
Other Assets 6,348 73,310
Notes Payable and Current Portion of Long-Term Debt (28,651)
Other Current Liabilities (18,859) (52,053)
Long-Term Debt (670)
Other Liabilities (347) (14,498)
------- --------
Net Assets Held for Sale $ 6,622 $ 70,614
======= ========
With the exception of the operations of Datacom and CGS, the operations of these
businesses are included in discontinued operations for the years ended December
31, 2000 and 1999. At December 31, 2000, the Company applied the provisions of
SFAS No. 121 to the net assets held for sale. SFAS No. 121 requires assets held
for sale to be valued on an asset by asset basis at the lower of carrying amount
or fair value less costs to sell. In applying those provisions, Covanta
management considered recent appraisals, valuations, offers and bids, and its
estimate of future cash flows related to those businesses. As a result, the
Company recorded a pre-tax loss of $77.2 million in the year 2000. This amount
relates entirely to businesses previously classified in the Entertainment
segment. This amount is shown in write-down and obligations related to net
assets held for sale in the 2000 Statement of Consolidated Operations and
Comprehensive Loss. At December 31, 2000, the valuation provision of $3.7
million provided against them during 2000 was reversed in discontinued
operations.
In accordance with the provisions of SFAS No. 121, the assets included in net
assets held for sale have not been depreciated commencing January 1, 2001, which
had the effect of decreasing the loss before income taxes in 2001 by
approximately $4.6 million.
During 2001, the Company sold several of these assets including its aviation
businesses in Spain, Italy and Colombia and the portion of its fueling business
that does not serve airports operated by the Port Authority of New York and New
Jersey (Non-Port Authority Fueling). Gross cash proceeds from the sales of
businesses that were included in net assets held for sale were approximately
$38.8 million during 2001.
During 2001, the Company had reached a definitive agreement to sell the portion
of its fueling business that is related to airports operated by the Port
Authority. However, given the impact of the events of September 11, 2001 on the
aviation industry and the Port Authority, no closing date was set for that Port
Authority component pending Port Authority approval of the sale. The Company is
reviewing this contract in light of its Chapter 11 filing.
The following is a list of Aviation businesses sold in 2001, the gross proceeds
from those sales and the realized gain or (loss) on those sales (in thousands of
dollars):
Description of Business Gross Proceeds Realized Gain (Loss)
- ----------------------- -------------- --------------------
Non-Port Authority Fueling $ 15,200 $ (4,026)
Colombia Airport Privatization 9,660 1,404
Rome, Italy Aviation Ground Operations 9,947 1,855
Spain Aviation Ground Operations 1,753 (261)
Aviation Fixed Base Operations 2,098 777
Other 197 (2,517)
--------- ----------
$ 38,855 $ (2,768)
========= ==========
The above realized loss of $2.8 million is included in net gain (loss) on sale
of businesses in the 2001 Statement of Consolidated Operations and Comprehensive
Loss.
During the year ended December 31, 2001, the Company also disposed of Datacom
and its Australian Venue Management operations. Those disposals resulted in no
cash proceeds. Accordingly, prior to those disposals, the Company recorded
write-downs of those two businesses based on negotiated sales prices, resulting
in pre-tax charges of $16.8 million and $2.0 million, respectively. Also,
various parcels of land and other assets held for sale were written down based
on the Company's estimates of sales prices, resulting in an additional charge of
$1.0 million.
At December 31, 2001, because of the economic turmoil and subsequent devaluation
of the peso in Argentina, the Company wrote down to zero its investments in the
La Rural exposition center, an entertainment venues in Argentina. The Company
also wrote down to a net realizable value of $2.4 million its investment in
Casino Iguazu in Argentina based on the status of negotiations evidenced by the
subsequent contract to sell the Casino for $3.5 million. The Company estimated
$1.1 million of costs to sell the Casino. These write-downs resulted in pre-tax
charges of $16.4 million and $4.5 million, respectively. In addition, at
December 31, 2001, the Company considered the status of current negotiations on
the potential sale of Metropolitan and the negative impact on the concert
business of the event of September 11, 2001,and wrote-down Metropolitan to $2.5
million resulting in a pre-tax charge of $5.4 million.
The carrying value of the Company's interests relating to the Arrowhead Pond,
the Center and the Team (all as defined below) have been materially adversely
affected by events occurring at the end of 2001 and in 2002 to date. On December
21, 2001 the Company announced that its inability to access the capital markets,
the continuing delays in payment of remaining California energy receivables and
delays in the sale of aviation and entertainment assets had adversely impacted
Covanta's ability to meet cash flows covenants under its Master Credit Facility.
The Company also stated that the banks had provided a waiver for the covenants
only through January of 2002, had not agreed to provide the additional short
term liquidity the Company had sought and that the Company was conducting a
comprehensive review of its strategic alternatives.
On December 27, 2001 and January 11, 2002 the Company's credit rating was
reduced by Moody's and Standard & Poor's. These downgrades triggered
requirements to post in excess of $100 million in performance and other letters
of credit for Energy projects and for which the Company did not have available
commitments under its Master Credit Facility. Subsequently, the Company's credit
ratings were further reduced.
The Company required further waivers from its cash flow covenants under its
Master Credit Facility for the period after January 2002. On January 31, 2002
the Company announced that it had obtained waivers through the end of March
2002, subject, however, to its meeting stringent cash balance requirements set
by its banks.
Among other things, these cash balance requirements prevented the Company from
paying interest due on March 1, 2002 on its 9.25% Debentures. In addition, the
restrictions prevented contributions to the working capital needs of the Ottawa
Senators Hockey Club Corporation (the "Team") of the National Hockey League (the
"NHL"), the prime tenant of the Corel Centre near Ottawa, Canada (the "Centre").
These events resulted in draws during March 2002 of the letters of credit for
the $19.0 million and $86.2 million guarantees discussed below with respect to
the Team and the Centre, respectively. In return for drawing on the letters of
credit, the Company obtained an interest in the loans that had been secured by
the letters of credit that had been drawn.
On April 1, 2002, the Company filed for relief under Chapter 11 of the
Bankruptcy Code. (See Note 1).
The events leading up to the bankruptcy filing and the filing itself have
materially adversely affected the Company's ability to manage the timing and
terms on which to dispose of its interests and related obligations with respect
to the Centre, the Team and the Arrowhead Pond, as described below.
With respect to the Centre and the Team, these events led to the termination, in
2002, of a pending sale of limited partnership interests and related
recapitalization of the Team that, if completed as contemplated, would have been
expected to stabilize the finances of the Team and Centre for a considerable
period of time. Given the Company's inability to fund short-term working capital
needs of the Team, and given the events described above, the Company is not in a
position to determine the timing and terms of disposition of the Team and the
Centre in a manner most advantageous to the Company. Currently, a process is
underway to dispose of both in connection with the NHL and the senior secured
lenders to the Team.
Based upon all currently available information, including an initial offer to
purchase dated June 20, 2002 and certain assumptions as to the future use, and
considering the factors listed above, the Company recorded a pre-tax impairment
charge as of December 31, 2001 of $140.0 million related to the Centre and the
Team.
The $140.0 million charge, which has been included in write-down of and
obligations related to net assets held for sale in the 2001 Statement of
Consolidated Operations and Comprehensive Loss, represents the Company's
estimate of the net cost to sell its interests in the Centre and Team and to be
discharged of all related obligations and guarantees. The resulting estimated
after tax cost of $118.8 million (net of tax of $21.2 million) has been included
in Obligations Related to Net Assets Held for Sale on the December 31, 2001
Consolidated Balance Sheet. However, in view of the proposed sales of these
interests, and the need for approval by the Bankruptcy Court, DIP lenders (see
Note 15) and NHL of such transactions, uncertainty remains as to the actual
amount of the impairment.
The Company's guarantees at December 31, 2001 comprised a: (1) $19.0 million
guarantee of the Team's subordinated loan payable; (2) $86.2 million guarantee
of the senior term debt of the Centre; (3) $45.3 million guarantee of the senior
subordinated debt of the Centre for which $6.3 million in cash collateral has
been posted by the borrower; (4) $3.1 million guarantee of senior secured term
debt of the team; (5) guarantee of the interest payments on $37.7 million of
senior secured term debt of the Team; (6) guarantee to make working capital
advances to the Centre from time to time in amounts necessary to cover any
shortfall between certain operating cash flows, operating expenses and debt
service of the Centre; and (7) $17.5 million cost for terminated foreign
exchange currency swap agreements. The swap agreements had a notional amount of
$130.6 million and were entered into by the Centre related to the $86.2 million
senior term and $45.3 million senior subordinated debt. These swap agreements
had extended originally through December 23, 2002 but were terminated by the
counter-parties in May 2002.
The Company's guarantees arose during 1994, when a subsidiary of Covanta entered
into a 30-year facility management contract at the Centre pursuant to which it
agreed to advance funds to the Team, and if necessary, to assist the Centre's
refinancing of senior secured debt incurred in connection with the construction
of the Centre. In compliance with these guarantees, the Company entered into
agreements pursuant to which it was required to purchase the $19.0 million and
$86.2 million series of debt referred to above if such debt was not timely
refinanced or upon the occurrences of certain defaults. On March 12, 2002 the
holders of the secured subordinated debt of the Team required the Company to
purchase such debt in the total amount (together with accrued and unpaid
dividends) of $19.0 million. On March 14, 2002, the holders drew on a $19.0
million letter of credit for which the Company was the reimbursement party. On
March 22, 2002, as the result of defaults occurring in 2002, the holders of the
senior secured debt required the Company to purchase such debt in the total
amount (together with accrued and unpaid dividends) of $86.2 million. The
holders drew on a letter of credit on March 27, 2002 for which the Company was
the reimbursement party to fund the purchase. The remaining series of
subordinated secured debt of the Centre in the amount of $45.3 million is also
subject to a put right pursuant to the terms of the underlying agreements. But
such subordinated secured debt has not been put to the Company, although the
holder has the right to do so. The obligation to purchase such debt is not
secured by a letter of credit.
In addition to the $140.0 impairment charge, and following the termination of
the pending sale of limited partnership interests discussed above, the Company
also recorded a charge of $5.5 million at December 31, 2001 to fully reserve
against receivables due from the Team. The $5.5 million charge has been included
in Other Operating Costs and Expenses in the 2001 Statement of Consolidated
Operations and Comprehensive Loss.
The events set forth above have also materially adversely affected the Company's
ability to manage the timing and terms on which to dispose of its interest and
related obligations in the Arrowhead Pond in Anaheim, California (the "Arrowhead
Pond"). The Company's limited ability to fund short term working capital needs
at the Arrowhead Pond under the DIP credit facility and the need to resolve the
bankruptcy case may create the need to dispose of the Arrowhead Pond presently
when Mighty Ducks attendance and the concert business, a prime driver of
revenues, is in substantial decline and attendance at the building is not at
levels consistent with past experience. Based upon all currently available
information, including a recently received valuation and certain assumptions as
to the future use, and considering the effects of the events set forth above,
the Company recorded an impairment charge as of December 31, 2001 of $74.4
million related to the Company's interest in the Arrowhead Pond.
The $74.4 million charge, which has been included in write-down of and
obligations related to net assets held for sale in the 2001 Consolidated
Statement of Consolidated Operations and Comprehensive Loss, represents the
write-off of the $16.4 million previous carrying amount at that date and the
Company's $58.0 million estimate of the net cost to sell its interests in the
long-term management agreement discussed in the following paragraph. The
resulting estimated net after tax cost to sell of $37.1 million (net of tax of
$20.9) has been included in Obligations Related to Net Assets Held for Sale on
the December 31, 2001 Consolidated Balance Sheet. However, in view of the
proposed sales of this interest, and the need for approval by the Bankruptcy
Court and DIP Lenders (see Note 15) of such transactions, uncertainty remains as
to the actual amount of the impairment.
A subsidiary of the Company is the manager of the Arrowhead Pond under a
long-term management agreement. The Company and the City of Anaheim are parties
to a reimbursement agreement to the financial institution which issued a letter
of credit in the amount of approximately $117.2 million which provides credit
support for Certificates of Participation issued to finance the Arrowhead Pond
project. As part of its management agreement, the manager is responsible for
providing working capital to pay operating expenses and debt service (including
swap exposure and reimbursement of the lender for draws under the letter of
credit including draws related to an acceleration by the lender of all amounts
payable under the reimbursement agreement) if the revenues of Arrowhead Pond are
insufficient to cover these costs. The Company has guaranteed the obligations of
the manager. The City of Anaheim has given the manager notice of default under
the management agreement. In such notice, the City indicated that it did not
propose to exercise its remedies at such time.
The Company is also the reimbursement party on a $26.0 million letter of credit
and a $1.5 million letter of credit relating to a lease transaction for
Arrowhead Pond. The $26.0 million letter of credit, which is security for the
lease investor, can be drawn upon the occurrence of an event of default. The
$1.5 million letter of credit is security for certain indemnification payments
under the lease transaction documents. The lease transaction documents require
the Company to provide additional letter of credit coverage from time to time.
The additional amount required for 2002 is estimated to be approximately $11.5
million, which the Company has not provided. Notices of default have been
delivered in 2002 under the lease transaction documents. As a result of the
default, parties may exercise remedies, including drawing on letters of credit
and recovering fees to which the manager may be entitled for managing Arrowhead
Pond.
The Company's exposure upon the occurrence of an event of default under the
lease transaction is estimated to be approximately $37.5 million, which is
secured by the $26.0 million letter of credit among other things. The Company is
also obligated to fulfill its indemnification obligations under the lease
transaction documents, the amount of which cannot be determined at this time.
Such indemnification obligations are secured in part by the $1.5 million letter
of credit. The parties to the lease transaction have agreed to delay the
exercise of remedies for the existing defaults until October 21, 2002. The
Company is exploring alternatives and no additional impairment charge related to
the lease transaction for the Arrowhead Pond was considered necessary at
December 31, 2001.
All of the above pre-tax SFAS No. 121 charges are included in write-down of net
assets held for sale in the 2001 Statement of Consolidated Operations and
Comprehensive Loss.
4. Investments In and Advances to Investees and Joint Ventures
The Company is party to joint venture agreements through which the Company has
equity investments in several operating projects and certain projects that are
expected to become operational during the next two years. The joint venture
agreements generally provide for the sharing of operational control as well as
voting percentages. The Company records its share of earnings from its equity
investees on a pre-tax basis and records the Company's share of the investee's
income taxes in income tax expense (benefit).
At December 31, 2001, the Company's share of earnings from its equity investees
was reduced by a $7.9 million SFAS No. 121 impairment charge, calculated based
upon discounted future cash flows and resulting mainly from closing down part of
an energy generating facility due to lower demand, related to its Bolivia
investment.
In 2000, the Company acquired an ownership interest in a 106 MW low sulfur
furnace oil based diesel engine power plant located in the State of Tamil Nadu,
India. Through a share purchase agreement the Company's ownership interest
reached 74.8% in 2001. Also in 2000, the Company acquired a 49% interest in an
oil based diesel engine power plant located in India. Upon the plant's achieving
commercial operation in February 2001, the Company obtained an additional 11%
stake in the plant. As of December 31, 2000, the Company accounted for these
investments on the equity method. Because the increased ownership interests gave
the Company control, the Company began to consolidate these project companies in
the first quarter of 2001.
The Company is a party to a joint venture formed to design, construct, own and
operate a coal-fired electricity generation facility in the Quezon province of
the Philippines ("Quezon Joint Venture"). The Company owns 26.125% of, and has
invested 27.5% of the total equity in, the Quezon Joint Venture (See Note 13).
This project commenced commercial operations in 2000.
In addition, the Company owns interests of up to 50% in 13 other affiliates
which principally own and operate, or are developing, energy facilities. The
Company's investments in and advances to those affiliates were approximately
$183.2 million and $223.4 million at December 31, 2001 and 2000, respectively.
The December 31, 2001 aggregate carrying value of the investments in and
advances to investees and joint ventures of $183.2 million is less than the
Company's equity in the underlying net assets of these investees by
approximately $4.2 million. The carrying value of $223.4 at December 31, 2000
was $0.7 million greater than the Company's equity in the underlying net assets.
These differences of cost over acquired net assets is mainly related to
property, plant, and equipment and power purchase agreements of several
investees.
At December 31, 2001 and 2000, investments in and advances to investees and
joint ventures accounted for under the equity method were comprised as follows
(expressed in thousands of dollars):
December 31,
Ownership Interest at ----------------------------
December 31, 2001 2001 2000
--------------------- ----------- -----------
Mammoth Pacific Plant (U.S.) 50% $ 53,085 $ 57,530
Ultrapower Chinese Station Plant (U.S.) 50% 12,133 12,338
South Fork Plant (U.S.) 50% 958 1,186
Koma Kulshan Plant (U.S.) 50% 3,471 3,268
Linasa Plant (Spain) 50% 2,137 2,000
Haripur Barge Plant (Bangladesh) 45% 17,363 14,636
Quezon Power (Philippines) 28% 73,861 70,747
Rojana Power Plant (Thailand) 25% 12,377 11,613
Madurai Power Plant (India) (A) 75% 14,173
Samalpatti Power Plant (India) (A) 60% 20,343
Empressa Valle Hermoso Project (Bolivia) 13% 1,000 9,282
Trezzo Power Plant (Italy) 13% 3,815 3,238
Other various 3,031 3,081
--------- ---------
Total Investments in Power Plants $ 183,231 $ 223,435
========= =========
(A) Both Madurai and Samalpatti plants were consolidated in 2001.
The unaudited combined results of operations and financial position of the
Company's equity method affiliates are summarized below (expressed in thousands
of dollars).
2001 2000 1999
----------- ----------- -----------
Condensed Statements of Operations
for the years ended December 31:
Revenues $ 333,277 $ 267,359 $ 124,798
Gross profit 158,487 62,976 25,380
Net income 56,172 67,832 28,789
Company's share of net income 17,665 24,088 13,005
Condensed Balance Sheets at December 31:
Current assets $ 212,074 $ 235,975 $ 101,365
Non-current assets 1,261,953 1,351,668 1,189,071
Total assets 1,474,027 1,587,643 1,290,436
Current liabilities 96,595 139,384 62,910
Non-current liabilities 826,962 826,319 751,606
Total liabilities 923,557 965,703 814,516
5. Investments in Marketable Securities Available for Sale
At December 31, 2001 and 2000, marketable equity and debt securities held for
current and noncurrent uses, such as nonqualified pension liabilities and a
deferred compensation plan, are classified as current assets and long-term
assets, respectively.
Marketable securities at December 31, 2001 and 2000 (expressed in thousands of
dollars), include the following:
2001 2000
- ------------------------------------------------------------------------------------------------------------
Market Value Carrying Value Market Value Carrying Value
- ------------------------------------------------------------------------------------------------------------
Classified as Noncurrent Assets:
Mutual and bond funds $ 2,940 $ 2,940 $ 3,590 $ 3,590
======= ======= ======= =======
Proceeds, realized gains and realized losses from the sales of securities
classified as available for sale for the years ended December 31, 2001, 2000 and
1999, were $.6 million, zero, and $.1 million; $7.2 million, $.9 million and $.1
million; and $66.5 million, $.8 million and $2.0 million, respectively. For the
purpose of determining realized gains and losses, the cost of securities sold
was based on specific identification.
6. Unbilled Service and Other Receivables
Unbilled service and other receivables (expressed in thousands of dollars)
consisted of the following:
2001 2000
- ---------------------------------------------------------------------------
Unbilled service receivables $149,624 $147,850
Notes receivable 3,650
Other 1,201 3,710
-------- --------
Total $150,825 $155,210
======== ========
Long-term unbilled service receivables are for services, which have been
performed for municipalities that are due by contract at a later date and are
discounted in recognizing the present value of such services. Current unbilled
service receivables, which are included in Receivables on the Consolidated
Balance Sheet, amounted to $62.8 million and $61.1 million at December 31, 2001
and 2000, respectively. Long-term notes receivable primarily represent notes
received relating to the sale of non-core businesses.
7. Restricted Funds Held in Trust
Funds held by trustees include debt service reserves for payment of principal
and interest on project debt; deposits of revenues received; lease reserves for
lease payments under operating leases; and proceeds received from financing the
construction of energy facilities. Such funds are invested principally in United
States Treasury bills and notes and United States government agencies
securities.
Fund balances (expressed in thousands of dollars) were as follows:
2001 2000
- -------------------------------------------------------------------------------
Current Non-current Current Non-current
------- ----------- ------- -----------
Debt service funds $48,357 $131,300 $48,519 $122,801
Revenue funds 11,608 13,765
Lease reserve funds 3,116 15,794 3,117 18,247
Construction funds 186 1,203
Other funds 29,952 19,915 29,676 16,013
------- -------- ------- --------
Total $93,219 $167,009 $96,280 $157,061
======= ======== ======= ========
8. Property, Plant and Equipment
Property, plant and equipment (expressed in thousands of dollars) consisted of
the following:
2001 2000
- ------------------------------------------------------------------------------
Land $ 8,427 $ 8,059
Energy facilities 2,239,082 2,047,315
Buildings and improvements 207,622 135,733
Machinery and equipment 84,930 121,451
Landfills 13,661 13,741
Construction in progress 15,042 48,940
---------- ----------
Total 2,568,764 2,375,239
Less accumulated depreciation and amortization 667,453 585,809
---------- ----------
Property, plant, and equipment - net $1,901,311 $1,789,430
========== ==========
Depreciation and amortization related to property, plant and equipment amounted
to $87.5 million, $82.8 million and $83.2 million for the years ended December
31, 2001, 2000 and 1999, respectively.
During 2001, the Company received all of the principal permits necessary to
commence construction on a 500 MW gas-fired project in California. However, due
to the significant changes in the California energy markets as well as in its
own financial situation, in late December 2001 the Company decided to delay
project implementation until California market conditions improve and wrote-off,
as project development expenses in the Statement of Consolidated Operations and
Comprehensive Loss, approximately $24.5 million of costs associated with this
project. These costs primarily related to turbine purchase deposits and related
termination fees, permit, viability and other development costs, and other
assets under construction.
9. Other Assets
Other assets (expressed in thousands of dollars) consisted of the following:
2001 2000
- --------------------------------------------------------------------------------
Unamortized bond issuance costs $33,459 $33,941
Deferred financing costs 8,590 8,329
Non-current securities available for sale 2,940 3,590
Interest rate swap 13,199
Other 1,324 20,864
------- -------
Total $59,512 $66,724
======= =======
10. Convertible Subordinated Debentures
Convertible subordinated debentures (expressed in thousands of dollars)
consisted of the following:
2001 2000
- --------------------------------------------------------------------------------
6% debentures due June 1, 2002 $85,000 $85,000
5.75% debentures due October 20, 2002 63,650 63,650
-------- --------
Total $148,650 $148,650
======== ========
The 6% convertible subordinated debentures are convertible into Covanta common
stock at the rate of one share for each $39.077 principal amount of debentures.
These debentures are redeemable at Covanta's option at 100% face value. The
5.75% convertible subordinated debentures are convertible into Covanta common
stock at the rate of one share for each $41.772 principal amount of debentures.
These debentures are redeemable at Covanta's option at 100% of face value.
11. Accrued Expenses
Accrued expenses (expressed in thousands of dollars) consisted of the following:
2001 2000
- --------------------------------------------------------------------------------
Operating expenses $ 139,771 $87,532
Severance and employment litigation settlement 13,512 32,862
Insurance 24,960 17,001
Debt service charges and interest 31,234 29,315
Municipalities' share of energy revenues 39,158 29,481
Payroll 22,134 17,222
Payroll and other taxes 9,435 19,439
Lease payments 15,644 18,308
Pension and profit sharing 16,448 8,724
Other 50,092 48,797
-------- --------
Total $362,388 $308,681
======== ========
12. Deferred Income
Deferred income (expressed in thousands of dollars) consisted of the following:
2001 2000
- -------------------------------------------------------------------------------------------
Current Noncurrent Current Noncurrent
- -------------------------------------------------------------------------------------------
Power sales agreement prepayment $ 9,001 $147,306 $ 9,001 $156,307
Sale and leaseback arrangements 1,523 14,219 1,523 15,743
Advance billings to municipalities 11,088 10,419
Other 21,082 17,574
--------- -------- -------- --------
Total $ 42,694 $161,525 $ 38,517 $172,050
========= ======== ======== ========
In 1998, Covanta received a payment for future energy deliveries required under
a power sales agreement. This prepayment is being amortized over the life of the
agreement. The gains from sale and leaseback transactions consummated in 1986
and 1987 were deferred and are being amortized as a reduction of rental expense
over the respective lease terms. Advance billings to various customers are
billed one or two months prior to performance of service and are recognized as
income in the period the service is provided.
13. Long-Term Debt
Long-term debt (expressed in thousands of dollars) consisted of the following:
2001 2000
- --------------------------------------------------------------------------------
Adjustable-rate revenue bonds due 2014-2024 $124,755 $124,755
9.25% debentures due 2022 100,000 100,000
Other long-term debt 73,847 85,371
-------- --------
Total $298,602 $310,126
======== ========
The adjustable-rate revenue bonds are adjusted periodically to reflect current
market rates for similar issues, generally with an upside cap of 15%. The
average rates for this debt were 2.52% and 4.03% in 2001 and 2000, respectively.
Beginning in April 2002 and pursuant to the Company's Chapter 11 filing,
trustees for these bonds declared the principal and accrued interest on such
bonds due and payable immediately. Accordingly, letters of credit supporting
these bonds have been drawn in the amount of $125.1 million and the Company is
presently not able to reissue these bonds.
The Company's 9.25% Debentures are, to the extent required by their terms,
equally and ratably secured by the security interests granted under the
Company's Revolving Credit and Participation Agreement (see Note 15). On March
1, 2002, the Company availed itself of the 30-day grace period provided under
the terms of its 9.25% debentures due March 2022, and did not make the interest
payment due March 1, 2002 at that time. Further, on April 1, 2002, Covanta
Energy Corporation (along with certain of its subsidiaries) filed voluntary
petitions for Chapter 11 reorganization and accordingly did not make the
interest payment on the 9.25% debentures at that time.
At December 31, 2000 the Company had drawn the entirety of its $50.0 million
revolving credit facility under its Master Credit Facility. The interest rate on
this facility at December 31, 2000 was 6.975% and was based on the 30 day LIBOR
plus 0.225% (see Note 15). The Company also had $63.7 million of bank debt
related to the Company's investment in the Quezon Joint Venture. The loans bore
interest at the current LIBOR plus .45% (6.98% at December 31, 2000). In
connection with the closing of the Revolving Credit and Participation Agreement,
this debt and the revolving credit facility were paid in March 2001 and,
therefore, are classified in current portion of long-term debt in the December
31, 2000 Consolidated Balance Sheet.
Other long-term debt includes an obligation for $28.4 million, related to a sale
and leaseback arrangement relating to an energy facility. This arrangement is
accounted for as a financing, has an effective interest rate of approximately
5%, and extends through 2017. Other long-term debt also includes $22.5 million
resulting from the sale of limited partnership interests in and related tax
benefits of an energy facility, which has been accounted for as a financing for
accounting purposes. This obligation has an effective interest rate of 10% and
extends through 2015.
Other long-term debt includes a $1.7 million note associated with the
acquisition of energy assets. The note bears interest at 6.0% and matures in
2009. Long-term debt also includes $21.7 million relating to the buyout of an
operating lease at a geothermal plant and fluid field. On February 11, 2002 the
Company restructured these notes extending their maturity from April 2002 to
July 2003, and, therefore, these notes are classified as long-term in the
December 31, 2001 Consolidated Balance Sheet. These notes bear interest at the
three-month Euro dollar rate plus 2.75% (5.34% at December 31, 2001). These
notes are to be paid from substantially all available cash generated by the
related plant and the field. This debt is secured by all the Company's assets
relating to the geothermal plant and fluid field.
The maturities on long-term debt (expressed in thousands of dollars) at December
31, 2001 were as follows:
2002 $ 13,089
2003 22,114
2004 215
2005 228
2006 242
Later years 275,803
---------
Total 311,691
Less current portion 13,089
---------
Total long-term debt $ 298,602
=========
See Note 15 for a description of the credit arrangements of the Company.
14. Project Debt
Project debt (expressed in thousands of dollars) consisted of the following:
2001 2000
- --------------------------------------------------------------------------------------------------
Revenue Bonds Issued by and Prime Responsibility of Municipalities:
3.625-6.75% serial revenue bonds due 2003 through 2011 $ 373,045 $ 414,605
5.0-7.0% term revenue bonds due 2003 through 2015 319,734 330,869
Adjustable-rate revenue bonds due 2006 through 2013 133,540 136,475
---------- ----------
Total 826,319 881,949
---------- ----------
Revenue Bonds Issued by Municipal Agencies with Sufficient
Service Revenues Guaranteed by Third Parties:
5.25-8.9% serial revenue bonds due 2003 through 2008 69,193 78,420
---------- ----------
Other Revenue Bonds:
4.7-5.5% serial revenue bonds due 2003 through 2015 86,365 92,795
5.5-6.7% term revenue bonds due 2014 through 2019 68,020 68,020
---------- ----------
Total 154,385 160,815
---------- ----------
Other project debt 252,484 169,204
---------- ----------
Total long-term project debt $1,302,381 $1,290,388
========== ==========
Project debt associated with the financing of waste-to-energy facilities is
generally arranged by municipalities through the issuance of tax-exempt and
taxable revenue bonds. The category, "Revenue Bonds Issued by and Prime
Responsibility of Municipalities," includes bonds issued with respect to which
debt service is an explicit component of the client community's obligation under
the related service agreement. In the event that a municipality is unable to
satisfy its payment obligations, the bondholders' recourse with respect to the
Company is limited to the waste-to-energy facilities and restricted funds
pledged to secure such obligations. The category, "Revenue Bonds Issued by
Municipal Agencies with Sufficient Service Revenues Guaranteed by Third
Parties," includes bonds issued to finance two facilities for which contractual
obligations of third parties to deliver waste ensure sufficient revenues to pay
debt service, although such debt service is not an explicit component of the
third parties' service fee obligations.
The category "Other Revenue Bonds" includes bonds issued to finance one facility
for which current contractual obligations of third parties to deliver waste
provide sufficient revenues to pay debt service related to that facility through
2011, although such debt service is not an explicit component of the third
parties' service fee obligations. The Company anticipates renewing such
contracts prior to 2011.
Payment obligations for the project debt associated with waste-to-energy
facilities are limited recourse to the operating subsidiary and non-recourse to
the Company, subject to construction and operating performance guarantees and
commitments. These obligations are secured by the revenues pledged under various
indentures and are collateralized principally by a mortgage lien and a security
interest in each of the respective waste-to-energy facilities and related
assets. At December 31, 2001, such revenue bonds were collateralized by
property, plant and equipment with a net carrying value of $1,807.3 million and
restricted funds held in trust of approximately $217.4 million
The interest rates on adjustable-rate revenue bonds are adjusted periodically
based on current municipal-based interest rates. The average adjustable rate for
such revenue bonds was 2.47% and 3.86% in 2001 and 2000, respectively.
Other project debt includes an obligation of a limited partnership acquired by
subsidiaries of Covanta and represents the lease of a geothermal power plant,
which has been accounted for as a financing. This obligation, which amounted to
$30.0 million at December 31, 2001, has an effective interest rate of 5.3% and
extends through 2008 with options to renew for additional periods and has a fair
market value purchase option at the conclusion of the initial lease term.
Payment obligations under this lease arrangement are limited to assets of the
limited partnership and revenues derived from a power sales agreement with a
third party, which are expected to provide sufficient revenues to make rental
payments. Such payment obligations are secured by all the assets, revenues, and
other benefits derived from the geothermal power plant, which had a net carrying
value of approximately $64.4 million at December 31, 2001.
All revenues from the limited partnership are contractually required by the
lessor to be deposited into a series of escrow accounts administered by an
independent escrow agent. A letter agreement with the lessor, as amended on
December 20, 2000, also required that if Covanta's senior debt rating fell below
investment grade, the limited partnership would commence depositing funds into a
lease reserve account pursuant to the existing project document until $7,500,000
was in the account. On January 16, 2002, Covanta's senior debt rating fell below
investment grade, as defined. On May 13, 2002, the Bankruptcy Court issued a
final order (the "Final Order") approving certain changes to the existing lease
documents negotiated as a result of the limited partnership's bankruptcy filing
on April 1, 2002. Under the Final Order, the limited partnership agreed to make
all lease payments due after the Petition Date. The Final Order did not
authorize the limited partnership to pay any lease amounts due prior to April 1,
2002, but instead ordered the limited partnership to place that amount in escrow
and accrue interest. The pre-petition lease payments being held in escrow would
be paid to the lessor with interest if the limited partnership assumes the
lease. If the limited partnership rejects the lease the escrowed funds and
interest would be returned to the limited partnership. Pursuant to the Final
Order, the limited partnership is not required to fund the lease reserve account
until the earliest of (1) the effective date of a plan of reorganization, (2)
expiration of the debtor in possession facility, but no later than October 1,
2003, and (3) a default arising after the Petition Date. On June 27, 2002 and in
compliance with the Final Order, the Bankruptcy Court approved an Order
Authorizing Assumption of Certain Intercompany Agreements authorizing the
limited partnership to assume executory contracts and agreements with related
parties.
Other project debt also includes $7.1 million due to a financial institution as
part of the refinancing of project debt in the category "Revenue Bonds Issued by
and Prime Responsibility of Municipalities." The debt service associated with
this loan is included as an explicit component of the client community's
obligation under the related service agreement. A portion of the funds was
retained in the Company's restricted funds and is loaned to the community each
month to cover the community's monthly service fees. The Company's repayment for
the other part of the loan is limited to the extent repayment is received from
the client community. This obligation has an effective interest rate of 7.06%
and extends through 2005.
Other project debt includes $15.1 million due to financial institutions which
bears interest at an adjustable rate that was the three-month LIBOR rate plus
1.3% (3.40% at December 31, 2001). The debt extends through 2005 and is secured
by substantially all the assets of a subsidiary that owns various power plants
in the United States, which had a carrying value of approximately $ 112.4
million at December 31, 2001, and a credit enhancement of $10.0 million.
Other project debt includes $58.2 million due to banks of which $23.9 million is
denominated in U.S. dollars and $34.3 million is denominated in Thai Baht. This
debt related to a Thailand gas-fired energy facility. The U.S. dollar debt bears
interest at the annual LIBOR, plus 2.75% (5.06% at December 31, 2001) and the
Thai Baht debt bears an interest rate of Thai bank MLR plus .5%. The MLR, which
is the melded Maximum Lending Rate of the consortium of Thai banks that has lent
to the project, was approximately 7.50% at December 31, 2001. The debt extends
through 2012, is non-recourse to Covanta and is secured by all project assets,
which had a net carrying value of approximately $102.5 million at December 31,
2001. In March 2002, the Company sold its interest in this plant (see Note 32).
Other project debt includes $31.0 million due to financial institutions for the
purchase of the Magellan Cogeneration Inc. power plant in the Philippines. This
debt bears interest at rates equal to the three-month LIBOR (3.52% at December
31, 2001) plus spreads that increase from plus 4.25% until June 2002, to plus
4.5% from June 2002 to June 2005, to plus 4.875% from June 2005 to June 2007.
The rate was 7.7% at December 31, 2001. This debt is non-recourse to Covanta and
is secured by all assets of the project, which had a net carrying value of $51.9
million at December 31, 2001, and all revenues and contracts of the project and
by a pledge of the Company's ownership in the project.
Other project debt includes approximately $56.3 million due to financial
institution. This debt relates to the purchase of a diesel-fired power plant in
India. It is denominated in Indian rupees and bears interest at rates ranging
from 14.5% to 16.46%. The debt extends through 2010, is non-recourse to Covanta
and is secured by the project assets, which had a net book value at December 31,
2001 of approximately $81.8 million.
Other project debt includes $54.7 million due to financial institutions, of
which $35.3 million is denominated in U.S. dollars and $19.4 million is
denominated in Indian Rupees. This debt relates to the purchase of a
diesel-fired power plant in Tamil Nadu, India. The U.S. dollar debt bears
interest at the three-month LIBOR, plus 4.5% (7.1% at December 31, 2001). The
Indian Rupee debt bears interest at rates ranging from 16% to 16.5% at December
31, 2001. The debt extends through 2011, is non-recourse to Covanta, and is
secured by the project assets, which had a net carrying value at December 31,
2001 of approximately $87.3 million.
At December 31, 2001, the Company had one interest rate swap agreement that
economically fixes the interest rate on certain adjustable-rate revenue bonds.
The swap agreement was entered into in September 1995 and expires in January
2019. This swap agreement relates to adjustable rate revenue bonds in the
category "Revenue Bonds Issued by and Prime Responsibility of Municipalities."
Any payments made or received under the swap agreement, including fair value
amounts upon termination, are included as an explicit component of the Client
Community's obligation under the related service agreement. Therefore, all
payments made, or received under the swap agreement are a passthrough to the
Client Community. Under the swap agreement, the Company will pay an average
fixed rate of 9.8% for 2002 through January 2005, and 5.18% thereafter through
January 2019, and will receive a floating rate equal to the rate on the
adjustable rate revenue bonds, unless certain triggering events occur (primarily
credit events), which results in the floating rate converting to either a set
percentage of LIBOR or a set percentage of the BMA Municipal Swap Index, at the
option of the swap counterparty (Note 1). In the event the Company terminates
the swap prior to its maturity, the floating rate used for determination of
settling the fair value of the swap would also be based on a set percentage of
one of these two rates at the option of the counterparty. For the years ended
December 31, 2001 and 2000, the floating rate on the swap averaged 2.46% and
4.09%, respectively. The notional amount of the swap at December 31, 2001 was
$80.2 million and is reduced in accordance with the scheduled repayments of the
applicable revenue bonds. The counterparty to the swap is a major financial
institution. The Company believes the credit risk associated with nonperformance
by the counterparty is not significant. The swap agreement resulted in increased
debt service expense of $2.2 million, $1.1 million and $1.7 million for 2001,
2000 and 1999, respectively. The effect on Covanta's weighted-average borrowing
rate of the project debt was an increase of .17%, .07% and .11%, for 2001, 2000
and 1999, respectively.
The maturities on long-term project debt (expressed in thousands of dollars) at
December 31, 2001 were as follows:
2002 $ 113,112
2003 118,847
2004 121,734
2005 123,023
2006 118,504
Later years 820,273
----------
Total 1,415,493
Less current portion 113,112
----------
Total long-term project debt $1,302,381
==========
See Note 15 for a description of the credit arrangements of the Company.
15. Credit Arrangements
At December 31, 2000, Covanta had no unused revolving credit lines and under its
principal revolving credit facility the Company had borrowed $50.0 million (see
Note 13). On March 14, 2001, the Company entered into a Revolving Credit and
Participation Agreement (the Master Credit Facility) with its principal credit
providers and paid the entire $50.0 million revolving credit line debt. The
Credit Agreement replaced the Company's major outstanding credit facilities with
one master credit facility that created a credit line of approximately $146
million and included a sub-facility which was permitted to only be used to
provide certain letters of credit which were required if the Company's
outstanding debt securities are no longer rated investment grade.
Under the terms of the Master Credit Facility, which matured on May 31, 2002,
without being fully discharged, and is secured by substantially all of the
Company's domestic assets other than those subject to prior liens of third
parties, the Company's credit facility was available to be used for working
capital and other general corporate purposes as well as to fund certain letter
of credit requirements. Under the facility, as amended, the Company agreed not
to make investments in new energy projects during the term of the Master Credit
Facility. The Master Credit Facility also contained several financial covenants
relating to the Company's cash position, net worth, and compliance with leverage
and interest coverage tests.
As a result of the Master Credit Facility maturing without being fully
discharged by the DIP Credit Facility discussed below, along with non-compliance
with certain required financed ratios also discussed below and possible other
items, the Company is in default of its Master Credit Facility. This, among
other things, will be addressed in the Company's Chapter 11 bankruptcy
proceeding.
The financial covenants of the Master Credit Facility provide limits on the (I)
the ratio of (a) the sum of Consolidated Operating Income (as shown in the
Consolidated Statements of Operations), plus LOC Fees (defined in the Master
Credit Facility as letter of credit fees, commitment fees, and amortization of
agency and termination fees) to the extent included in Operating Income, and
Minority Interest (as shown on the Consolidated Statement of Income) to (b) the
total interest expense on the Company's indebtedness, plus LOC Fees, less
interest income, (II) the ratio of the Company's net indebtedness to adjusted
Earnings Before Interest and Taxes ("EBIT") as defined for the four quarters
ended December 31, 2001, and (III) the sum of capital stock, capital surplus and
earned surplus as shown on the Company's Consolidated Balance Sheets. The Master
Credit Facility provides that for the first quarter of 2001, consolidated net
worth must exceed the amount of consolidated net worth shown on the Company's
Consolidated Balance Sheet as of December 31, 2000. For each succeeding quarter,
the permitted minimum net worth is increased by 75% of the Company's
consolidated net income (but not net loss) for such quarter.
At the time the Master Credit Facility was executed, the Company believed that
it would be able to meet the liquidity covenants in the Master Credit Facility,
timely discharge its obligations on maturity of the Master Credit Facility and
repay or refinance its convertible subordinated debentures from cash generated
by operations, the proceeds from the sale of its non-core businesses and access
to the capital markets. However, a number of factors in 2001 and early 2002
affected these plans, including:
(1) The sale of non-core assets took longer and yielded substantially
less proceeds than anticipated;
(2) The power crisis in California substantially reduced the Company's
liquidity in 2001 as a result of California utilities' failures to
pay for power purchased from the company; and
(3) A general economic downturn during 2001 and a tightening of credit
and capital markets, particularly for energy companies which were
substantially exacerbated by the bankruptcy of Enron Corporation.
As a result of a combination of these factors during 2001 and early 2002, the
Company was forced to obtain seven amendments to the Master Credit Facility.
Also, because of the California energy crisis, analyses raising doubt about the
financial viability of the independent power industry, the Enron crisis, the
decline in financial markets as a result of the events of September 11, 2001 and
the drop in the demand for securities of independent power companies, the
Company was unable to access capital markets.
In 2001, the Company also began a wide-ranging review of strategic alternatives
given the very substantial debt maturities in 2002, which far exceed the
Company's cash resources. In this connection, throughout the last six months of
2001 and the first quarter of 2002, the Company sought potential minority equity
investors, conducted a broad-based solicitation for indications of interest in
acquiring the Company among potential strategic and financial buyers and
investigated a combined private and public placement of equity securities. On
December 21, 2001, in connection with a further amendment to the Master Credit
Facility, the Company issued a press release stating its need for further
covenant waivers and for access to short term liquidity. Following this release,
the Company's debt rating by Moody's and Standard & Poor's was reduced below
investment grade on December 27, 2001 and January 16, 2002, respectively. These
downgrades further adversely impacted the Company's access to capital markets
and triggered the Company's commitments to provide $100 million in additional
letters of credit in connection with two waste-to-energy projects and the draws
during March of 2002 of approximately $105.2 million in letters of credit
related to the Centre and the Team. Despite the Company's wide-range search for
alternatives, ultimately the Company was unable to identify any option which
satisfied its obligations outside the Chapter 11 process. On March 1, 2002, the
Company availed itself of the 30-day grace period provided under the terms of
its 9.25% debentures due March 2022, and did not make the interest payment due
March 1, 2002 at that time.
On April 1, 2002 the Company publicly announced that as a result of the review
the Company:
(1) Determined that reorganization under the Bankruptcy Code
represents the only viable venue to reorganize the Company's
capital structure, complete the disposition of its remaining
non-core entertainment and aviation assets, and protect the
value of the energy and water franchise;
(2) Entered into a non-binding Letter of Intent with the
investment firm of Kohlberg Kravis Roberts & Co. ("KKR") for
a $225 million equity investment under which a KKR affiliate
would acquire the Company upon emergence from Chapter 11; and
(3) Announced a strategic restructuring program to focus on the
U.S. energy and water market, expedite the disposition of
non-core assets and, as a result, reduce overhead costs.
On April 1, 2002, Covanta Energy Corporation and 123 of its subsidiaries, each a
debtor in possession (the "Debtors") filed for protection under the Bankruptcy
Code and accordingly did not make the interest payment on the 9.25% debentures
due at that time.
The rights of Covanta's creditors will be determined as part of the Plan of
Reorganization. Existing common equity and preferred shareholders are not
expected to participate in the new capital structure or receive any value.
In connection with its bankruptcy filing, the Company and most of its
subsidiaries, including some that have not filed for relief under Chapter 11,
have entered into a Debtor In Possession Credit Agreement (as amended, the "DIP
Credit Facility") with the lenders who provided the revolving credit facility
under the Master Credit Facility. On April 5, 2002, the Bankruptcy Court issued
its interim order approving the debtor in possession financing which was
confirmed in a final order dated May 15, 2002, subject to the objection of
holders of limited interests in two joint venture partnerships who dispute the
inclusion of those companies in the DIP Credit Facility. The Bankruptcy Court
has taken these objections under advisement and has not indicated when it will
render a decision. The DIP Credit Facility terms are described below.
The DIP Credit Facility, which provides for the continuation of approximately
$240.0 million of letters of credit (including $208 million to secure
performance under energy contracts) previously provided under the Master Credit
Facility and a $48.2 million liquidity facility, is secured by all of the
Company's domestic assets not subject to liens of others and generally 65% of
the stock of certain of its foreign subsidiaries. Obligations under the DIP
Credit Facility will have senior status to other prepetition secured claims and
the DIP Credit Facility is now the operative debt agreement with the Company's
banks. The Master Credit Facility remains in effect to determine the rights of
the lenders who are a party to it with respect to obligations not continued
under the DIP Credit Facility.
The DIP Credit Facility comprises two tranches. The Tranche A Facility provides
the Company with a credit line of approximately $48.2 million, divided into $34
million commitments for cash borrowings under a revolving credit line and $14.2
million commitments for the issuance of certain letters of credit. The Tranche B
Facility consists of approximately $240 million commitments solely for the
extension of, or issuance of letter of credit to replace certain existing
letters of credit.
Amounts available for cash borrowing under the Tranche A Facility are subject to
monthly and budget limits. The Company may utilize the amount available for cash
borrowings under the Tranche A Facility to reimburse the issuers of letters of
credit issued under the Tranche A Facility if and when such letters of credits
are drawn, to fund working capital requirements and general corporate purposes
of the Company relating to the Company's post-petition operations and other
expenditures in accordance with a monthly budget and applicable restrictions
typical for a Chapter 11 debtor in possession financing.
Under the DIP Credit Facility, the Company will pay a one-time facility fee
equal to 2% of the amount of Tranche A commitments.
In addition, the Company will pay a commitment fee varying depending on
utilization, between .50% and 1% of the unused Tranche A commitments. The
Company will also pay a fronting fee for each Tranche A and Tranche B letter of
credit equal to the greater of $500 and 0.25% of the daily amount available to
be drawn under such letter of credit, as well as letter of credit fees of 3.25%
on Tranche A letters of credit, and 2.50% on Tranche B letters of credit fee,
calculated over the daily amount available for drawings thereunder.
Outstanding loans under the Tranche A Facility and the Tranche B Facility bear
interest at the Company's option at either the prime rate plus 2.50% or the
Eurodollar rate plus 3.50%.
The DIP Credit Facility contains covenants, which restrict (1) the incurrence of
additional debt, (2) the creation of liens, (3) investments and acquisitions (4)
contingent obligations and performance guarantees and (5) disposition of assets.
In addition, the Company must comply with certain specified levels of budget
financial and reporting covenants. The Company is currently in compliance with
these covenants, other than certain reporting requirements.
The DIP Credit Facility matures on April 1, 2003, but may, with the consent of
DIP Lenders holding more than 66-2/3% of the Tranche A Facility, be extended for
two additional periods of six months each. There are no assurances that the DIP
lenders will agree to an extension. At maturity, all outstanding loans under the
DIP Credit Facility must be repaid, outstanding letters of credit must be
discharged or cash-collateralized, and all other obligations must be satisfied
or released.
The Company believes that the DIP Credit Facility when taken together with the
Company's own funds provide it sufficient liquidity to continue to operate its
core businesses during the Chapter 11 proceeding. Moreover, the legal provisions
relating to Chapter 11 proceedings are expected to provide a legal basis for
maintaining the Company's business intact while it is being reorganized.
However, the outcome of the Chapter 11 proceedings are not within the Company's
control and no assurances can be made with respect to the outcome of these
efforts.
16. Preferred Stock
The outstanding Series A $1.875 Cumulative Convertible Preferred Stock is
convertible at any time at the rate of 5.97626 common shares for each preferred
share. Covanta may redeem the outstanding shares of preferred stock at $50 per
share, plus all accrued dividends. These preferred shares are entitled to
receive cumulative annual dividends at the rate of $1.875 per share, plus an
amount equal to 150% of the amount, if any, by which the dividend paid or any
cash distribution made on the common stock in the preceding calendar quarter
exceeded $.0667 per share. With the filing of voluntary petitions for
reorganization under Chapter 11 on April 1, 2002 (see Note 1) dividend payments
were suspended. The holders of the preferred shares are not expected to
participate in the new capital structure or receive any value following the
Chapter 11 process.
17. Common Stock and Stock Options
In 1986, Covanta adopted a nonqualified stock option plan (the "1986 Plan").
Under this plan, options and/or stock appreciation rights were granted to key
management employees to purchase Covanta common stock at prices not less than
the fair market value at the time of grant, which became exercisable during a
five-year period from the date of grant. Options were exercisable for a period
of ten years after the date of grant. As adopted and as adjusted for stock
splits, the 1986 Plan called for up to an aggregate of 2,700,000 shares of
Covanta common stock to be available for issuance upon the exercise of options
and stock appreciation rights, which were granted over a ten-year period ending
March 10, 1996.
In October 1990, Covanta adopted a nonqualified stock option plan (the "1990
Plan"). Under this plan, nonqualified options, incentive stock options, and/or
stock appreciation rights and stock bonuses may be granted to key management
employees and outside directors to purchase Covanta common stock at an exercise
price to be determined by the Covanta Compensation Committee, which become
exercisable during the five-year period from the date of grant. These options
are exercisable for a period of ten years after the date of grant. Pursuant to
the 1990 Plan, which was amended in 1994 to increase the number of shares
available by 3,200,000 shares, an aggregate of 6,200,000 shares of Covanta
common stock were available for grant over a ten-year period which ended October
11, 2000.
In 1999, Covanta adopted a nonqualified stock option plan (the "1999 Plan").
Under this plan, nonqualified options, incentive stock options, limited stock
appreciation rights ("LSAR's") and performance-based cash awards may be granted
to employees and outside directors to purchase Covanta common stock at an
exercise price not less than 100% of the fair market value of the common stock
on the date of grant which become exercisable over a three-year period from the
date of grant. These options are exercisable for a period of ten years after the
date of grant. In addition, performance-based cash awards may also be granted to
employees and outside directors. As adopted, the 1999 Plan calls for up to an
aggregate of 4,000,000 shares of Covanta common stock to be available for
issuance upon the exercise of such options and LSAR's, which may be granted over
a ten-year period ending May 19, 2009. At December 31, 2001, 2,042,032 shares
were available for grant.
Effective January 1, 2000, the 1999 Plan was amended and restated, to change the
name of the plan to the "1999 Stock Incentive Plan" and to include the award of
restricted stock to key employees based on the attainment of pre-established
performance goals. The maximum number of shares of common stock that is
available for awards of restricted stock is 1,000,000. As of December 31, 2001,
no awards of restricted stock have been made under the plan.
Under the foregoing plans, Covanta issued 3,952,900 LSARs between 1990 and
2001in conjunction with the stock options granted. These LSARs are exercisable
only during the period commencing on the first day following the occurrence of
any of the following events and terminate 90 days after such date: the
acquisition by any person of 20% or more of the voting power of Covanta's
outstanding securities; the approval by Covanta shareholders of an agreement to
merge or to sell substantially all of its assets; or the occurrence of certain
changes in the membership of the Covanta Board of Directors. The exercise of
these limited rights entitles participants to receive an amount in cash with
respect to each share subject thereto, equal to the excess of the market value
of a share of Covanta common stock on the exercise date or the date these
limited rights became exercisable, over the related option price.
In February 2000, Covanta adopted (through an amendment to the 1999 Stock
Incentive Plan) the Restricted Stock Plan for Key Employees (the "Key Employees
Plan") and the Restricted Stock Plan for Non-Employee Directors (the "Directors
Plan"). The Plans, as amended, call for up to 500,000 shares and 160,000 shares,
respectively, of restricted Covanta common stock to be available for issuance as
awards. Awards of restricted stock will be made from treasury shares of Covanta
common stock, par value $.50 per share. The Company accounts for restricted
shares at their market value on their respective dates of grant. Restricted
shares awarded under the Directors Plan vest 100% at the end of three months
from the date of award. Shares of restricted stock awarded under the Key
Employees Plan are subject to a two-year vesting schedule, 50% one year
following the date of award and 50% two years following the date of award. As of
December 31, 2001, an aggregate of 169,198 shares of restricted stock had been
awarded under the Key Employees Plan and an aggregate of 95,487 shares of
restricted stock had been awarded under the Directors Plan. The total
compensation cost recorded by the Company in 2001 and 2000 relating to the
restricted stock plans was $2.2 million and $.7 million, respectively.
In connection with the acquisition of the minority interest of Covanta Energy
Group, Inc. ("CEGI"), Covanta assumed the pre-existing CEGI stock option plan
then outstanding and converted these options into options to acquire shares of
Covanta common stock. All of these options were exercised or cancelled at August
31, 1999.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized for these stock option plans. Had compensation cost for the
options granted in 2001, 2000 and 1999 under these plans been determined
consistent with the provisions of SFAS No. 123, using the binomial
option-pricing model with the following weighted average assumptions - dividend
yield of 0.0%, 0.0%, and 0.0%; volatility of 42.47%, 39.61%, and 33.52%;
risk-free interest rate of 5.8%, 6.53%, and 5.89%; and a weighted average
expected life of 6.5 years, 7.5 years and 7.5 years, net loss and diluted loss
per share would have been $(234.8) million and $(4.73) for 2001, $(233.2)
million and $(4.71) for 2000, and $(83.3) million and $(1.70) for 1999. The
weighted-average fair value of options granted during 2001, 2000 and 1999 was
$5.61, $3.50 and $4.53, respectively.
Information regarding the Company's stock option plans is summarized as follows:
Weighted-Average
Option Price Exercise
Per Share Outstanding Exercisable Price
- --------------------------------------------------------------------------------------------------------------
1986 Plan:
December 31, 1998, balance $18.31-$28.54 620,500 601,400 $19.69
Became exercisable $22.50 19,100
Cancelled $28.54 (50,000) (50,000) $28.54
------ -------- -------- ------
December 31, 1999, balance $18.31-$22.50 570,500 570,500 $19.01
Cancelled $18.31 (475,000) (475,000) $18.31
------ -------- -------- ------
December 31, 2000, balance $22.50 95,500 95,500 $22.50
Cancelled $22.50 (85,500) (85,500) $22.50
------ -------- -------- ------
December 31, 2001, balance $22.50 10,000 10,000 $22.50
------ -------- -------- ------
1990 Plan:
December 31, 1998, balance $18.31-$31.50 4,060,600 2,293,600 $20.56
Granted $26.78 655,000 $26.78
Became exercisable $20.06-$29.38 589,800
Exercised $18.31-$23.56 (242,600) (242,600) $19.47
Cancelled $20.06-$31.50 (198,500) $23.21
------------- --------- --------- ------
December 31, 1999, balance $18.31-$29.38 4,274,500 2,640,800 $21.14
Granted $9.97 50,000 $9.97
Became exercisable $20.06-$29.38 450,900
Cancelled $18.31-$26.78 (1,956,000) (1,580,500) $21.29
------------- ----------- ----------- ------
December 31, 2000, balance $9.97-$29.38 2,368,500 1,511,200 $23.56
Became exercisable $9.97-$29.38 268,600
Cancelled $20.06-$26.78 (559,500) (436,800) $23.51
------------- -------- --------- ------
December 31, 2001, balance $9.97-$29.38 1,809,000 1,343,000 $23.51
------------ --------- --------- ------
1999 Plan:
Granted $8.66-$26.59 1,437,400 $13.13
------------ --------- ------
December 31, 1999, balance $8.66-$26.59 1,437,400 $13.13
Granted $9.97-$14.77 78,000 $12.61
Became exercisable $8.66-$26.59 474,033
Cancelled $11.78-$14.73 (26,500) (2,500) $12.34
------------- --------- ------- ------
December 31, 2000, balance $8.66-$26.59 1,488,900 471,533 $13.12
Granted $16.18-$20.23 685,100 $17.29
Exercised $11.28-$14.73 (62,863) (62,863) $12.85
Became exercisable $8.66-$26.59 443,509
Cancelled $11.28-$17.59 (153,169) (20,500) $13.52
------------- --------- ------- ------
December 31, 2001, balance $8.66-$26.59 1,957,968 831,679 $14.68
------------- --------- ------- ------
Conversion of CEGI Plan:
December 31, 1998, balance $14.17 172,061 172,061 $14.17
Exercised $14.17 (172,061) (172,061) $14.17
------ --------- -------- ------
December 31, 1999, balance - - - -
------ --------- -------- ------
December 31, 2000, balance - - - -
------ --------- -------- ------
December 31, 2001, balance - - - -
------ --------- -------- ------
-
Total December 31, 2001 $8.66-$29.38 3,776,968 2,184,679 $19.34
------------ --------- --------- ------
The following table summarizes information about stock options outstanding at
December 31, 2001:
Options Outstanding Options Exercisable
---------------------------------------------------- ---------------------------------
Range of Number of Weighted-Average Weighted-Average Number of Weighted-Average
Exercise Shares Remaining Exercise Shares Exercise
Prices Outstanding Contractual Life Price Outstanding Price
- -----------------------------------------------------------------------------------------------------------
$ 8.66-$12.98 847,867 7.9 years $11.53 522,009 $11.58
$14.10-$21.15 1,483,101 7.5 years $17.39 623,000 $17.63
$21.19-$29.38 1,446,000 4.8 years $24.91 1,039,670 $24.26
- ------------- --------- ----------- ------ --------- ------
$ 8.66-$29.38 3,776,968 6.6 years $18.95 2,184,679 $19.34
- ------------- --------- ----------- ------ --------- ------
The weighted-average exercise prices for all exercisable options at December 31,
2001, 2000 and 1999 were $19.34, $20.67, and $20.76, respectively.
At December 31, 2001, there were 10,050,477 shares of common stock reserved for
the exercise of stock options, the issuance of restricted stock and the
conversion of preferred shares and debentures.
In 1998, Covanta's Board of Directors authorized the purchase of shares of the
Company's common stock in an amount up to $200 million. From 1998 through
December 31, 2001, 2,223,000 shares of common stock were purchased at a total
cost of $58.9 million. No shares were purchased during 2001 and 2000.
Existing common stock and stock option holders are not expected to participate
in the new capital structure or receive any value following the Chapter 11
process (see Note 1).
18. Shareholders' Rights Agreement
In 1990, the Board of Directors declared a dividend of one preferred stock
purchase right ("Right") on each outstanding share of common stock pursuant to a
Rights Agreement. In 2000, the Board of Directors amended and extended the
Rights Agreement. Among other provisions, each Right may be exercised to
purchase a one one-hundredth share of a new series of cumulative participating
preferred stock at an exercise price of $80, subject to adjustment. The Rights
may only be exercised after a party has acquired 15% or more of the Company's
common stock or commenced a tender offer to acquire 15% or more of the Company's
common stock. The Rights do not have voting rights, expire October 2, 2010, and
may be redeemed by the Company at a price of $.01 per Right at any time prior to
the acquisition of 15% of the Company's common stock.
In the event a party acquires 15% or more of the Company's outstanding common
stock in accordance with certain defined terms, each Right will then entitle its
holders (other than such party) to purchase, at the Right's then-current
exercise price, a number of the Company's common shares having a market value of
twice the Right's exercise price. At December 31, 2001, 49,835,076 Rights were
outstanding, but are not expected to have any function or value following the
Chapter 11 process.
19. Foreign Exchange
Foreign exchange translation adjustments net of tax for 2001, 2000 and 1999,
amounting to $4.0 million, $8.0 million, and $4.6 million, respectively, have
been charged directly to Other Comprehensive Loss. In 2001, $7.0 million
relating to the sale or write-down of net assets held for sale was reclassified
to gain (loss) on sale of businesses ($6.7 million) and write-down of assets
held for sale ($.3 million). In 2000, $25.3 million relating to Aviation and
Entertainment businesses sold were reclassified to loss from discontinued
operations. Foreign exchange transaction adjustments, amounting to $.7 million,
$.4 million, and zero, have been charged directly to net loss for 2001, 2000 and
1999, respectively.
20. Debt Service Charges
Debt service charges for Covanta's project debt (expressed in thousands of
dollars) consisted of the following:
2001 2000 1999
- ---------------------------------------------------------------------------------------------
Interest incurred on taxable and
tax-exempt borrowings $94,656 $88,426 $93,612
Interest earned on temporary investment
of certain restricted funds (1,551) (1,363) (1,991)
------- ------- -------
Net interest incurred 93,105 87,063 91,621
Interest capitalized during construction in property,
plant and equipment (5,985) (2,336) (3,182)
------- ------- -------
Debt service charges--net $87,120 $84,727 $88,439
======= ======= =======
21. Pensions and Other Postretirement Benefits
Covanta has retirement plans that cover substantially all of its employees. A
substantial portion of hourly employees participate in defined contribution
plans. Other employees participate in defined benefit or defined contribution
plans. The defined benefit plans provide benefits based on years of service and
either employee compensation or a fixed benefit amount. Covanta's funding policy
for those plans is to contribute annually an amount no less than the minimum
funding required by ERISA. Contributions are intended to provide not only
benefits attributed to service to date but also for those expected to be earned
in the future.
In 1992, the Company discontinued its policy of providing postretirement health
care and life insurance benefits for all salaried employees, except those
employees who were retired or eligible for retirement at December 31, 1992.
In 1999, the Company discontinued a defined benefit retirement plan for certain
Covanta salaried employees and paid benefits due to employees at December 31,
1999.
Amounts for 1999 exclude details related to the defined benefit plans and other
postretirement benefits for the Aviation and Entertainment businesses, since
these businesses were previously classified as discontinued operations. The
following table sets forth the details of Covanta's defined benefit plans' and
other postretirement benefit plans' funded status and related amounts recognized
in Covanta's Consolidated Balance Sheets (expressed in thousands of dollars):
Pension Benefits Other Benefits
---------------- --------------
2001 2000 2001 2000
- --------------------------------------------------------------------------------------------------------------
Change in Benefit Obligation:
Benefit obligation at beginning of year $29,664 $25,108 $9,325 $ 8,905
Service cost 2,275 2,105 64 57
Interest cost 2,270 2,012 713 675
Effect of settlement (86)
Actuarial loss 3,031 1,231 1,012 7
Benefits paid (640) (792) (245) (233)
------- ------- -------- --------
Benefit obligation at end of year 36,600 29,664 10,869 9,325
------- ------- -------- --------
Change in Plan Assets:
Plan assets at fair value
at beginning of year 24,994 23,430
Actual return on plan assets 679 2,056
Company contributions 1,178 300 245 233
Benefits paid (640) (792) (245) (233)
------- ------- -------- --------
Plan assets at fair value at year end 26,211 24,994
------- ------- -------- --------
Reconciliation of Accrued Benefit Liability and
Net Amount Recognized:
Funded status of the plan (10,389) (4,670) (10,869) (9,325)
Unrecognized:
Net transition asset (54)
Prior service cost 600 638
Net loss (gain) 1,954 (2,528) (808) (1,937)
------- ------- -------- --------
Net Amount Recognized $(7,835) $(6,614) $(11,677) $(11,262)
======= ======= ======== ========
Amounts Recognized in the Consolidated Balance
Sheets Consist of:
Accrued benefit liability $(7,835) $(6,614) $(11,677) $(11,262)
------- ------- -------- --------
Net Amount Recognized $(7,835) $(6,614) $(11,677) $(11,262)
======= ======= ======== ========
Weighted Average Assumptions as of December 31:
Discount Rate 7.25% 7.75% 7.25% 7.75%
Expected return on plan assets 8.00% 8.00%
Rate of compensation increase 4.50% 4.50% 4.50% 4.50%
For management purposes, an annual rate of increase of 12.0% in the per capita
cost of health care benefits was assumed for 2001 for covered employees. The
rate was assumed to decrease gradually to 5.5% in 2005 and remain at that level.
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the pension plans with accumulated benefit obligations in
excess of plan assets were $4.5 million, $2.4 million, and zero, respectively as
of December 31, 2001 and $10.3 million, $8.0 million and $5.3 million,
respectively as of December 31, 2000.
Contributions and costs for defined contribution plans are determined by benefit
formulas based on percentage of compensation as well as discretionary
contributions and totaled $1.5 million, $5.6 million, and $9.0 million, in 2001,
2000, and 1999, respectively. Plan assets at December 31, 2001, 2000 and 1999,
primarily consisted of common stocks, United States government securities, and
guaranteed insurance contracts.
With respect to union employees, the Company is required under contracts with
various unions to pay, generally based on hours worked, retirement, health and
welfare benefits. These multi-employer defined contribution plans are not
controlled or administered by the Company. The amount charged to expense for
such plans during 2001, 2000 and 1999 was $3.0 million, $3.6 million and $4.9
million, respectively.
Pension costs for Covanta's defined benefit plans and other post-retirement
benefit plans included the following components (expressed in thousands of
dollars):
Pension Benefits Other Benefits
- ---------------------------------------------------------------------------------------------------------------
2001 2000 1999 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------
Components of Net Periodic Benefit Cost:
Service Cost $ 2,275 $ 2,105 $ 2,866 $ 64 $ 57 $ 39
Interest Cost 2,270 2,012 1,871 713 675 593
Expected return on plan assets (2,027) (1,859) (1,441)
Amortization of unrecognized:
Net transition (asset) obligation (53) (54) 27
Prior service cost 37 207 233
Net gain (102) (100) (33) (117) (197) (124)
------- ------- ------- ----- ----- -----
Net periodic benefit cost $ 2,400 $ 2,311 $ 3,523 $ 660 $ 535 $ 508
======= ======= ======= ===== ===== =====
Curtailment Gain $(2,493)
Settlement Gain (51) $(117)
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plan. A one-percentage point change in the assumed
health care trend rate would have the following effects (expressed in thousands
of dollars):
One-Percentage One-Percentage
Point Increase Point Decrease
-------------- --------------
Effect on total service and interest cost components $ 24 $ (22)
Effect on postretirement benefit obligation $ 289 $(269)
22. Special Charges
In December 2000, the Company approved a plan to reorganize its development
office in Hong Kong and its New Jersey headquarters. As a result, the Company
implemented a reduction in its workforce of approximately 80 employees, both
domestically and internationally, in connection with the refocusing of the
Company's energy development activities and streamlining its organizational
structure. This plan included closure of the Company's Hong Kong office, the
closure of its Brazilian development office, and consolidation of certain
domestic regional organizational structure. As of December 31, 2001, the plan
was completed except for the closure of the office in Brazil, and certain
remaining severance payments had yet to be made. During 2002, the Company
anticipates closing the Brazilian office and the severance payments to Energy
employees are scheduled to cease. The amounts recorded included $10.3 million
for severance costs, $4.0 million related to the buyout of certain leases, the
write-down of certain fixed assets of $.3 million, and $2.0 million in legal and
consulting services fees related to that plan. Also, in 2000, Energy determined
that a majority-owned project in China exceeded its net realizable value, and in
accordance with SFAS No. 121, the Company recorded a $2.8 million write-down of
that project. In 2001, the Company exchanged ownership in this project, for an
increase in its ownership in another project in China. The value used as a basis
for the write-down was obtained as a result of the negotiations for that
transaction. Upon consummation of that transaction no additional gain or loss
was recognized.
In September 1999, the Company's Board of Directors approved a plan to dispose
of its Aviation and Entertainment businesses and close its New York
headquarters, and in December 1999 approved a plan to exit other non-core
businesses so that Covanta could focus its resources on its Energy business. At
December 31, 2001, that plan was substantially completed. However, several
non-core businesses have not yet been sold (see Note 3). Of the New York
employees, 24 employees were terminated during 1999; 139 were terminated during
2000; and 29 employees were terminated in 2001. As of December 31, 2001, 24
employees remained and the Company intends to terminate them at various dates
throughout 2002, as the other remaining aviation and entertainment businesses
are sold. Severance payments for several of those employees to be terminated in
2002 are anticipated to continue into 2003.
As a result of these decisions, the Company has incurred various expenses, which
have been recognized in its continuing and discontinued operations. These
expenses in 2001 include bank fees and expenses incurred in connection with the
Company entering into the Master Credit Facility in March 2001 and related
subsequent amendments of $25.5 million. Also in 2001, the Company
re-characterized $2.1 million of lease buy-out costs as severance cost. This
reflects the fact that in 2001 the Company negotiated certain lease buy-outs at
terms that were more favorable than anticipated; however, the terms with some
severed employees were worse than anticipated. The net effect of these
negotiations was favorable and resulted in a reduction of total special charges
of $0.4 million.
In 2000, these expenses include $22.8 million of creditors' fees and expenses
incurred in connection with extensions of credit agreements and covenant waivers
($18.0 million), and fees and expenses paid to financial advisors and
consultants for their performance of due diligence procedures in connection with
financing efforts to support the Company's balance sheet recapitalization plan
($4.8 million); legal, accounting and consulting expenses related to the
capitalization plan and to the sales of businesses of $14.7 million; workers'
compensation insurance charges of $17.5 million related to discontinued
operations and other sold businesses; and severance charges of $.2 million. The
Company also assigned its lease of the Company aircraft resulting in the
write-off of certain lease prepayments of $1.1 million. The expenses also
include the accelerated amortization of a new data processing system of $11.4
million, based upon a revised useful life of 15 months starting October 1, 1999.
In 1999, these expenses include severance costs mainly for its New York City
employees of $41.5 million; contract termination costs of its former Chairman
and Chief Executive Officer of $17.5 million; the write-down to estimated net
realizable value of other non-core businesses of $36.2 million based upon the
estimated proceeds from the sale of such businesses; and the accelerated
amortization of a new data processing system of $2.3 million based upon a
revised useful life of 15 months starting October 1, 1999. Such expenses also
include the costs to abandon expansion plans of its Entertainment business
totaling $17.8 million, which includes the forfeiture of the nonrefundable
deposit and related costs totaling $10.5 million in connection with the
termination of the proposed acquisition of Volume Services America ("VSA"). In
addition, charges totaling $13.2 million were recorded to recognize losses prior
to the decision to discontinue the Entertainment business relating to the sale
of assets and to the write-down of unamortized contract acquisition costs at two
venues.
In addition, Datacom recorded write-downs of its accounts receivable from
Genicom in 2000 of $6.5 million and in 1999, write-downs of inventories and
accounts receivable from Genicom of $10.5 million, primarily as a result of
Genicom's poor financial position in 1999 evidenced by Genicom's announcement of
its violation of its credit facilities in the third quarter and its subsequent
filing for protection from creditors under the provisions of Chapter 11 of the
U.S. Bankruptcy Code on March 10, 2000. The Company sold Datacom in November
2001.
The following is a summary of the principal special charges (both cash and
noncash charges) recognized in the years ended, December 31, 2001, 2000 and 1999
(expressed in thousands of dollars):
Balance at Charges for Total Amounts Balance at
January Continuing Special Paid In December
1, 2001 Operations Charges 2001 31, 2001
-------------------------------------------------------------------------------
2001
Severance for 216 employees $27,500 $10,000 $17,500
Contract termination settlement 400 400
Bank fees 2,100 $25,500 $25,500 16,600 11,000
Severance for approximately
80 Energy employees 10,300 1,700 1,700 8,200 3,800
Office closure costs 4,000 (2,100) (2,100) 1,300 600
Professional services relating to
Energy reorganization 1,500 1,500
------- ------- ------- ------- -------
Total $45,800 $25,100 $25,100 $37,600 $33,300
======= ======= ======= ======= =======
Balance at Charges for Charges for Total Amounts Balance at
January Continuing Discontinued Special Paid In December
1, 2000 Operations Operations Charges 2000 31, 2000
-------------------------------------------------------------------------------
2000
Severance for 216 employees $40,400 $ 900 $ (700) $ 200 $13,100 $27,500
Contract termination settlement 15,700 15,300 400
Bank fees 18,000 18,000 15,900 2,100
Recapitalization plan expenses 4,800 4,800 4,800
Professional services relating to
recapitalization and sales of 5,100 9,600 14,700 14,700
businesses
Severance for approximately
80 Energy employees 10,300 10,300 10,300
Office closure costs 4,000 4,000 4,000
Professional services relating to
Energy reorganization 2,000 2,000 500 1,500
------- ------- ------ ------- ------- -------
Subtotal 56,100 45,100 8,900 54,000 $64,300 $45,800
======= =======
Workers' compensation charges 8,700 8,800 17,500
Write-down of Datacom receivables 6,500 6,500
Write-off of aircraft lease 1,100 1,100
prepayments
Accelerated amortization of new data
processing system 5,600 5,800 11,400
Write-down of impaired Energy assets 3,100 3,100
------- ------- ------ -------
Total $56,100 $70,100 $23,500 $ 93,600
======= ======= ======= ========
Charges for Charges for Total Amount Balance at
Continuing Discontinued Special Paid In December
Operations Operations Charges 1999 31, 1999
--------------------------------------------------------------------
1999
Severance for 216 employees
(mainly New York) $ 16,400 $ 25,100 $ 41,500 $1,100 $ 40,400
Contract termination settlement 17,500 17,500 1,800 15,700
Termination of VSA acquisition 10,500 10,500 10,500
-------- -------- -------- ------- --------
Subtotal 33,900 35,600 69,500 $13,400 $ 56,100
======= ========
Write-down of non-core businesses:
OEES goodwill ($23,000) and property and other
assets ($5,400); ADTI goodwill ($7,800) 36,200 36,200
Datacom inventory ($7,200) and receivables ($3,300) 10,500 10,500
Entertainment asset sales and abandonment:
Sale of Grizzly Nature Center ($4,200)
and a casino in Aruba ($2,500); unrecoverable
contract acquisition costs ($6,500) 13,200 13,200
Abandonment of Entertainment expansion:
Casino facilities in South Africa 7,300 7,300
Accelerated amortization of new data
processing system 500 1,800 2,300
-------- -------- --------
Total $81,100 $ 57,900 $139,000
======== ======== ========
In 2001, bank fees of $25.5 million are included in Other expense-net and the
net reversal of severance of the $.4 million discussed above is included in
plant operating expenses.
In 2000, for continuing operations, bank fees of $18.0 million, recapitalization
plan expenses of $4.8 million, professional services fees relating to the
recapitalization plan and sales of businesses of $5.1 million, and Energy's
severance costs of $10.3 million, office closure costs of $4.0 million,
professional services expenses of $2.0 million and write-down of impaired assets
of $3.1 million are included in Other expense-net; workers' compensation
expenses of $8.7 million and provisions relating to Datacom receivables of $6.5
million are included in Other operating costs and expenses; the write-off of the
aircraft lease prepayments of $1.1 million and severance charges of $.9 million
are included in selling, administrative and general expenses; and accelerated
amortization of the new data processing system of $5.6 million is included in
depreciation and amortization in the 2000 Statement of Consolidated Operations
and Comprehensive Loss.
In 1999, for continuing operations, severance accruals of $16.4 million, the
provision for contract termination settlement of $17.5 million, and the
write-down of non-core businesses of $36.2 million, are included in selling,
administrative and general expenses; the provisions relating to Datacom
receivables of $3.3 million are included in Other operating costs and expenses;
a provision relating to Datacom's inventory of $7.2 million is included in costs
of goods sold; and accelerated amortization of the new data processing system of
$.5 million is included in depreciation and amortization in the 1999 Statement
of Consolidated Operations and Comprehensive Loss.
The amount accrued for severance is based upon the Company's written severance
policy and the positions eliminated. The accrued severance does not include any
portion of the employees' salaries through their severance dates.
The amount accrued for the contract termination costs of the Company's former
Chairman and Chief Executive Officer is based upon a settlement agreement
reached in December 1999. Pursuant to the settlement agreement, in 1999 the
Company forgave demand notes dated August 1999 in the face amount of
approximately $1.8 million, and with the exception of certain insurance
benefits, paid the remaining amounts in 2000.
23. Income Taxes
The components of the benefit for income taxes (expressed in thousands of
dollars) were as follows:
2001 2000 1999
- -----------------------------------------------------------------------------
Current:
Federal $ (470) $ 4,552
State $ 6,002 2,558 4,108
Foreign 6,512 1,631 1,367
--------- -------- --------
Total current 12,514 3,719 10,027
--------- -------- --------
Deferred:
Federal (23,917) (36,844) (13,809)
State (4,629) (1,024) (3,543)
Foreign (998) 408
--------- -------- --------
Total deferred (29,544) (37,868) (16,944)
--------- -------- --------
Total benefit for
income taxes $ (17,030) $(34,149) $ (6,917)
========= ======== ========
The benefit for income taxes (expressed in thousands of dollars) varied from the
Federal statutory income tax rate due to the following:
2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
Amount Percent of Loss Amount Percent of Loss Amount Percent of Loss
of Tax Before Taxes of Tax Before Taxes of Tax Before Taxes
Taxes at statutory rate $(84,161) 35.0% $(40,246) 35.0% $(12,961) 35.0%
State income taxes, net of
federal tax benefit 892 (0.4) 997 (.9) 367 (1.0)
Taxes on foreign earnings 879 (0.4) (2,101) 1.8 (3,469) 9.3
Subpart F income and foreign
dividends 3,755 (1.6)
Amortization of goodwill 56 651 (1.7)
Write-down of goodwill 767 (0.3) (1,729) 1.5 10,795 (29.1)
Energy credits (2,338) 6.3
Valuation allowance 59,210 (24.6) 7,000 (6.1)
Other--net 1,572 (0.6) 1,930 (1.6) 38 (.1)
--------- ---- -------- ---- -------- ----
Benefit for
income taxes $ (17,030) 7.1% $(34,149) 29.7% $ (6,917) 18.7%
========= ==== ======== ==== ======== ====
The components of the net deferred income tax liability (expressed in thousands
of dollars) as of December 31, 2001 and 2000, were as follows:
2001 2000
- ------------------------------------------------------------------------------------------
Deferred Tax Assets:
Deferred income $ 877
Accrued expenses $106,767 82,399
Other liabilities 18,515 48,986
Net assets held for sale and related obligations 41,001 26,734
Net operating losses 42,121 13,683
Valuation allowance (89,923) (7,000)
Investment tax credits 26,073 21,133
Alternative minimum tax credits 28,514 28,212
-------- --------
Total deferred tax assets 173,068 215,024
-------- --------
Deferred Tax Liabilities:
Unbilled accounts receivable 80,087 40,723
Property, plant, and equipment 352,492 416,213
Other 36,658 37,505
-------- --------
Total deferred tax liabilities 469,237 494,441
-------- --------
Net deferred tax liability $296,169 $279,417
======== ========
Deferred tax assets and liabilities (expressed in thousands of
dollars) are presented as follows in the balance sheets:
2001 2000
- ---------------------------------------------------------------------------- ------------
Net deferred tax liability--noncurrent $323,669 $315,931
Less net deferred tax asset--current (27,500) (36,514)
-------- --------
Net deferred tax liability $296,169 $279,417
======== ========
A valuation allowance of $75.6 million has been recorded because the Company
does not believe it is more likely than not that certain of the losses resulting
from the sales and writedown of and obligations related to discontinued
operations and net assets held for sale will be realized for tax purposes. At
December 31, 2001, for Federal income tax purposes, the Company had net
operating loss carryforwards of approximately $107.1 million, which will expire
in 2021, investment and tax energy credit carryforwards of approximately $26.1
million, which will expire in 2004 through 2009, and alternative minimum tax
credit carryforwards of approximately $28.5 million, which have no expiration
date. A valuation allowance of $14.3 million was recorded against the investment
and energy tax credit carryforwards because the Company does not believe it is
more likely than not that those credits will be realized for tax purposes.
24. Leases
Total rental expense amounted to $40.2 million, $63.1 million, and $54.3 million
(net of sublease income of $1.9 million, $4.2 million, and $5.2 million) for
2001, 2000 and 1999, respectively. Principal leases are for leaseholds, sale and
leaseback arrangements on waste-to-energy facilities, trucks and automobiles,
and machinery and equipment. Some of these operating leases have renewal
options.
The following is a schedule (expressed in thousands of dollars), by year, of
future minimum rental payments required under operating leases that have initial
or remaining non-cancelable lease terms in excess of one year as of December 31,
2001:
2002 $ 43,333
2003 42,686
2004 31,806
2005 32,900
2006 28,662
Later years 369,081
--------
Total $548,468
========
These future minimum rental payment obligations include $398.8 million of future
non-recourse rental payments that relate to energy facilities of which $250.1
million are supported by third-party commitments to provide sufficient service
revenues to meet such obligations. The remaining $148.7 million related to a
waste-to-energy facility at which the Company serves as operator and directly
markets one half of the facility's disposal capacity. This facility currently
generates sufficient revenues from short- and medium-term contracts to meet
rental payments. The Company anticipates renewing the short- and medium-term
contracts or entering into new contracts to generate sufficient revenues to meet
those remaining future rental payments. Also included are $21.4 million of
non-recourse rental payments relating to an energy facility operated by a
subsidiary, which are supported by contractual power purchase obligations of a
third party and which are expected to provide sufficient revenues to make the
rent payments. These non-recourse rental payments (in thousands of dollars) are
due as follows:
2002 $ 36,298
2003 36,474
2004 25,908
2005 26,027
2006 20,952
Later years 274,618
--------
Total $420,277
========
25. Loss Per Share
Basic loss per share was computed by dividing net loss reduced by preferred
stock dividend requirements, by the weighted average of the number of shares of
common stock outstanding during each year.
Diluted loss per share was computed on the assumption that all convertible
debentures, convertible preferred stock, restricted stock, and stock options
converted or exercised during each year or outstanding at the end of each year
were converted at the beginning of each year or at the date of issuance or
grant, if dilutive. This computation provided for the elimination of related
convertible debenture interest and preferred dividends.
The reconciliation of the loss and common shares included in the computation of
basic loss per common share and diluted earnings per common share for the years
ended December 31, 2001, 2000 and 1999, is as follows (in thousands, except per
share amounts):
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Loss Shares Per-Share Loss Shares Per-Share Loss Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------ ----------- ------------- ------
Loss from continuing
operations $(231,027) $(85,621) $(36,290)
Less: Preferred
stock Dividend 64 68 137
--------- -------- --------
Basic Loss
Per Share (231,091) 49,674 $(4.65) (85,689) 49,534 $(1.73) (36,427) 49,235 $(0.74)
====== ====== ======
Effect of Dilutive
Securities:
Stock options (A) (A) (A)
Restricted stock (A) (A)
Convertible
Preferred Stock (A) (A) (A)
6% Convertible
Debentures (A) (A) (A)
5.75% Convertible
Debentures (A) (A) (A)
--------- ------ --------- ------ --------- ------
Diluted Loss
Per Share $(231,091) 49,674 $(4.65) $ (85,689) 49,534 $(1.73) $ (36,427) 49,235 $(0.74)
========= ====== ====== ========= ====== ====== ========= ====== ======
(A) Antidilutive
Outstanding stock options to purchase common stock with an exercise price
greater than the average market price of common stock were not included in the
computation of diluted earnings per share. The balance of such options was
2,466,000 in 2001, 3,249,000 in 2000, and 2,954,000 in 1999. Shares of common
stock to be issued, assuming conversion of convertible preferred shares, the 6%
convertible debentures, the 5.75% convertible debentures, and unvested
restricted stock issued to employees were not included in computations of
diluted earnings per share if to do so would have been antidilutive. The common
shares excluded from the calculation were 2,175,000 in 2001, 2000 and 1999 for
the 6% convertible debentures; 1,524,000 in 2001, 2000 and 1999 for the 5.75%
convertible debentures; 172,000, 49,000, and 308,000 in 2001, 2000 and 1999,
respectively for stock options; 209,000, 220,000 and 245,000 in 2001, 2000 and
1999, respectively for convertible preferred stock and 110,000 and 76,000 in
2001 and 2000 for unvested restricted stock issued to employees.
26. Commitments and Contingent Liabilities
Covanta and certain of its subsidiaries have issued or are party to performance
bonds and guarantees and related contractual obligations undertaken mainly
pursuant to agreements to construct and operate certain energy, entertainment
and other facilities. In the normal course of business, they are involved in
legal proceedings in which damages and other remedies are sought.
An energy client community and the Company have several commercial disputes
between them. Among these is a January 16, 2002 demand by the client community
to provide a credit enhancement to a service agreement in the form of a $50
million letter of credit or a guarantee, following rating downgrades of the
Company's unsecured corporate debt. On February 22, 2002, the client community
issued a notice purporting to terminate its contract with the Company effective
May 30, 2002 if such a credit enhancement was not provided, and also demanded an
immediate payment of $2.0 million under the terms of the agreement. The Company
believes such notice was improper and has commenced a lawsuit in state court
with respect to such disputes, as well as the client community's right to
terminate. This matter has been removed to Federal court. The client community
has moved to have the case remanded to State Court and the Company has moved to
have the action transferred to the Bankruptcy Court. These matters have been
taken under advisement by the court.
The Company's agreement with another energy client also provides that following
these rating downgrades of the Company's unsecured corporate debt, the client
may, if it does not receive from the Company a $50.0 million letter of credit by
January 31, 2003, either terminate the agreement or receive a $1.0 million
reduction of its annual service fee obligation. The bankruptcy proceeding
described above stays the client's right to terminate under the agreement.
The Company is engaged in ongoing investigation and remediation actions with
respect to three airports where it provides aviation fueling services on a
cost-plus basis pursuant to contracts with individual airlines, consortia of
airlines and operators of airports. The Company currently estimates the costs of
those ongoing actions will be approximately $1.0 million (over several years),
and that airlines, airports and others should reimburse it for substantially all
these costs. To date, the Company's right to reimbursement for remedial costs
has been challenged successfully in one prior case in which the court found that
the cost-plus contract in question did not provide for recovery of costs
resulting from the Company's own negligence. That case did not relate to any of
the airports described above. Except in that instance and one other, the Company
has not been alleged to have acted with negligence. The Company has also agreed
to indemnify various transferees of its divested airport operations with respect
to certain known and potential liabilities that may arise out of such operations
and in certain instances has agreed to remain liable for certain potential
liabilities that were not assumed by the transferee. Accordingly, the Company
may in the future incur liability arising out of investigation and remediation
actions with respect to airports served by such divested operations to the
extent the purchaser of these operations is unable to obtain reimbursement of
such costs from airlines, airports or others. To date such indemnification has
been sought with respect to one airport. Because the Company did not provide
fueling services at that airport, it does not believe it will have significant
obligations with respect to this matter. The Company is currently reviewing the
potential impact of its filing under Chapter 11 on its exposure for these
liabilities.
At December 31, 2001, capital commitments for continuing operations amounted to
$7.0 million for normal replacement and growth in Energy. Other capital
commitments for Energy as of December 31, 2001 amounted to approximately $12.9
million. This amount includes a commitment to pay, in 2008, $10.6 million for a
service contract extension at an energy facility. In addition, this amount
includes $2.3 million for an oil-fired project in India, which commenced
operations in September 2001.
See Note 3 for the 2001 impairment charges related to the Company's Ottawa and
Anaheim interests.
27. Information Concerning Business Segments
As of September 29, 1999, the Company adopted a plan to discontinue the
operations of its Aviation and Entertainment segments. As a result of that
decision, the operations of those businesses were discontinued operations
through December 31, 2000 (see Note 2). At December 31, 2001, the remaining
assets and liabilities of those businesses are now reflected in the Other
segment. The Company now has two reportable segments, Energy and Other.
Covanta's Energy segment develops, owns and operates energy generating
facilities that utilize a variety of fuels, as well as water and wastewater
facilities that will similarly serve communities on a long-term basis. The
Energy segment also included environmental consulting and engineering, which
have been sold, and construction and infrastructure activities which have been
discontinued.
The Other segment is primarily comprised of non-core businesses of the Company
and at December 31, 2001 includes those Aviation and Entertainment businesses
yet to be sold. Covanta has substantially completed the disposition of its
non-core businesses through 1998, principally through the sale of the remaining
Facility Services operations (New York Region) which provided facility
management, maintenance, janitorial and manufacturing support services; and the
sale of the Charlotte, North Carolina, Binghamton, New York and Cork, Ireland
operations of Datacom; and in 2001 and 2000, principally through the sales of
ADTI, located in San Diego, California, a supplier of air combat maneuvering
instrumentation systems and after-action reporting and display systems; its Food
and Beverage/Venue Management operations; its Themed Parks and Attractions
business; its Aviation Ground Services, it's non-Port Authority Aviation Fueling
and Fixed Based Operations businesses; and its airport privatization businesses
in Argentina, Columbia and the Dominican Republic.
Revenues and loss from continuing operations, Energy and Other segments and
Corporate, (expressed in thousands of dollars) for the years ended December 31,
2001, 2000 and 1999 were as follows:
2001 2000 1999
- ------------------------------------------------------------------------------------------------
Revenues:
Energy $ 984,370 $ 970,258 $ 944,304
Other 96,827 49,744 78,251
Corporate 1,570 5,138
---------- ---------- ----------
Total Revenues $1,082,767 $1,020,002 $1,027,693
---------- ---------- ----------
Income (Loss) from Operations:
Energy $ 130,998 $ 83,584 $ 67,607
Other (including write-down of net assets held
for sale in 2001 and 2000) (297,382) (103,458) (22,731)
---------- ---------- ----------
Total income (loss) from operations (166,384) (19,874) 44,876
Corporate unallocated income and expenses - net (43,829) (59,768) (51,210)
Interest expense - net (30,246) (35,347) (30,697)
---------- ---------- ----------
Loss from Continuing Operations Before
Income Taxes, Minority Interests and the Cumulative
Effect of Change in Accounting Principle $ (240,459) $ (114,989) $ (37,031)
========== ========== ==========
Covanta's revenues include $.9 million, $46.9 million, and $59.9 million from
United States government contracts for the years ended December 31, 2001, 2000
and 1999, respectively.
Total revenues by segment reflect sales to unaffiliated customers. In computing
loss from operations, none of the following have been added or deducted:
unallocated corporate expenses, non-operating interest expense, interest income
and income taxes.
A summary (expressed in thousands of dollars) of identifiable assets,
depreciation and amortization, and capital additions of continuing operations
for the years ended December 31, 2001, 2000 and 1999 is as follows:
Identifiable Depreciation and Capital
Assets Amortization Additions
- --------------------------------------------------------------------------------
2001
Energy $3,066,322 $ 101,485 $ 61,272
Other 16,376 335
Corporate 103,128 245 181
---------- --------- --------
Consolidated $3,185,826 $ 102,065 $ 61,453
========== ========= ========
2000
Energy $2,926,701 $95,898 $ 54,225
Other 84,584 1,482 693
Corporate 287,543 12,945 47
---------- --------- --------
Consolidated $3,298,828 $ 110,325 $ 54,965
========== ========= ========
1999
Energy $3,013,282 $93,300 $ 64,655
Other 51,440 2,007 735
Corporate 95,790 6,163 407
---------- --------- --------
Consolidated $3,160,512 $ 101,470 $ 65,797
========== ========= ========
Covanta's areas of operations are principally in the United States. Operations
outside of the United States are primarily in Asia, Latin America and Europe. No
single foreign country or geographic area is significant to the consolidated
operations. A summary of revenues and identifiable assets by geographic area for
the years ended December 31, 2001, 2000 and 1999 (expressed in thousands of
dollars) is as follows:
2001 2000 1999
- --------------------------------------------------------------------------------
Revenues:
United States $ 876,794 $ 890,045 $ 926,040
Asia 170,681 112,109 82,240
Latin America 21,851 12,037 11,891
Europe 9,679 5,811 7,522
Other 3,762
---------- ---------- ----------
Total $1,082,767 $1,020,002 $1,027,693
========== ========== ==========
Identifiable Assets:
United States $2,857,945 $3,091,283 $2,751,398
Asia 329,031 176,150 399,136
Latin America (2,871) 9,419 2,784
Europe 1,571 10,910 7,194
Other 150 11,066
---------- ---------- ----------
Total $3,185,826 $3,298,828 $3,160,512
========== ========== ==========
28. Supplemental Disclosure of Cash Flow Information
(Expressed in thousands of dollars) 2001 2000 1999
- -------------------------------------------------------------------------------------------
Cash Paid for Interest and Income Taxes:
Interest (net of amounts capitalized) $123,052 $131,647 $147,597
Income taxes paid (refunded) (4,929) (13,842) 22,278
Noncash Investing and Financing Activities:
Conversion of preferred shares for common shares 2 3 4
Acquisition of property, plant and equipment for debt 21,660
Notes received in connection with issuance of common stock 1,049
Reduction of notes receivable from key employees 179
Detail of Entities Acquired:
Fair value of assets acquired 165,829
Liabilities assumed (106,393)
Net cash paid for acquisitions 59,436
29. Related Party Transactions
In 1999, four officers of the Company were extended loans for the purpose of
paying the exercise price and withholding taxes in connection with their
exercise of certain stock options. In 1999, following the termination of his
employment the notes of the former Chairman of the Company was forgiven as part
of the settlement of litigation brought by him to enforce payment of his
severance (see Note 22). On November 26, 2001 the remaining notes receivable and
accrued interest from other officers were restructured as a settlement of a
dispute surrounding the circumstances under which the loans were originally
granted. That settlement changed the notes from a fixed principal amount which
accrued interest to a variable amount, equal to the market value on November 26,
2001 of the Covanta common shares purchased by the officers when exercising the
above-mentioned stock options. At that time, the notes receivable and accrued
interest recorded by the Company were adjusted to the market value of the
Company's common shares underlying those notes. The effect of amending the loan
agreements on November 26, 2001 was to adjust the balance in the separate
component of equity by $0.2 million. Also, the subsequent indexing to the
Company's stock price of the balance due under the notes is marked to fair value
each reporting period, with the change in fair value recorded in earnings and as
an asset or liability. As of December 31, 2001, $0.6 million is recorded as a
liability as a result of the change in fair value of the Company's stock since
the amendment date.
In addition, one member of the Company's Board of Directors is a partner in a
major law firm, and another member is an employee of another major law firm.
From time to time, the Company seeks legal services and advice from those two
law firms. During 2001, 2000 and 1999, the Company paid those two law firms
approximately $1.0 million, $1.3 million and $.7 million, and $2.7 million, $1.2
million and $.2 million, respectively, for services rendered.
30. Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of SFAS No. 107, "Disclosures About
Fair Value of Financial Instruments." The estimated fair-value amounts have been
determined using available market information and appropriate valuation
methodologies. However, considerable judgment is necessarily required in
interpreting market data to develop estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts that
Covanta would realize in a current market exchange.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value.
For cash and cash equivalents, restricted cash, and marketable securities, the
carrying value of these amounts is a reasonable estimate of their fair value.
The fair value of long-term unbilled receivables is estimated by using a
discount rate that approximates the current rate for comparable notes. The fair
value of non-current receivables is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to such
borrowers based on the remaining maturities, consideration of credit risks, and
other business issues pertaining to such receivables. The fair value of
restricted funds held in trust is based on quoted market prices of the
investments held by the trustee. Other assets, consisting primarily of insurance
and escrow deposits, and other miscellaneous financial instruments used in the
ordinary course of business are valued based on quoted market prices or other
appropriate valuation techniques.
Fair values for debt were determined based on interest rates that are currently
available to the Company for issuance of debt with similar terms and remaining
maturities for debt issues that are not traded on quoted market prices. With
respect to convertible subordinated debentures, fair values are based on quoted
market prices. The fair value of project debt is estimated based on quoted
market prices for the same or similar issues. Other liabilities are valued by
discounting the future stream of payments using the incremental borrowing rate
of the Company. The fair value of the Company's interest rate swap agreements is
the estimated amount the Company would receive or pay to terminate the agreement
based on the net present value of the future cash flows as defined in the
agreement. The fair value of Covanta financial guarantees provided on behalf of
certain customers (see Note 26) are valued by discounting the future stream of
payments using the incremental borrowing rate of the Company.
The fair-value estimates presented herein are based on pertinent information
available to management as of December 31, 2001 and 2000. Since December 31,
2001, the Company's credit rating has deteriorated. However, such amounts have
not been comprehensively revalued for purposes of these financial statements
since that date and current estimates of fair value may differ significantly
from the amounts presented herein.
The estimated fair value (expressed in thousands of dollars) of financial
instruments at December 31, 2001 and 2000, is summarized as follows:
2001 2000
- ------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- ------------------------------------------------------------------------------------------------
Assets:
Cash and cash equivalents $ 86,773 $ 86,773 $ 80,643 $ 80,643
Restricted cash 194,118 194,118
Marketable securities 2,940 2,940 3,590 3,590
Receivables 457,537 472,090 403,124 408,096
Restricted funds 260,228 261,018 253,341 236,163
Other assets 332 332 317 317
Interest rate swap receivable 13,199 13,199
Liabilities:
Debt 311,691 346,713 455,415 486,753
Convertible subordinated debentures 148,650 101,460 148,650 130,045
Project debt 1,415,493 1,442,552 1,390,263 1,362,017
Interest rate swap 13,199 13,199
Other liabilities 2,000 1,955 3,000 2,817
Off Balance-Sheet Financial Instruments:
Interest rate swap 12,280
Guarantees 2,950 5,213
Effective with the adoption of SFAS No. 133 on January 1, 2001, the interest
rate swap is recorded in other noncurrent assets and other noncurrent
liabilities in the December 31, 2001 Consolidated Balance Sheet.
The estimated fair value of guarantees at December 31, 2001 and 2000 exclude
performance bonds and guarantees and related contractual obligations undertaken
mainly pursuant to agreements to construct and operate certain energy,
entertainment and other facilities issued by the Company (see Note 26) and
$162.9 million primarily related to credit enhancements at energy facilities.
31. Receivables from California Utilities
During 2000, events affecting the energy market in California impacted the
creditworthiness of two California utilities to which the Company sells power.
These events resulted in these utilities delaying payment for power they had
purchased from the Company. As of December 31, 2000, the Company had outstanding
receivables from these two utilities, Southern California Edison ("SCE") and
Pacific Gas & Electric ("PG&E"), of approximately $41.5 million (including the
Company's 50% interest in several partnerships) against which the Company had
recorded a reserve of approximately $7.0 million. As of March 7, 2001, the
Company had received payments from one of these utilities of approximately $8.0
million. In the first quarter of 2001, the Company recorded an additional
reserve of $12.4 million. These reserves were calculated as the total of
receivables being protested by SCE and PG&E.
On March 26, 2001 the California Public Utilities Commission ("CPUC") approved a
substantial rate increase and directed the utilities to make payments to
suppliers for current energy deliveries. SCE has made payments for energy
delivered since March 26, 2001. On April 6, 2001, PG&E filed for protection
under Chapter 11of the U.S. Bankruptcy Code. Since that time PG&E is also in
compliance with the CPUC order and is making payments for current energy
deliveries.
In mid-June the CPUC issued an order declaring as reasonable and prudent any
power purchase amendment at a certain fixed-price for a five-year term. On June
18, 2001 and July 31, 2001 the Company entered into several agreements and
amendments to power purchase agreements with SCE which contained the CPUC
approved pricing for a term of five years, to commence upon the occurrence of
events relating to improvements in SCE's financial condition. In addition, in
June 2001, SCE paid 10% of the outstanding receivables and agreed to a timetable
by which the remaining 90% would be paid, which outstanding amount will earn
interest.
The agreements with SCE contemplated the passage of legislation by the
California State Legislature or other actions that would trigger payment to the
Company. In late October 2001, SCE reached a settlement of a lawsuit brought
against the CPUC concerning the CPUC's failure to allow SCE to pass cost
increases through to its ratepayers. The settlement achieved the same goals as
the proposed legislation, which was to provide a path for SCE to achieve
creditworthiness. The SCE agreements are not impacted by the settlement except
for the timing of the payment of past due amounts and the start of the fixed
price period for energy sales. The settlement was approved by the Federal Court.
A consumer group requested a stay pending an appeal, which request was denied.
In July 2001, the Company also entered into agreements with similar terms with
PG&E. These agreements also contain the CPUC approved price and term, both of
which were effective immediately. Unlike SCE, PG&E made no cash payments but did
agree that the amount owed to the Company will earn interest at a rate to be
determined by the Bankruptcy Court. PG&E agreed to assume the Company's power
purchase agreements and elevate the outstanding payables to priority
administrative claim status. The Bankruptcy Court approved the agreements, the
power purchase agreements and the assumption of the contracts on July 13, 2001.
On October 30, 2001, the Company transferred $14.9 million of the outstanding
PG&E receivables for $13.4 million to a financial institution. Of this amount,
$8.5 million (which related to receivables not subject to pricing disputes with
PG&E) was paid immediately in cash. The balance, $4.9 million (which related to
receivables to which there are pricing disputes) was placed in escrow until the
resolution of those disputes, the payment of the receivables by PG&E, or the
conclusion of the PG&E bankruptcy. The remaining of $1.5 million represents the
10% discount charged by the financial institution. The Company has accounted for
this transaction as a secured borrowing.
On December 6, 2001, the Company transferred $30.9 million of outstanding SCE
receivables for $28.8 million to a financial institution. Of this amount $21.7
million (which related to receivables not subject to pricing disputes with SCE)
was paid in immediate cash. The balance (which related to receivables to which
there are pricing disputes) was placed in escrow until the earlier of the
resolution of the pricing disputes or the achievement by SCE of credit
worthiness. The remaining $2.1 million represents the 6.75% discount charged by
the financial institution. On March 1, 2002, after securing certain financing,
SCE paid all outstanding receivables due to the Company. The $7.1 million in
escrow was also released to the Company on March 1, 2002. All Company litigation
pending against SCE in connection with past due receivables has been withdrawn.
On January 31, 2002, all but one of the Company's facilities in the PG&E service
territory entered into Supplemental Agreements with PG&E whereby PG&E agreed to
the amount of the prepetition payable owed to each facility, the rate of
interest borne by the payable and a payment schedule. PG&E agreed to make twelve
monthly installments commencing on February 28, 2002. The Bankruptcy Court
approved the Supplemental Agreements and the first five installments have been
received by the Company between February 28, 2002 and June 28, 2002. The
escrowed amount of $4.9 million will remain in escrow until the financial
institution is paid in full.
SCE paid 100% of their past due receivables on March 1, 2002, and PG&E has paid
five-twelfths of their past due receivables through June 28, 2002, in accordance
with an agreed-upon twelve-month payment schedule. The Company believes it will
ultimately receive payment of all these outstanding receivables. Therefore, at
December 31, 2001, the Company reversed approximately $15.8 million of the
reserves leaving $3.6 million. That remaining reserve applies to the discount
incurred by the Company in transferring the receivables since that amount of the
receivables will not be collected. Upon receipt of those payments from SCE and
PG&E, the Company also reversed $27.9 million of the liabilities recorded upon
the transfer of the receivables, leaving a liability balance of $2.3 million on
June 30, 2002. As of December 31, 2001, the Company had outstanding gross
receivables from these two utilities of approximately $71.6 million (including
the Company's 50% interest in several partnerships). The Company believes it
will ultimately receive payments in full of the net amount of these receivables.
32. Subsequent Events
As stated in Note 1, the Company and certain of its domestic subsidiaries filed
voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code
on April 1, 2002. In the Chapter 11 Cases, the Debtors obtained several orders
from the Bankruptcy Court which were intended to enable the Debtors to operate
in the normal course of business during the Chapter 11 Cases. These orders (i)
permit the Debtors to operate their consolidated cash management system during
the Chapter 11 Cases in substantially the same manner as it was operated prior
to the commencement of the Chapter 11 Cases, (ii) authorize payment of certain
prepetition employee salaries, wages, health and welfare benefits, retirement
benefits and other employee obligations and (iii) authorize payment of
prepetition obligations to certain critical vendors to aid the Debtors in
maintaining the operation of their businesses (iv) authorize the use of cash
collateral and grant adequate protection in connection with such use, and (v)
authorize post-petition financing.
Specifically with respect to post-petition financing, on April 5, 2002, the
Bankruptcy Court also entered an interim order and on May 15, 2002 a final order
authorizing the Debtors to enter into a debtor in possession financing facility
(the DIP Credit Facility) with certain lenders, and to grant first priority
mortgages, security interests, liens and superiority claims on substantially all
of the domestic assets of the Debtors, other than assets related to its power
production and waste-to-energy facilities, which are subject to the liens of
others in connection with such facilities financing (Project Financing) to
secure the DIP Credit Facility, subject to the objection of holders of minority
interests in two joint venture partnerships who dispute the inclusion of those
companies in the DIP Credit Facility. The Bankruptcy Court has taken these
objections under advisement and has not indicated when he will render a
decision. See Note 15 for a further discussion regarding the DIP Credit
Facility.
The Debtors are currently operating their businesses as debtors in possession
pursuant to the Bankruptcy Code. Pursuant to the Bankruptcy Code, prepetition
obligation of the Debtors, including obligations under debt instruments,
generally may not be enforced against the Debtors, and any actions to collect
prepetition indebtedness are automatically stayed, unless the stay is lifted by
the Bankruptcy Court. The rights of, and the ultimate payments by, the Company
under prepetition obligations may be substantially altered. This could result in
claims being liquidated in Chapter 11 Cases at less than their face value.
However, the Company has continued to pay debt service as it matures on the
Company's Project Debt.
In addition, as debtors in possession, the Debtors have the right, subject to
Bankruptcy Court approval and certain other limitations, to assume or reject
executory contracts and unexpired leases. In this context, "assume" means that
the Debtors agree to perform their obligations and cure all existing defaults
under the contract or lease, and "reject" means that the Debtors are relieved
from their obligations to perform further under the contract or lease, but are
subject to a claim for damages for any breach thereof. Any damages resulting
from rejection of executory contracts and unexpired leases will be treated as
general unsecured claims in the Chapter 11 Cases unless such claims had been
secured on a prepetition basis prior to the Petition Date. The Debtors are in
the process of reviewing their executory contracts and unexpired leases to
determine which, if any, they will reject. The Debtors cannot presently
determine or reasonably estimate the ultimate liability that may result from
rejecting contracts or leases or from the filing of claims for any rejected
contracts or leases, and no provision have yet been made for these items. The
amount of the claims to be filed by the creditors could be significantly
different than the amount of the liabilities recorded by the Debtors.
The United States Trustee for the Southern District of New York has appointed an
Official Committee of Unsecured Creditors in accordance with the applicable
provisions of the Bankruptcy Code. The Bankruptcy Code provides that the Debtors
have an exclusive period during which they may file a plan of reorganization.
The Debtors however, may request that the Bankruptcy Court extend such
exclusivity period. If the Debtors fail to file a plan of reorganization during
the exclusive period or, after such plan has been filed, if the Debtors fail to
obtain acceptance of such plan from the requisite number and amount of impaired
classes of creditors and equity holders before the expiration of the applicable
period, any party in interest, including a creditor, an equity holder, a
committee of creditors or equity holders, or an indenture trustee, may file a
plan of reorganization. After a plan of reorganization has been filed with the
Bankruptcy Court, the plan, along with a disclosure statement approved by the
Bankruptcy Court, will be sent to all creditors and equity holders belonging to
impaired classes who are entitled to vote. Following the solicitation period,
the Bankruptcy Court will hold a hearing to consider whether to confirm the plan
in accordance with the applicable provisions of the Bankruptcy Code. In order to
confirm a plan of reorganization, the Bankruptcy Court, among other things, is
required to find that (i) with respect to each impaired class of creditors and
equity holders, each holder in such class has accepted the plan or will,
pursuant to the plan, receive at least as much as such holder would receive in a
liquidation, (ii) each impaired class of creditors and equity holders has
accepted the plan by the requisite vote (except as otherwise provided under the
Bankruptcy Code), and (iii) confirmation of the plan is not likely to be
followed by a liquidation or a need for further financial reorganization of the
Debtors or any successors to the Debtors unless the plan proposes such
liquidation or reorganization. If any impaired class of creditors or equity
holders does not accept the plan and, assuming that all of the other
requirements of the Bankruptcy Code are met, the proponent of the plan may
invoke the "cram down" provisions of the Bankruptcy Code. Under those
provisions, the Bankruptcy Court may confirm a plan notwithstanding the
non-acceptance of the plan by an impaired class of creditors or equity holders
if certain requirements of the Bankruptcy Code are met. As a result of the
amount of prepetition indebtedness and the availability of the "cram down"
provisions, the holders of the Company's capital stock might receive no
distributions on account of their equity interests under the plan of
reorganization. Because of such possibility, the value of the Company's
outstanding capital stock and unsecured instruments are highly speculative.
Since the Petition Date, the Debtors have been conducting businesses in the
ordinary course. Management is in the process of stabilizing the businesses of
the Debtors and evaluating their operations as part of the development of a plan
of reorganization. The Company is currently beginning the initial stages of
developing that plan of reorganization. In connection with a plan of
reorganization, the Debtors are considering, among other things, (i) a strategic
restructuring program to focus on the U.S. energy and water market, (ii)
expediting the dispositions of non-core assets and as a result, reduce overhead
costs and (iii) a non-binding letter of intent with the investment firm of
Kohlberg Kravis Roberts & Co. ("KKR") for a $225.0 million equity investment
under which a KKR affiliate would acquire the Company upon emergence from
Chapter 11 reorganization. During the pendency of the Chapter 11 Cases, the
Debtors may, subject to any necessary Bankruptcy Court and lender approvals,
sell assets and settle liabilities for amounts other than those reflected in the
financial statements. The Debtors are in the process of reviewing their
operations and identifying those assets for disposition. The administrative and
reorganization expenses resulting from Chapter 11 Cases will unfavorably affect
the Debtors' results of operations. Future results of operations may also be
adversely affected by other factors related to the Chapter 11 Cases.
On March 28, 2002, following approval from the Master Credit Facility lenders,
three of the Company's subsidiaries sold their interests in two power plants and
an operating and maintenance contractor based in Thailand. The total sale price
for all three interests of approximately $35.0 million is less than the net
carrying value of the interests of approximately $57.7 million. The Company,
therefore, expects to realize a net loss of approximately $23.6 million on this
sale, after deducting costs relating to the sale.
At December 31, 2001, the Company had no intention of selling these Thai assets
or any other Asian Energy assets. Subsequently, a determination was made to sell
the Thai assets to generate liquidity. The Company may consider a variety of
different strategies as the Bankruptcy process proceeds. If the Company were to
adopt a formal plan to sell its remaining Asian portfolio in the current market
environment, there would be an impairment charge, currently not determinable,
for a significant portion of the $255.1 million net book value at December 31,
2001. The ultimate sale of these assets, if any, would be subject to approval by
the DIP Credit Facility lenders and the Bankruptcy Court.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Covanta Energy Corporation (Debtor
In Possession):
We have audited the Consolidated Balance Sheets of Covanta Energy Corporation
(Debtor in Possession) and subsidiaries (the "Company") as of December 31, 2001
and 2000, and the related Statements of Consolidated Operations and
Comprehensive Loss, Shareholders' Equity and of Consolidated Cash Flows for each
of the three years in the period ended December 31, 2001. Our audits also
included the financial statement schedules listed in the Index at Item 14. These
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such Consolidated Financial Statements present fairly, in all
material respects, the financial position of the Company at December 31, 2001
and 2000, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such financial statement schedules, when considered in relation
to the basic Consolidated Financial Statements taken as a whole, present fairly
in all material respects the information set forth therein.
As discussed in Notes 1and 32, on April 1, 2002 Covanta Energy Corporation and
123 of its domestic subsidiaries filed voluntary petitions for reorganization
under Chapter 11 of the United States Bankruptcy Code. The accompanying
financial statements do not purport to reflect or provide for the consequences
of the bankruptcy proceedings. In particular, such financial statements do not
purport to show (a) as to assets, their realizable value on a liquidation basis
or their availability to satisfy liabilities; (b) as to prepetition liabilities,
the amounts that may be allowed for claims or contingencies, or the status and
priority thereof; (c) as to stockholder accounts, the effect of any changes that
may be made in the capitalization of the Company; or (d) as to operations, the
effect of any changes that may be made in its business.
In addition, as discussed in Note 3, based upon various events related to the
bankruptcy, the Company recorded write-downs and obligations related to certain
assets held for sale.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Notes 1 and 32, the
Company's dependence upon, among other things, confirmation of a plan of
reorganization, the Company's ability to comply with the terms of its debtor in
possession financing facility, and the Company's ability to generate sufficient
cash flows from operations, asset sales and financing arrangements to meet its
obligations, raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans concerning these matters are also discussed
in Notes 1 and 32. The financial statements do not include adjustments that
might result from the outcome of this uncertainty.
As discussed in Note 1, on January 1, 2001 the Company adopted Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities", as amended, under which the Company records the fair
value of derivatives held as assets and liabilities and on January 1, 1999, the
Company adopted
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities",
under which the Company changed its method of accounting for the costs of
start-up activities.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
July 10, 2002
Covanta Energy Corporation (Debtor in Possession) and Subsidiaries
REPORT OF MANAGEMENT
Covanta's management is responsible for the information and representations
contained in this annual report. Management believes that the financial
statements have been prepared in conformity with accounting principles generally
accepted in the United States of America appropriate in the circumstances to
reflect in all material respects the substance of events and transactions that
should be included and that the other information in the annual report is
consistent with those statements. In preparing the financial statements,
management makes informed judgments and estimates of the expected effects of
events and transactions currently being accounted for.
However, on April 1, 2002, Covanta Energy Corporation and 123 of its domestic
subsidiaries filed voluntary petitions for reorganization under Chapter 11 of
the United States Bankruptcy Code. The Company's Consolidated Financial
Statements have been prepared on a "going concern" basis in accordance with
accounting principles generally accepted in the United States of America. The
"going concern" basis of presentation assumes that Covanta will continue in
operation for the foreseeable future and will be able to realize its assets and
discharge its liabilities in the normal course of business. Because of the
Chapter 11 Cases and the circumstances leading to the filing thereof, the
Company's ability to continue as a "going concern" is subject to substantial
doubt and is dependent upon, among other things, confirmation of a plan of
reorganization, the Company's ability to comply with, and if necessary renew,
the terms of the Debtor in Possession Financing Facility (see Notes 15 and 32 to
the Company's Consolidated Financial Statements), and the Company's ability to
generate sufficient cash flows from operations, asset sales and financing
arrangements to meet its obligations. There can be no assurances this can be
accomplished and if it were not, the Company's ability to realize the carrying
value of its assets and discharge its liabilities would be subject to
substantial uncertainty. Therefore, if the "going concern" basis were not used
for the Company's Consolidated Financial Statements, significant adjustments
could be necessary to the carrying value of assets and liabilities, the revenues
and expenses reported, and the balance sheet classifications used.
The Company's Consolidated Financial Statements do not reflect adjustments that
may occur in accordance with the American Institute of Certified Public
Accountants' Statement of Position No. 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" ("SOP 90-7"), which the Company will
adopt for its financial reporting in periods ending after April 1, 2002 assuming
that the Company will continue as a "going concern". Substantially all unsecured
liabilities as of the Petition Date are subject to compromise or other treatment
under a plan of reorganization which must be confirmed by the Bankruptcy Court
after submission to any required vote by affected parties. For financial
reporting purposes, those liabilities and obligations whose treatment and
satisfaction is dependent on the outcome of the Chapter 11 Cases will be
segregated and classified as Liabilities Subject to Compromise in the
Consolidated Balance Sheet under SOP 90-7.
In meeting its responsibility for the reliability of the financial statements,
management depends on the Corporation's internal control structure. This
structure is designed to provide reasonable assurance that assets are
safeguarded and transactions are executed in accordance with management's
authorization and recorded properly to permit the preparation of financial
statements in accordance with accounting principles generally accepted in the
United States of America. In designing control procedures, management recognizes
that errors or irregularities may nevertheless occur. Also, estimates and
judgments are required to assess and balance the relative cost and expected
benefits of such controls. Management believes that the Company's internal
control structure provides reasonable assurance that errors or irregularities
that could be material to the financial statements are prevented and would be
detected within a timely period by employees in the normal course of performing
their assigned functions.
The Board of Directors pursues its oversight role for these financial statements
through the Audit Committee, which is composed solely of nonaffiliated
directors. The Audit Committee, in this oversight role, meets periodically with
management to monitor their responsibilities. The Audit Committee also meets
periodically with the independent auditors and the internal auditors, both of
whom have free access to the Audit Committee without management present.
The independent auditors elected by the shareholders express an opinion on our
financial statements. Their opinion is based on procedures they consider to be
sufficient to enable them to reach a conclusion as to the fairness of the
presentation of the financial statements.
Scott G. Mackin William J. Keneally
President and Chief Executive Officer Senior Vice President and
Chief Accounting Officer
Covanta Energy Corporation (Debtor in Possession) and Subsidiaries
QUARTERLY RESULTS OF OPERATIONS
(In thousands of dollars, except per-share amounts)
2001 Quarter Ended March 31 June 30 Sept. 30 Dec. 31
- --------------------------------------------------------------------------------------------------------
Total revenues from continuing operations... $ 250,777 $ 300,235 $ 272,386 $ 259,369
--------- --------- --------- ---------
Gross profit................................ $ 63,210 $ 88,521 $ 65,943 $ 63,135
--------- --------- --------- ---------
Net income (loss)........................... $ 9,415 $ 14,458 $ (6,162) $(248,738)
--------- --------- --------- ---------
Basic earnings (loss) per common share...... $ 0.19 $ 0.29 $ (0.12) $ (5.01)
--------- --------- --------- ---------
Diluted earnings (loss) per common share.... $ 0.19 $ 0.29 $ (0.12) $ (5.01)
--------- --------- --------- ---------
2000 Quarter Ended March 31 June 30 Sept. 30 Dec. 31
- --------------------------------------------------------------------------------------------------------
Total revenues from continuing operations... $ 239,016 $ 264,982 $ 254,737 $ 261,267
--------- --------- --------- ---------
Gross profit................................ $ 43,074 $ 65,875 $ 61,010 $ 54,710
--------- --------- --------- ---------
Income (loss) from continuing operations ... $ (4,174) $ (10,414) $ 2,701 $ (73,734)
Loss from discontinued operations........... (25,310) (66,489) (37,072) (14,793)
--------- --------- --------- ---------
Net loss.................................... $ (29,484) $ (76,903) $ (34,371) $ (88,527)
========= ========= ========= =========
Basic earnings (loss) per common share:
Income (loss) from continuing operations.... $ (0.08) $ (0.21) $ 0.05 $ (1.49)
Loss from discontinued operations........... (0.51) (1.34) (0.75) (0.30)
--------- --------- --------- ---------
Total....................................... $ (0.59) $ (1.55) $ (0.70) $ (1.79)
========= ========= ========= =========
Diluted earnings (loss) per common share:
Income (loss) from continuing operations ... $ (0.08) $ (0.21) $ 0.05 $ (1.49)
Loss from discontinued operations........... (0.51) (1.34) (0.75) (0.30)
--------- --------- --------- ---------
Total....................................... $ (0.59) $ (1.55) $ (0.70) $ (1.79)
========= ========= ========= =========
See Note 2, 3, 4, 8, 22 and 31 to the Consolidated Financial Statements for
information regarding write-offs during the years ended December 31, 2001 and
2000.
SCHEDULE II
ITEM 14.(a)2). FINANCIAL STATEMENT SCHEDULES
COVANTA ENERGY CORPORATION (DEBTOR IN POSSESSION) AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands of dollars)
FOR THE YEAR ENDED DECEMBER 31, 2001
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS
---------------------------------
BALANCE AT CHARGED TO
BEGINNING CHARGED TO COSTS OTHER BALANCE AT
DESCRIPTION OF PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
- -----------------------------------------------------------------------------------------------------------------------------------
ALLOWANCES DEDUCTED IN THE BALANCE SHEET
FROM THE ASSETS TO WHICH THEY APPLY:
DOUBTFUL RECEIVABLES - CURRENT $19,234 $14,212 $1,215(B) $ 6,026(A) $16,444
12,191(C)
------------------------------------------------------------------------
TOTAL $19,234 $14,212 $1,215 $ 18,217 $16,444
========================================================================
ALLOWANCES NOT DEDUCTED:
RESERVES RELATING TO TAX INDEMNIFICATION AND
OTHER CONTINGENCIES IN CONNECTION WITH THE
SALE OF LIMITED PARTNERSHIP INTERESTS IN AND
RELATED TAX BENEFITS OF A WASTE-TO-ENERGY FACILITY $ 300 $ 300
------------------------------------------------------------------------
TOTAL $ 300 $ 300
========================================================================
NOTES:
(A) WRITE-OFFS OF RECEIVABLES CONSIDERED UNCOLLECTIBLE
(B) TRANSFER FROM OTHER ACCOUNTS
(C) RECLASSIFICATION TO NET ASSETS HELD FOR SALE
SCHEDULE II
ITEM 14.(a)2). FINANCIAL STATEMENT SCHEDULES
COVANTA ENERGY CORPORATION (DEBTOR IN POSSESSION) AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands of dollars)
FOR THE YEAR ENDED DECEMBER 31, 2000
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS
---------------------------------
BALANCE AT CHARGED TO
BEGINNING CHARGED TO COSTS OTHER BALANCE AT
DESCRIPTION OF PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
- -----------------------------------------------------------------------------------------------------------------------------------
ALLOWANCES DEDUCTED IN THE BALANCE SHEET
FROM THE ASSETS TO WHICH THEY APPLY:
DOUBTFUL RECEIVABLES - CURRENT $17,942 $15,598 $1,272(B) $15,578(A) $19,234
------------------------------------------------------------------------
TOTAL $17,942 $15,598 $1,272 $15,578 $19,234
========================================================================
ALLOWANCES NOT DEDUCTED:
RESERVES RELATING TO TAX INDEMNIFICATION AND
OTHER CONTINGENCIES IN CONNECTION WITH THE
SALE OF LIMITED PARTNERSHIP INTERESTS IN AND
RELATED TAX BENEFITS OF A WASTE-TO-ENERGY FACILITY $ 300 $ 300
------------------------------------------------------------------------
TOTAL $ 300 $ 300
========================================================================
NOTES:
(A) WRITE-OFFS OF RECEIVABLES CONSIDERED UNCOLLECTIBLE
(B) TRANSFER FROM OTHER ACCOUNTS
SCHEDULE II
ITEM 14.(a)2). FINANCIAL STATEMENT SCHEDULES
COVANTA ENERGY CORPORATION (DEBTOR IN POSSESSION) AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands of dollars)
FOR THE YEAR ENDED DECEMBER 31, 1999
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS
---------------------------------
BALANCE AT CHARGED TO
BEGINNING CHARGED TO COSTS OTHER BALANCE AT
DESCRIPTION OF PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
- -----------------------------------------------------------------------------------------------------------------------------------
ALLOWANCES DEDUCTED IN THE BALANCE SHEET
FROM THE ASSETS TO WHICH THEY APPLY:
DOUBTFUL RECEIVABLES - CURRENT $18,135 $ 5,130 $3,468(E) $ 2,094(A) $17,942
6,697(C)
DEFERRED CHARGES ON PROJECTS 13,070 13,070(D)
------------------------------------------------------------------------
TOTAL $31,205 $ 5,130 $3,468 $21,861 $17,942
========================================================================
ALLOWANCES NOT DEDUCTED:
PROVISION FOR RESTRUCTURING $ 274 $ 274(C)
RESERVES RELATING TO TAX INDEMNIFICATION AND
OTHER CONTINGENCIES IN CONNECTION WITH THE
SALE OF LIMITED PARTNERSHIP INTERESTS IN AND
RELATED TAX BENEFITS OF A WASTE-TO-ENERGY FACILITY 300 300
OTHER 1,850 1,850(B)
------------------------------------------------------------------------
TOTAL $ 2,424 $ 2,124 $ 300
========================================================================
(A) WRITE-OFFS OF RECEIVABLES CONSIDERED UNCOLLECTIBLE.
(B) PAYMENTS CHARGED TO ALLOWANCES.
(C) REVERSAL OF PROVISIONS NO LONGER REQUIRED.
(D) WRITE-OFF OF DEFERRED CHARGES.
(E) TRANSFER FROM OTHER ACCOUNTS.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF COVANTA
DIRECTORS
FIRST BECAME
NAME, AGE(1), AND OTHER INFORMATION PRINCIPAL OCCUPATION A DIRECTOR
----------------------------------- -------------------- ------------
George L. Farr: Age 61 Principal, Muirhead Holdings, 1999
Chairman of Covanta's Board of Directors; LLC; former Vice Chairman, The
Director of Swiss Reinsurance Company, Zurich, American Express Company
Switzerland; Director of MISYS PLC, London,
England
Jeffrey F. Friedman: Age 57 Investment Manager, Dreyfus 1998
Chairman of Covanta's Audit Committee and member Corporation
of Covanta's Compensation Committee
Helmut F.O. Volcker: Age 68 Member of Covanta's Professor of Energy Technology, 1994
Governance and Finance Committees; Chairman of University of Essen, Germany
the Technical Advisory Board, Alstom Power
Boiler GmbH, Stuttgart, Germany; Vice Chairman,
ELYO AG, Potsdam, Germany
Veronica M. Hagen: Age 56 Vice President, Alcoa, Inc.; 2001
Member of Covanta's Audit and Compensation President, Alcoa Engineered
Committees (2) Products
Anthony J. Bolland: Age 48 Managing Director, Boston 1998
Chairman of Covanta's Finance Committee and Ventures Management, Inc.
member of Covanta's Audit Committee; Director of
Production Resource Group, Inc. and Northern
Light Technology Corporation
Scott G. Mackin: Age 45 President and Chief Executive 1999
Officer, Covanta and Covanta
Energy Group, Inc., a Covanta
subsidiary
Craig G. Matthews: Age 59 Retired Vice Chairman and Chief 2000
Member of Covanta's Audit and Governance Operating Officer, KeySpan
Committees; Director of the Houston Exploration Corporation
Company
Robert E. Smith: Age 66 Counsel, Katten Muchin Zavis 1990
Member of Covanta's Finance and Governance Rosenman, a law firm
Committees
Norman G. Einspruch: Age 69 Professor and Senior Fellow, 1981
Chairman of Covanta's Compensation Committee and College of Engineering,
member of Covanta's Finance Committee University of Miami
Homer A. Neal: Age 60 Samuel A. Goudsmit Distinguished 1988
Chairman of Covanta's Governance Committee and University Professor of Physics
member of Covanta's Compensation Committee; and Director of Project Atlas,
Director of Ford Motor Company University of Michigan
Joseph A. Tato: Age 48 Partner, LeBoeuf, Lamb, Greene & 2000
Member of Covanta's Governance and Finance MacRae, LLP, a law firm
Committees
Robert R. Womack: age 64 Retired Chairman and Chief 2000
Member of Covanta's Audit and Compensation Executive Officer, Zurn
Committees; Chairman of the Board of Precision Industries, Inc.
Partners, Inc.; Director of Commercial Metals
Company and U.S. Industries, Inc.
(1) All ages are as of June 17, 2002.
(2) Ms. Hagen, a graduate of the University of Southern California, is currently
President of Alcoa Engineered Products and in July 2001 was named Vice President
of Alcoa, Inc. She has held several other executive-level positions with Alcoa,
Inc., the most recent being President of Alcoa Distribution & Industrial
Products. She served as Executive Vice President of Alumax Distribution &
Industrial Products, formerly Cressona Aluminum Company, which was a
business unit of Alumax Semi-Fabricated Products Group, from 1996 until 1998
(when Alcoa, Inc. acquired Alumax, Inc.). From 1981 to 1996, Ms. Hagen was
President and owner of Metal Sales Associates.
EXECUTIVE OFFICERS OF COVANTA
Set forth below are the names, ages, positions and offices held and
years appointed of Covanta's current "executive officers" (as defined by Rule
3b-7 of the Securities Exchange Act of 1934).
CONTINUALLY
POSITION AND AGE AS OF AN EXECUTIVE
NAME OFFICE HELD 6/17/2002 OFFICER SINCE
- --------------------- ---------------------------- --------- -------------
Scott G. Mackin President and Chief 45 1992
Executive Officer
Bruce W. Stone Executive Vice President 54 1997
Chief Administrative Officer
Jeffrey R. Horowitz Senior Vice President 52 2001
General Counsel and Secretary
Lynde H. Coit Senior Vice President 47 1991
William E. Whitman Senior Vice President 46 2001
Strategic Planning and
Business Development
Paul B. Clements Senior Vice President 46 2001
Independent Power Projects
Anthony J. Orlando Senior Vice President 42 2001
Waste-to-Energy
J. Joseph Burgess Executive Vice President 43 2001
of Covanta's subsidiaries
Covanta Water Systems, Inc.
and Covanta Projects, Inc.
B. Kent Burton Senior Vice President 50 1997
Policy and International
Government Relations
Stephen M. Gansler Vice President 47 2001
Human Resources
Louis M. Walters Vice President 49 2001
and Treasurer
William J. Keneally Senior Vice President 39 2002
and Chief Accounting
Officer
There is no family relationship by blood, marriage or adoption (not more remote
than first cousins) between any of the above individuals and any Covanta
director.
The term of office of all officers shall be until the next election of directors
and until their respective successors are chosen and qualified.
There are no arrangements or understandings between any of the above officers
and any other person pursuant to which any of the above was selected as an
officer.
The following briefly describes the business experience, principal occupation
and employment of the foregoing Executive Officers during the past five years:
Scott G. Mackin has served as President and Chief Executive Officer of Covanta
since September 1999. Prior thereto he served as Executive Vice President of
Covanta from January 1997 to September 1999 and as President and Chief Operating
Officer of Covanta Energy Group, Inc., a Covanta subsidiary, since January 1991.
Bruce W. Stone has served as Executive Vice President and Chief Administrative
Officer of Covanta since January of 2001. Previously, Mr. Stone served as
Executive Vice President and Managing Director of Covanta Energy Group, Inc., a
Covanta subsidiary, a position he held starting in January 1991.
Jeffrey R. Horowitz was named Senior Vice President, General Counsel and
Secretary in 2002. Prior to that time Mr. Horowitz served as Senior Vice
President for Legal Affairs and Secretary and prior to that as Executive Vice
President, General Counsel and Secretary of Covanta Energy Group, Inc, a Covanta
subsidiary. Mr. Horowitz joined the Company in 1991.
Lynde H. Coit serves as Senior Vice President of Covanta. Prior to 2002, Mr.
Coit served as Senior Vice President and General Counsel of Covanta for more
than five years.
William E. Whitman was named Covanta's Senior Vice President for Strategic
Planning and Business Development in 2001. Previously Mr. Whitman served as
Executive Vice President and Chief Financial Officer of Covanta Energy Group,
Inc., a Covanta subsidiary. Mr. Whitman joined the Company in 1986.
Paul B. Clements was named Covanta's Senior Vice President of Independent Power
Operations in 2001. Mr. Clements previously served as Executive Vice President
of Covanta Energy Group, Inc., and President of Covanta Energy West, Inc., both
of which are Covanta subsidiaries. Mr. Clements joined the Company in 1988.
Anthony J. Orlando was named Covanta's Senior Vice President of Waste to Energy
Operations in 2001. Previously he served as Executive Vice President of Covanta
Energy Group, Inc., a Covanta subsidiary. Mr. Orlando joined the Company in
1987.
J. Joseph Burgess was designated an Executive Officer of Covanta in 2001. Mr.
Burgess currently serves as Executive Vice President of Covanta Projects, Inc.,
and of Covanta Water Systems, Inc., both of which are Covanta subsidiaries. Mr.
Burgess joined the Company in 1988.
B. Kent Burton has served as Senior Vice President - Policy and International
Government Relations of Covanta since May 1999, from May 1997 to May 1999 he
served as Vice President - Policy and Communications of Covanta and prior
thereto he served as Senior Vice President of the Covanta Energy Group, Inc., a
Covanta subsidiary, in political affairs and lobbying activities.
Stephen M. Gansler was named Vice President of Human Resources in March, 2001.
Before joining the Company, Mr. Gansler was Worldwide Vice President, Human
Resources, at a Johnson & Johnson affiliate, where he held various positions in
Human Resources for more than 20 years.
Louis M. Walters was named Treasurer of Covanta in 2001. Prior to that time, Mr.
Walters served as Treasurer of Covanta Energy Group, Inc., since January 2000.
Before joining Covanta, Mr. Walters was Treasurer at Conectiv, and before that
held various positions at Atlantic Energy, Inc.
William J. Keneally was named Senior Vice President and Chief Accounting Officer
of Covanta on April 8, 2002. Prior to joining Covanta, Mr. Keneally was Vice
President - Controller and Treasurer for Metion, Inc. a Partner with BDO
Seidman, LLP and Senior Vice President - Financial Controller of
Inter-Continental Hotels and Resorts.
ITEM 11. EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth the aggregate cash
and non-cash compensation for each of the last three fiscal years awarded to,
earned by or paid to the CEO of Covanta and each of Covanta's four other most
highly compensated executive officers whose salary and bonus exceeded $100,000:
SUMMARY COMPENSATION TABLE(1)
ANNUAL COMPENSATION LONG TERM COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER ANNUAL RESTRICTED SECURITIES ALL OTHER COMPENSTION
--------------------------- ---- ------ ----- ------------ ---------- ---------- ---------------------
(5) COMPENSATION STOCK UNDERLYING/
--- ------------ ------ -----------
(2) (4) OPTIONS DISPUTE
--- --- ------- -------
LIMITED SAR RESOLUTION(6) OTHER (3)
----------- ------------- ---------
Scott G. Mackin 2001 $625,000 $650,000 $ 0 $ 0 0 $466,358 $62,860
President and Chief 2000 600,000 650,000 0 89,700 60,000 0 55,075
Executive Officer 1999 542,275 449,600 0 150,400 490,000 0 115,826
Bruce W. Stone 2001 $325,000 $240,000 $ 0 $ 0 0 $397,283 $28,610
Executive Vice President 2000 302,702 240,000 0 60,000 40,000 0 24,570
and Chief Administrative 1999 291,059 172,425 0 57,575 55,000 0 54,168
Officer
Jeffrey R. Horowitz 2001 $260,000 $250,000 $ 0 $ 0 0 $ 0 $24,360
Senior Vice President 2000 209,796 220,000 0 50,000 40,000 0 16,772
General Counsel and Secretary 1999 200,000 112,500 0 37,500 50,000 0 36,590
Anthony J. Orlando 2001 $245,000 $260,000 $ 0 $ 0 0 $ 0 $23,110
Senior Vice President 2000 221,375 210,000 0 40,000 40,000 0 19,075
Waste to Energy 1999 201,250 200,000 0 41,300 50,000 0 41,945
Lynde H. Coit 2001 $300,150 $250,000 $ 0 $ 0 0 $ 98,000 $ 6,000
Senior Vice President 2000 290,000 250,000 0 40,000 0 0 6,535
1999 290,000 250,000 11,500 0 0 0 6,400
(1) Includes annual compensation awarded to, earned by or paid to the individual
during the last three fiscal years, or any portion thereof that the named
individual served as an executive officer of Covanta.
(2) Amounts in this column represent cost of life insurance, car allowance,
medical reimbursement and other personal benefits which in the aggregate
exceeded the lesser of either $50,000 or 10% of the executive's combined salary
and bonus.
(3) Includes, for the fiscal year ending December 31, 2001: (i) contributions in
the amount of $8,500 credited to the account balances of each of Messrs. Mackin,
Stone, Horowitz and Orlando under the Company's Profit Sharing Plan; (ii) a
special discretionary cash payment made to Messrs. Mackin, Stone, Horowitz and
Orlando in the amount of $46,474, $15,969, $8,171 and $10,449, respectively; and
(iii) matching contributions totaling $6,000 were credited to the account
balance of Mr. Coit under the Ogden Corporation 401(k) Plan.
(4) Awards of restricted stock are based on the price of Covanta Common Stock on
the date of award and vest at the rate of 50% each year over a period of two
years from the date of award; The number (and value) of the aggregate restricted
stock holdings at December 31, 2001 for each of Messrs. Mackin, Stone, Coit,
Horowitz and Orlando are 11,400 ($51,528), 5,850 ($26,442), 2,300 ($10,396),
4,400 ($19,888), and 4,450 ($20,114), respectively.
(5) The amounts shown represent the full amount of the bonuses attributable to
2001, 50% of which were paid in January 2002. The remaining 50% is scheduled to
be paid in May 2002, subject to Bankruptcy Court approval.
(6) Includes for fiscal year ending December 31, 2001, loan forgiveness (and tax
gross-up payment) in settlement of dispute as further detailed in Item 13 of
this document for Messrs. Mackin, Stone and Coit of $212,212 ($254,146),
$184,657 ($212,626) and $43,816 ($55,004), respectively. On August 6, 1999,
Covanta made loans to Messrs. Mackin, Stone and Coit for the purpose of paying
the exercise price and withholding taxes in connection with their exercise of
Covanta stock options which were expiring on August 9, 1999. All loans were
evidenced by demand notes with interest accruing thereon at the short-term
applicable federal rate compounded annually. In 2001, as settlement of a dispute
surrounding the circumstances under which the loans were originally granted, the
Company forgave a portion of the loan and reduced the amount of the loan to the
then fair market value of the stock. From the date of the settlement, the
balance of each note will fluctuate with the fair market value of the stock. No
interest will be payable. Upon any sale of the stock, the executive must pay the
net proceeds to the Company.
Aggregated Option/SAR exercises in Last Fiscal Year
And FY-End Options Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at FY-End at FY-End
Shares Acquired On Exercisable/ Exercisable/
Name Exercise Value Realized Unexercisable Unexercisable
---- -------- -------------- ------------- -------------
Scott G. Mackin 0 $0 556,000/244,000 $0/$0
Bruce W. Stone 0 $0 36,666/58,334 $0/$0
Jeffrey R. Horowitz 0 $0 75,334/64,666 $0/$0
Anthony J. Orlando 0 $0 61,334/68,666 $0/$0
Lynde H. Coit 0 $0 100,000/0 $0/$0
COVANTA ENERGY GROUP PENSION PLAN
Scott G. Mackin, Jeffrey R. Horowitz, Bruce W. Stone and Anthony J.
Orlando participate in the Company's Energy Group Pension Plan, a tax-qualified
defined benefit plan subject to the provisions of the Employee Retirement Income
Security Act of 1974, as amended. Under the Energy Group Pension Plan each
participant who meets the plan's vesting requirements will be provided with an
annual benefit at or after age 65 equal to 1.5% of the participant's average
compensation during the five consecutive calendar years of employment out of the
ten consecutive calendar years immediately preceding his retirement date or
termination date during which such average is the highest, multiplied by his
total years of service. Compensation includes salary and other compensation
received during the year and deferred income earned, but does not include
imputed income, severance pay, special discretionary cash payments or other
non-cash compensation. The relationship of the covered compensation to the
annual compensation shown in the Summary Compensation Table would be the Salary
and Bonus columns and any car allowance. A plan participant who is at least age
55 and who retires after completion of at least five years of employment
receives a benefit equal to the amount he would have received if he had retired
at age 65, reduced by an amount equal to 0.5% of the benefit multiplied by the
number of months between the date the participant commences receiving benefits
and the date he would have commenced to receive benefits if he had not retired
prior to age 65.
Messrs. Mackin, Horowitz, Stone and Orlando also participate in the
Company's Energy Group Supplementary Benefit Plan, a deferred compensation plan
that is not qualified for federal income tax purposes. The Energy Group
Supplementary Benefit Plan provides that, in the event that the annual
retirement benefit of any participant in the Energy Group Pension Plan,
determined pursuant to such plan's benefit formula, cannot be paid because of
certain limits on annual benefits and contributions imposed by the Code, the
amount by which such benefit must be reduced represent an unfunded liability and
will be paid to the participant from the general assets of the Company.
The following table shows the estimated annual retirement benefits
payable in the form of a life annuity at age 65 under the Energy Group Pension
Plan and the Energy Group Supplemental Benefit Plan. Mr. Mackin has 15.5 years,
Mr. Stone has 25.8 years and Mr. Horowitz has 10.5 years and Mr. Orlando has
14.7 years of credited service under the Energy Group Pension Plan as of
December 31, 2001 and had annual average earnings for the last five years of
$1,063,244, $514,917, $365,856 and $357,613 respectively.
AVERAGE ANNUAL
EARNINGS IN 5
CONSECUTIVE HIGHEST PAID
YEARS OUT OF LAST 10 YEARS
PRECEDING RETIREMENT
ESTIMATED ANNUAL RETIREMENT BENEFITS BASED ON YEARS OF SERVICE
5 10 15 20 25 30
360,000 27,000 54,000 81,000 108,000 135,000 162,000
375,000 28,125 56,250 84,375 112,500 140,625 168,750
400,000 30,000 60,000 90,000 120,000 150,000 180,000
425,000 31,875 63,750 95,625 127,500 159,375 191,250
450,000 33,750 67,500 101,250 135,000 168,750 202,500
500,000 37,500 75,000 112,500 150,000 187,500 225,000
550,000 41,250 82,500 123,750 165,000 205,250 247,500
600,000 45,000 90,000 135,000 180,000 225,000 270,000
625,000 46,875 93,750 140,625 187,500 234,375 281,250
900,000 67,500 135,000 202,500 270,000 337,500 405,000
950,000 71,250 142,500 213,750 285,000 356,250 427,500
1,000,000 75,000 150,000 225,000 300,000 375,000 450,000
1,050,000 78,750 157,500 236,250 315,000 393,750 472,500
1,110,000 82,000 165,000 247,500 333,000 412,000 495,000
DIRECTOR COMPENSATION
(a) Director's Fees
In 2001 through March 31, 2002 each director who was not an employee of
Covanta or a Covanta subsidiary received an annual director's retainer fee of
$35,000 plus a meeting fee of $1,500 for each Board of Directors meeting
attended. Each non-employee director also received a meeting fee of $1,500 for
each committee meeting attended. All directors are reimbursed for expenses
incurred in attending Board of Directors and committee meetings. Directors who
are employees of Covanta or a Covanta subsidiary receive no additional
compensation for serving on the Board of Directors or any committee. On January
21, 2002, the Board of Directors voted to pay all non-employee director
compensation in the form of cash rather than 50% cash and 50% restricted stock
as had been the practice. Effective April 1, 2002 the annual retainer fee was
decreased by ten percent by resolution of the Board of Directors.
(b) Stock Options
Pursuant to the Covanta Amended and Restated 1999 Stock Incentive Plan
(the "1999 Plan"), the Board of Directors may award annual grants of Directors
Stock Options and limited stock appreciation rights of up to 2,500 shares of
Covanta Common Stock to each non-employee director, at an exercise price equal
to the Fair Market Value on the date of grant. There were no options granted to
non-employee directors in 2002.
(c) Restricted Stock
On February 17, 2000, the Board of Directors adopted the Covanta
Restricted Stock Plan for Non-Employee Directors (the "Director's Restricted
Stock Plan") which is administered by the Board of Directors and provides that
only non-employee directors are eligible to receive awards. Each award of
restricted stock will vest upon the earliest of the third month following the
date of grant; the non-employee director's attainment of normal retirement age;
the non-employee director's disability; or the non-employee director's death.
Shares are freely transferable after they become vested subject to meeting
certain SEC requirements. All unvested shares of restricted stock are forfeited
upon the director's termination of directorship for any reason, other than death
or disability. Shares become fully vested upon a change-in-control of the
Company. Shares of Common Stock to be issued under the Director's Restricted
Stock Plan will be made from shares held in Covanta's treasury, the maximum
aggregate number of shares authorized to be issued is 100,000 shares and the
purchase price for each share issued is zero.
In recognition of the special role that Mr. Farr was performing as
Covanta's Chairman of the Board, the Board of Directors authorized a special
compensation package for Mr. Farr that will apply only during the period of time
in which he was serving in this special role. The compensation package provided
for a monthly retainer of $35,000, payable 50% in cash and 50% in restricted
stock at the end of each quarter, commencing during the first quarter of 2000
and subject to review by the Compensation Committee on a quarterly basis. During
this period of time, Mr. Farr was not paid any director's or committee retainer
or meeting fees.
In May 2001, the Compensation Committee reviewed the compensation
payable to the Chairman of the Board and determined that it was appropriate to
adjust the monthly retainer to $20,000 for such time as the Chairman remained in
the special role. In accordance with the January 21, 2002 resolution of the
Board of Directors, such monthly retainer shall be paid in cash. Effective April
1, 2002, Mr. Farr's monthly retainer was further reduced by ten percent by
resolution of the Board of Directors.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
EMPLOYMENT CONTRACTS
The Company is reviewing its employment contracts with employees in view of the
Chapter 11 proceedings.
(A) Mr. Mackin is employed by Covanta as its President and Chief Executive
Officer, pursuant to an employment agreement dated as of October 1, 1998
and amended November 26, 2001 for a five year term commencing October 1,
1998 and continuing through September 30, 2003 and year to year thereafter,
subject to the right of either party to terminate the agreement on any
September 30 upon at least sixty (60) days prior written notice. The
agreement provides for an annual salary in the amount of $625,000 or such
higher rate as may be determined from time to time by the Board of
Directors, and an annual incentive bonus in such amount as may be
determined by the Board of Directors. The agreement also provides that if
Mr. Mackin terminates his employment for good reason, including a change in
control (as defined in the agreement), or if his employment is terminated
by Covanta for any reason other than for cause (as defined in the
agreement) then he is entitled to a lump sum cash payment equal to the
product of five times his base salary at the highest annual rate in effect
at any time prior to the termination date, and the highest amount of annual
bonus payable at any time prior to the termination date and, if applicable,
an additional payment equal to the amount of any excise tax imposed on any
payments under the agreement (including the additional payment) under the
excess parachute payments of the Code.
(B) Mr. Stone is employed by Covanta as its Executive Vice President and Chief
Administrative Officer pursuant to an employment agreement which continues
through May 1, 2004, and from year to year thereafter. The annual salary
under the agreement is $291,059 or such higher rate as may be determined
from time to time by the Board of Directors with an annual incentive bonus
in such amount as determined by the Board of Directors. The agreement also
provides that if Mr. Stone's employment is terminated by Covanta Energy for
any reason other than for cause (as defined in the agreement) or if Mr.
Stone terminates employment for good reason, including a change in control
(as defined in the agreement), then Mr. Stone is entitled to a lump sum
cash payment equal to the product of five times his annualized base salary
at the highest annual rate in effect at any time prior to the termination
date and the highest amount of annual bonus payable at any time prior to
the termination date.
(C) Mr. Coit is employed by Covanta as its Senior Vice President and General
Counsel pursuant to an employment agreement dated as of March 1, 1999 and
amended November 26, 2001 which continues in effect until terminated by Mr.
Coit, by Covanta or by Mr. Coit's death or total disability. The annual
salary under the agreement is $290,000 or such higher rate as may be
determined from time to time by the Board of Directors with an annual
incentive bonus in such amount as determined by the Board of Directors. The
agreement also provides that if Mr. Coit's employment is terminated by
Covanta for any reason other than for cause (as defined in the agreement)
or if Mr. Coit terminates employment for good reason, including a change in
control (as defined in the Agreement), then Mr. Coit is entitled to a lump
sum cash payment equal to the product of five times his base salary at the
highest annual rate in effect at any time prior to the termination date and
the highest amount of annual bonus payable at any time prior to the
termination date.
(D) Mr. Horowitz is employed by Covanta as its Senior Vice President, Legal
Affairs and Secretary, pursuant to an employment agreement effective May 1,
1999 and continuing until May 1, 2004 and thereafter from year to year. The
annual salary under the agreement is $201,721 or such higher rate as may be
determined from time to time by the Board of Directors with an annual
incentive bonus in such amount as determined by the Board of Directors. The
Agreement also provides that if Mr. Horowitz' employment is terminated for
any reason other than for cause (as defined in the agreement) or if Mr.
Horowitz terminates employment for good reason, including a change in
control (as defined in the agreement), then Mr. Horowitz would be entitled
to a lump sum cash payment equal to the product of five times his
annualized base salary at the highest annual rate in effect at any time
prior to the termination date and the highest amount of annual bonus
payable at any time prior to the termination date.
(E) Mr. Orlando is employed by Covanta as its Senior Vice President, Waste to
Energy, pursuant to an employment agreement effective May 1, 1999 and
continuing until May 1, 2004 and thereafter from year to year. The annual
salary under the agreement is $201,250 or such higher rate as may be
determined from time to time by the Board of Directors with an annual
incentive bonus in such amount as determined by the Board of Directors. The
Agreement also provides that if Mr. Orlando's employment is terminated for
any reason other than for cause (as defined in the agreement) or if Mr.
Orlando terminates employment for good reason, including a change in
control (as defined in the agreement), then Mr. Orlando would be entitled
to a lump sum cash payment equal to the product of five times his
annualized base salary at the highest annual rate in effect at any time
prior to the termination date and the highest amount of annual bonus
payable at any time prior to the termination date.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of Covanta's Compensation Committee are Norman G.
Einspruch, Chairman; Jeffrey F. Friedman; Veronica M. Hagen; Homer A. Neal; and
Robert R. Womack. All of the foregoing members are "non-employee directors"
within the meaning of revised Rule 16b-3 promulgated under Section 16(b) of the
Securities Exchange Act of 1934, as amended, and "outside directors" within the
meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended, who
are not employees or members of management of Covanta or any of its
subsidiaries.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
THE EXECUTIVE COMPENSATION PROGRAM
The following section describes the Executive Compensation Program used in
determining the compensation paid to the Company's executives for the year
ending December 31, 2001. Due to the events described in Part I, CHAPTER 11
REORGANIZATION, this Program will be reviewed and may be changed or amended to
reflect the Company's current financial situation.
PHILOSOPHY
The Company's Compensation Committee (the "Committee") of the Board of
Directors is responsible for developing the Company's executive compensation
philosophy. In addition, the Committee administers the compensation program with
respect to the Company's Chief Executive Officer ("CEO") and other senior
executive officers.
The primary goal of the Company's compensation philosophy is to
establish incentives that encourage and reward the creation of shareholder
value. This "pay-for-performance" principle permeates all elements of the
Company's compensation program, which is designed to align executives' financial
interests with those of the Company's shareholders. The mix of direct
compensation is being shifted toward a greater emphasis on long-term
performance. The Company seeks to reward exceptional performers--those
individuals whose job performance clearly exceeds expectations and is consistent
with the Company's financial goals and corporate values.
The Committee retains outside compensation consultants to assist in
implementing the Company's compensation philosophy and in periodically comparing
the Company's compensation levels with other similarly sized companies in the
markets in which it operates. These companies are included in the Standard &
Poor's indices shown in the performance graphs.
To attract and retain high-caliber executives, the Company targets its
executives' total compensation opportunity for superior performance at
approximately the 75th percentile of the competitive market. Actual compensation
levels may vary, depending upon individual performance, achievement of business
unit goals, the Company's results of operations and actual shareholder returns
realized. The primary elements of the Company's current compensation
arrangements are discussed below.
BASE SALARY
The Company targets base salary levels to attract, motivate and retain
talented executives who demonstrate the personal and professional qualities
required to succeed in the Company's entrepreneurial culture and who meet or
exceed our goals and standards for exceptional performance. As the Company
continues to increase its emphasis on long-term incentive compensation, it is
expected that while base salary will remain competitive, it will comprise a
smaller proportion of the total compensation received by our executive officers.
ANNUAL INCENTIVE
The Company's annual incentive bonus payments are designed to be highly
variable based on the achievement of relevant quantitative and qualitative
criteria established by the Committee, which may vary from year to year.
Historically, annual incentive awards have been based upon any or all of the
following elements: earnings-per-share, cash flow, business unit operating
income and attainment of team and individual goals. For 2001, based on the
changes in the nature of the Company's business, the Committee gave particular
consideration to the growth in the Company's energy earnings before interest and
taxes resulting from continuing operations (excluding the results of Ogden
Environmental and Energy Services, corporate overhead and interest on corporate
level debt) ("Energy EBIT") and extraordinary individual efforts in connection
with the sale of non-core businesses and the financial restructuring of the
Company. The Committee believes that annual incentive bonuses reinforce the
Company's pay-for-performance philosophy and it intends to continue rewarding
individuals whose performance contributes to the Company's achievement of its
strategic and financial objectives.
LONG-TERM INCENTIVES
The Committee believes that creation of shareholder value is best
facilitated through clear and uncomplicated long-term incentives. Accordingly,
the Company grants stock options on an annual basis to encourage equity
ownership and better align executives' and shareholders' interests. These grants
currently vest over a three-year period and are concentrated among those
executives who the Company believes have the greatest potential to substantially
increase shareholder value. The size of these annual grants reflects a variety
of factors, including corporate performance during the most recent fiscal year,
overall compensation levels for comparable positions in the competitive market,
consideration of a given individual's importance in implementing the Company's
long-term strategic plan and an evaluation of individual performance and
previous option grants.
CHIEF EXECUTIVE OFFICER (CEO) COMPENSATION
In assessing competitors' compensation levels and practices, the
Committee reviews data covering the industries within which the Company competes
as well as general industry data. Consistent with the Company's
pay-for-performance compensation philosophy and the desire to align Mr. Mackin's
incentives with those of the Company's shareholders, Mr. Mackin's base salary
for 2001 was set at $625,000 per annum and his target annual incentive bonus was
set at 100% of his base salary. Mr. Mackin received an option grant of 60,000
shares in 2001.
The Executive Performance Incentive Plan ("EIP") adopted by the
Committee and the Board and approved by shareholders in 2001 sets forth a target
bonus payment that can be earned by Mr. Mackin based upon achievement of one or
more business criteria as designated by the Committee. For 2001, the Committee
designated that the maximum funding for the CEO award be equal to 2% of positive
Energy EBIT. The bonus actually earned by Mr. Mackin under the EIP was $650,000
in cash.
It is anticipated that only Covanta's Chief Executive Officer will be
eligible to receive awards under the EIP for the 2002 fiscal year. For 2002, the
maximum bonus award that may be paid to Mr. Mackin upon Covanta's achievement of
the performance goals established by the Committee shall once again be equal to
2% of Energy EBIT. The bonus actually earned by Mr. Mackin will be based upon
the achievement of other business objectives at the sole discretion of the
Committee.
POLICY REGARDING DEDUCTIBILITY OF EXECUTIVE COMPENSATION
The Company's policy regarding deductibility of executive pay in excess
of $1 million is to preserve the tax deductibility of such amounts by having
annual incentive bonuses and stock options for executives qualified as
performance-based compensation under the IRS rules. The EIP and the Company's
1999 Stock Incentive Plan, both of which were adopted by the Committee and the
Board, and approved by shareholders, constitute the largest elements of the
Company's senior executives' compensation packages. The Committee acknowledges
that there may be certain non-cash "imputed income" items and certain
non-incentive designed plans which may cause pay to exceed $1 million in any
year. This policy does not contemplate restricting the Committee from using
discretionary business judgment as it determines appropriate.
COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
Norman G. Einspruch--Chairman, Compensation Committee
Jeffrey F. Friedman
Veronica M. Hagen
Homer A. Neal
Robert R. Womack
The graph below compares the cumulative total shareholder return on Covanta's
Common Stock for the last five fiscal years with the cumulative total
shareholder return on the S&P 500 Index and the S&P MidCap 400 Index over the
same period, assuming the investment of $100 in Covanta Common Stock and the
reinvestment of all dividends.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
Covanta Energy Corporation, S&P 500 and S&P MidCap 400 Index
[Chart here]
The above graph presenting cumulative total return for the five-year period
ending December 31, 2001 is included in compliance with Item 402 of Regulation
S-K. It does not reflect the impact on total return of events incurring after
December 31, 2001 including the Company's filing for relief under Chapter 11 of
the United States Bankruptcy Code of April 1, 2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Covanta has been advised by Greenway Partners, L.P., FMR Corp. and
Dimensional Fund Advisors, Inc. that they, along with certain members of their
group or respective investment managers, are each the beneficial owner of more
than 5% of Covanta's Common Stock, which shares were acquired for investment
purposes for certain of their advisory clients. The following table sets forth
certain information concerning the foregoing:
TITLE OF NAME AND ADDRESS AMOUNT AND NATURE PERCENT
CLASS OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OF CLASS
Common Greenway Partners, L.P. 5,782,900 shares (1) 11.6
277 Park Avenue, 27th Floor
New York, New York 10017
Common Dimensional Fund Advisors, Inc. 2,607,201 shares (2) 5.2
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401
- --------------------------------
(1) A Schedule 13D/A Report dated April 18, 2002 shows that 380,000 shares are
held with sole voting power, 5,402,900 shares are held with shared voting power,
380,000 shares are held with sole dispositive power and 5,402,900 shares are
held with shared dispositive power.
(2) A Schedule 13G Report dated January 30, 2002 shows that 2,607,201 shares are
held with sole power to vote or to direct the vote and sole power to dispose or
direct the disposition thereof.
SECURITY OWNERSHIP BY MANAGEMENT
Information about the Common Stock beneficially owned as of March 31, 2002 by
each nominee, each director, each executive officer named in the summary
compensation table and all directors and executive officer of Covanta as a group
is set forth as follows:
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1)(2)
- ---------------------------------------------------------------------------
Anthony J. Bolland..................................... 46,292(3)
Lynde H. Coit.......................................... 109,815(4)
Norman G. Einspruch.................................... 23,015(3)
George L. Farr......................................... 235,886(3)
Jeffrey F. Friedman.................................... 33,406(3)
Veronica M. Hagen...................................... 833
Jeffrey R. Horowitz.................................... 101,868(4)
Scott G. Mackin........................................ 671,000(4)
Craig G. Matthews...................................... 3,975(3)
Judith D. Moyers....................................... 15,486(3)
Homer A. Neal.......................................... 9,607(3)
Anthony J. Orlando..................................... 91,568(4)
Robert E. Smith........................................ 10,280(3)
Bruce W. Stone......................................... 92,517(4)
Joseph A. Tato......................................... 9,525(3)
Helmut F.O. Volcker.................................... 36,895(3)
Robert R. Womack....................................... 14,796(3)
All executive officers and directors as a group
(32 persons) including those named above............. 2,221,912(5)
----------------------------------------
(1) Except as otherwise noted, each individual owns all shares directly and has
sole investment and voting power with respect to all shares. No officer or
director owns shares of Covanta Series A Preferred Stock.
(2) The beneficial ownership of each individual is less than 1.0% of the class.
(3) Includes: 19,668 shares for Mr. Bolland, 4,168 shares for Dr. Einspruch,
93,169 shares for Mr. Farr, 24,168 shares for Mr. Friedman, 1,667 shares for Mr.
Matthews, 4,168 shares for Mrs. Moyers, 4,168 shares for Dr. Neal, 4,168 shares
for Mr. Smith and 24,168 shares for Dr. Volcker, 6,668 shares for Mr. Womack and
6,668 shares for Mr. Tato, subject to stock options which are exercisable and
restricted stock which will vest within 60 days of March 31, 2002. Also
includes: 2,735 shares held in a Keogh Plan and 16,112 shares held in a
revocable trust by Dr. Einspruch, 100,000 shares held by a partnership in which
Mr. Farr is a partner, 12,000 shares held by Mr. Friedman in an IRA, and 100
shares held by Dr. Neal jointly with his wife over which Dr. Neal has shared
voting and investment authority with his wife.
(4) Includes: 100,000 shares for Mr. Coit; 95,868 shares for Mr. Horowitz;
594,000 shares for Mr. Mackin; 84,968 shares for Mr. Orlando and 54,900 shares
for Mr. Stone, subject to stock options which are exercisable within 60 days of
March 31, 2002.
(5) This amount reflects shares subject to stock options which are exercisable
and restricted stock which becomes vested within 60 days of March 31, 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A loan was made by Covanta in 1989 to Lynde H. Coit, Senior Vice
President of Covanta, to assist Mr. Coit in the purchase of a home in connection
with his relocation. The loan is evidenced by a demand note, bearing interest at
the rate of 8% per annum and is secured by a second mortgage on the premises.
The maximum amount outstanding under the loan during 2001 was $156,000. As of
December 31, 2001, there was an outstanding balance of $156,000.
A loan was made by Covanta on December 16, 1998 to David L. Hahn,
Senior Vice President, Aviation to assist Mr. Hahn in making improvements and
additions to his existing home. The loan is evidenced by a promissory note
bearing interest at the rate of 7% per annum. The maximum amount outstanding
during 2001 under the promissory note was $369,806. As of December 31, 2001,
there was an outstanding balance of $300,000 plus $69,806 of accrued interest,
under the promissory note.
In 1990, a loan was made by Covanta Energy to Bruce W. Stone, an
Executive Officer of Covanta, for the purpose of assisting him in the purchase
of his home in the amount of $99,593. The loan is evidenced by a demand note
bearing interest at the rate 8% per annum. As of December 31, 2001, there was an
outstanding balance of $88,888, including accrued interest. The maximum amount
outstanding during 2001 is the amount outstanding on December 31, 2001.
On August 6, 1999, Covanta made loans to Messrs. Mackin, Stone and Coit
for the purpose of paying the exercise price and withholding taxes in connection
with their exercise of Covanta stock options which were expiring on August 9,
1999. All loans were evidenced by demand notes with interest accruing thereon at
the short-term applicable federal rate compounded annually. In 2001, as
settlement of a dispute surrounding the circumstances under which the loans were
originally granted, the Company forgave a portion of the loan and reduced the
amount of the loan to the then fair market value of the stock. No interest will
be payable. Upon any sale of the stock, the executive must pay the net proceeds
to the Company. The Company also made a tax gross-up payment to the executives.
These amounts are reflected in the Summary Compensation Table. The largest
amount of indebtedness outstanding since January 1, 2001 for Messrs. Mackin,
Stone and Coit was $586,608, $505,644 and $123,928, respectively, including
accrued interest. As of December 31, 2001, the outstanding balances for Messrs.
Mackin, Stone and Coit were $132,888, $113,904 and $28,467, respectively.
Robert E. Smith, a Covanta director, is counsel to the law firm of
Katten Muchin Zavis Rosenman which during 2001 rendered legal services to
Covanta principally in the area of litigation management.
Joseph A. Tato, a Covanta director, is a partner of the law firm of
LeBoeuf, Lamb, Greene & MacRae, LLP which rendered services during 2001 to
Covanta Energy Group, Inc., a Covanta subsidiary.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires Covanta's
directors, officers and persons who beneficially own more than 10% of any class
of Covanta's equity securities to file certain reports concerning their
beneficial ownership and changes in their beneficial ownership of Covanta's
equity securities. Covanta believes that during fiscal 2001 all persons who are
required to file reports did so.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Listed below are the documents filed as a part of this report:
(1) All financial statements: see Index to financial statements, see
Part II, Item 8.
(2) Financial statement schedules: see Index to financial statements,
see Part II, Item 8.
(b) During the fourth quarter of 2001 a Form 8-K Report was filed on
November 13, 2001 and on December 21, 2001, each under Item 5, Other
Events, and Item 7, Financial Statements, Pro Forma Financial
Information, and Exhibits, and are each incorporated herein by
reference. In addition, during the first six months of 2002, a Form
8-K Report was filed on January 3, 2002, January 22, 2002, January 31,
2002, February 8, 2002, March 1, 2002, March 12, 2002, March 14, 2002,
March 19, 2002 and April 2, 2002, each under Item 5, Other Events, and
are each incorporated herein by reference.
(c) Those exhibits required to be filed by Item 601 of Regulation S-K:
EXHIBITS
3.0 Articles of Incorporation and By-laws.
3.1 (a) The Company's Restated Certificate of Incorporation as amended.*
(b) Certificate of Ownership and Merger, Merging Ogden-Covanta, Inc.
into Ogden Corporation, dated March 7, 2001. *
3.2 The Company's By-Laws, as amended through April 8, 1998.*
4.0 Instruments Defining Rights of Security Holders.
4.1 Fiscal Agency Agreement between Covanta and Bankers Trust Company,
dated as of June 1, 1987, and Offering Memorandum dated June 12, 1987,
relating to U.S. $85 million Ogden 6% Convertible Subordinated
Debentures, Due 2002.*
4.2 Fiscal Agency Agreement between the Company and Bankers Trust Company,
dated as of October 15, 1987, and Offering Memorandum, dated October
15, 1987, relating to U.S. $75 million Ogden 5-3/4% Convertible
Subordinated Debentures, Due 2002.*
4.3 Indenture dated as of March 1, 1992 from the Company Corporation to
Wells Fargo Bank Minnesota, National Association, as Trustee (as
successor in such capacity to The Bank of New York, Trustee), relating
to the Company's $100 million debt offering.*
10.0 Material Contracts
10.1 (a) U.S. $95 million Term Loan and Letter of Credit and Reimbursement
Agreement among the Company, the Deutsche Bank AG, New York
Branch and the signatory Banks thereto, dated March 26, 1997.*
(b) Revolving Credit and Participation Agreement, dated as of March
14, 2001, among the Company, the Lenders listed therein, Bank of
America, NA, as Administrative Agent, Co-Arranger and Co-Book
Runner and Deutsche Bank AG, New York Branch, as Documentation
Agent, Co-Arranger and Co-Book Runner.*
(c) First Amendment to Revolving Credit and Participation Agreement,
dated as of July 30, 2001, among the Company, the Lenders listed
therein, Bank of America, NA, as Administrative Agent,
Co-Arranger and Co-Book Runner and Deutsche Bank AG, New York
Branch, as Documentation Agent, Co-Arranger and Co-Book Runner.*
(d) Second Amendment to Revolving Credit and Participation Agreement,
dated as of August 31, 2001, among the Company, the Lenders
listed therein, Bank of America, NA, as Administrative Agent,
Co-Arranger and Co-Book Runner and Deutsche Bank AG, New York
Branch, as Documentation Agent, Co-Arranger and Co-Book Runner.*
(e) Third Amendment to Revolving Credit and Participation Agreement,
dated as of December 20, 2001, among the Company, the Lenders
listed therein, Bank of America, NA, as Administrative Agent,
Co-Arranger and Co-Book Runner and Deutsche Bank AG, New York
Branch, as Documentation Agent, Co-Arranger and Co-Book Runner,
transmitted herewith as Exhibit 10.1(e).
(f) Fourth Amendment to Revolving Credit and Participation Agreement,
dated as of January 31, 2002, among the Company, the Lenders
listed therein, Bank of America, NA, as Administrative Agent,
Co-Arranger and Co-Book Runner and Deutsche Bank AG, New York
Branch, as Documentation Agent, Co-Arranger and Co-Book Runner,
transmitted herewith as Exhibit 10.1(f).
(g) Fifth Amendment to Revolving Credit and Participation Agreement,
dated as of February 21, 2002, among the Company, the Lenders
listed therein, Bank of America, NA, as Administrative Agent,
Co-Arranger and Co-Book Runner and Deutsche Bank AG, New York
Branch, as Documentation Agent, Co-Arranger and Co-Book Runner,
transmitted herewith as Exhibit 10.1(g).
(h) Sixth Amendment to Revolving Credit and Participation Agreement,
dated as of March 12, 2002, among the Company, the Lenders listed
therein, Bank of America, NA, as Administrative Agent,
Co-Arranger and Co-Book Runner and Deutsche Bank AG, New York
Branch, as Documentation Agent, Co-Arranger and Co-Book Runner,
transmitted herewith as Exhibit 10.1(h).
(i) Seventh Amendment to Revolving Credit and Participation
Agreement, dated as of March 22, 2002, among the Company, the
Lenders listed therein, Bank of America, NA, as Administrative
Agent, Co-Arranger and Co-Book Runner and Deutsche Bank AG, New
York Branch, as Documentation Agent, Co-Arranger and Co-Book
Runner, transmitted herewith as Exhibit 10.1(i).
(j) Debtor In Possession Credit and Participation Agreement, dated as
of April 1, 2002, among the Company, the Company's U.S.
Subsidiaries listed therein, the Lenders listed therein, Bank of
America, NA, as Administrative Agent, Co-Arranger and Co-Book
Runner and Deutsche Bank AG, New York Branch, as Documentation
Agent, Co-Arranger and Co-Book Runner, transmitted herewith as
Exhibit 10.1(j).
(k) Security Agreement, dated as of April 1, 2002, by and among the
Company, each of the other Borrowers listed on the signature
pages thereof, each of the Subsidiary Guarantors listed on the
signature pages thereof and each Additional Subsidiary Guarantor
and Borrower that may become a party thereto after the date
thereof, and Bank of America, N.A., in its capacity as
administrative agent for and representative of Lenders from time
to time party to the Credit Agreement, transmitted herewith as
Exhibit 10.1(k).
(l) First Amendment to Debtor In Possession Credit Agreement and
Security Agreement, dated as of April 3, 2002, by and among the
Company, the Subsidiaries of the Company listed on the signature
pages thereof as Borrowers, the Subsidiaries of the Company
listed on the signature pages thereof as Subsidiary Guarantors,
the Lenders party thereto, Bank of America, N.A., as
Administrative Agent for the Lenders, and Deutsche Bank AG, New
York Branch, as Documentation Agent for the Lenders, transmitted
herewith as Exhibit 10.1(l).
(m) First Amendment to Intercreditor Agreement, dated as of April 1,
2002, by and among the Company, the Subsidiaries of the Company
listed on the signature pages thereof as Borrowers, the
Subsidiaries of the Company listed on the signature pages thereof
as Subsidiary Guarantors, the financial institutions party
thereto, Bank of America, N.A., as Administrative Agent for the
Lenders, and Deutsche Bank AG, New York Branch, as Documentation
Agent for the Lenders, transmitted herewith as Exhibit 10.1(m).
(n) Subsidiary Guaranty, entered into as of April 1, 2002, by the
Guarantors signatories thereto in favor of and for the benefit of
Bank of America, N.A., as Administrative Agent for and
representative of the Lenders from time to time party to the
Credit Agreement referred to therein, transmitted herewith as
Exhibit 10.1(n).
10.2 Amended and Restated Rights Agreement between the Company and
the Bank of New York, dated as of September 28, 2000.*
10.3 Executive Compensation Plans and Agreements.
(a) Ogden Corporation 1990 Stock Option Plan as Amended and Restated
as of January 19, 1994.*
(i) Amendment adopted and effective as of September 18, 1997.*
(b) Ogden Corporation 1999 Stock Incentive Plan Amended and Restated
as of January 1, 2000.*
(c) Ogden Energy Select Plan, dated January 1, 2000 (c).*
(d) (i) Ogden Corporation Restricted Stock Plan and Restricted
Stock Agreement.*
(ii) Ogden Corporation Restricted Stock Plan for Non-Employee
Directors and Restricted Stock Agreement.*
(iii) Covanta Energy Corporation Restricted Stock Unit Plan for
Non-Employee Directors, as Amended and Restated on May 23,
2001, transmitted herewith as Exhibit 10.3(d)(iii).
(e) Ogden Corporation Profit Sharing Plan as Amended and Restated
effective as of January 1, 1995.*
(f) Ogden Corporation Core Executive Benefit Program.*
(g) Ogden Projects Pension Plan.*
(i) Covanta Energy Pension Plan, as amended and restated and
effective January 1, 2001, transmitted herewith as Exhibit
10.3(g)(i).
(h) Ogden Projects Profit Sharing Plan.*
(i) Covanta Energy Profit Sharing Plan, as amended and restated
December 18, 2001 and effective January 1, 1998,
transmitted herewith as Exhibit 10.3(h)(i).
(i) Ogden Projects Supplemental Pension and Profit Sharing Plans.*
(j) Ogden Projects Core Executive Benefit Program.*
(k) (i) Form of Amended Ogden Projects, Inc. Profit Sharing Plan,
effective as of January 1, 1994.*
(ii) Form of Amended Ogden Projects, Inc. Pension Plan,
effective as of January 1, 1994.*
(l) Ogden Executive Performance Incentive Plan.*
(m) Ogden Key Management Incentive Plan.*
10.4 Employment Agreements
(a) Employment Agreement between the Company and Lynde H. Coit dated
March 1, 1999.*
(i) Amendment to Employment Agreement between Covanta Energy
Corporation and Lynde H. Coit dated November 26, 2001,
transmitted herewith as Exhibit 10.4(a)(i).
(ii) Supplemental Agreement to Consolidated Amended and Restated
Demand Note between Covanta Energy Corporation and Lynde H.
Coit dated November 26, 2001, transmitted herewith as
Exhibit 10.4(a)(ii).
(iii) Consolidated Amended and Restated Demand Note between
Covanta Energy Corporation and Lynde H. Coit dated November
26, 2001, transmitted herewith as Exhibit 10.4(a)(iii).
(b) Employment Agreement between Scott G. Mackin, Executive Vice
President and the Company dated as of October 1, 1998.*
(i) Amendment to Employment Agreement between Covanta Energy
Corporation and Scott G. Mackin dated November 26, 2001,
transmitted herewith as Exhibit 10.4(b)(i).
(ii) Supplemental Agreement to Consolidated Amended and Restated
Demand Note between Covanta Energy Corporation and Scott G.
Mackin dated November 26, 2001, transmitted herewith as
Exhibit 10.4(b)(ii).
(iii) Consolidated Amended and Restated Demand Note between
Covanta Energy Corporation and Scott G. Mackin dated
November 26, 2001, transmitted herewith as Exhibit
10.4(b)(iii).
(c) Employment Agreement between Jeffrey R. Horowitz and Covanta
Energy Group, Inc., dated May 1, 1999.*
(d) Employment Agreement between Paul B. Clements and Covanta Energy
Group, Inc., dated May 1, 1999.*
(e) Employment Agreement between Covanta Energy Group, Inc. and Bruce
W. Stone dated May 1, 1999.*
(i) Supplemental Agreement to Consolidated Amended and Restated
Demand Note between Covanta Energy Corporation and Bruce W.
Stone dated November 26, 2001, transmitted herewith as
Exhibit 10.4(e)(i).
(ii) Consolidated Amended and Restated Demand Note between
Covanta Energy Corporation and Bruce W. Stone dated
November 26, 2001, transmitted herewith as Exhibit
10.4(e)(ii).
(f) Employment Agreement between the Company and Raymond E.
Dombrowski, Jr., Senior Vice President and Chief Financial
Officer, dated as of September 21, 1998.*
(g) Employment Agreement between Anthony J. Orlando and Covanta
Energy Group, Inc., dated May 1, 1999 transmitted herewith as
Exhibit 10.4(g).
11 Not Applicable.
12 Not Applicable.
13 Not Applicable.
16 Not Applicable.
18 Not Applicable.
21 Subsidiaries of Covanta, transmitted herewith as Exhibit 21.
22 Not Applicable.
23 Independent Auditors Consent, transmitted herewith as Exhibit 23.
24 Not Applicable.
* INCORPORATED BY REFERENCE AS SET FORTH IN THE EXHIBIT INDEX OF THIS ANNUAL
REPORT ON FORM 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COVANTA ENERGY CORPORATION
DATE: July 17, 2002 By /s/ Scott G. Mackin
------------------------
Scott G. Mackin
President and Chief
Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints jointly and severally, Scott G. Mackin
and William J. Keneally, or either of them as his or her true and lawful
attorneys-in-fact and agents, will full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to this Report to Form 10-K, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated.
SIGNATURE TITLE DATE
/s/ Scott G. Mackin
- -------------------------------
SCOTT G. MACKIN President, Chief Executive July 17, 2002
Officer and Director
/s/ William J. Keneally
- -------------------------------
WILLIAM J. KENEALLY Senior Vice President, July 17, 2002
Chief Accounting Officer
/s/ Anthony J. Bolland
- -------------------------------
ANTHONY J. BOLLAND Director July 17, 2002
/s/ Norman G. Einspruch
- -------------------------------
NORMAN G. EINSPRUCH Director July 17, 2002
/s/ George L. Farr
- -------------------------------
GEORGE L. FARR Director July 17, 2002
/s/ Jeffrey F. Friedman
- -------------------------------
JEFFREY F. FRIEDMAN Director July 17, 2002
/s/ Veronica M. Hagen
- -------------------------------
VERONICA M. HAGEN Director July 17, 2002
/s/ Craig G. Matthews
- -------------------------------
CRAIG G. MATTHEWS Director July 17, 2002
/s/ Homer A. Neal
- -------------------------------
HOMER A. NEAL Director July 17, 2002
/s/ Robert E. Smith
- -------------------------------
ROBERT E. SMITH Director July 17, 2002
/s/ Joseph A. Tato
- -------------------------------
JOSEPH A. TATO Director July 17, 2002
/s/ Helmut F.O. Volcker
- -------------------------------
HELMUT F.O. VOLCKER Director July 17, 2002
/s/ Robert R. Womack
- -------------------------------
ROBERT R. WOMACK Director July 17, 2002