FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-3122
Covanta Energy Corporation (Debtor in Possession)
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(Exact name of registrant as specified in its charter)
Delaware 13-5549268
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
40 Lane Road, Fairfield, NJ 07004
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(Address or principal executive office) (Zip code)
(973) 882-9000
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(Registrant's telephone number including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by checkmark 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|
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of the registrant's Common Stock outstanding as of November
1, 2002 was 49,827,651 shares. The number of shares of the registrant's $1.875
Cumulative Convertible Preferred Stock (Series A) outstanding as of November 1,
2002 was 33,049 shares.
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COVANTA ENERGY CORPORATION (DEBTOR IN POSSESSION) AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
FOR THE NINE MONTHS ENDED FOR THE THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------------
2002 2001 2002 2001
------------------------- --------------------------
(In Thousands of Dollars, Except per Share Amounts)
Service revenues $ 387,737 $ 430,679 $ 124,580 $ 142,415
Electricity and steam sales 283,128 266,299 98,210 89,340
Equity in income from unconsolidated subsidiaries 17,001 19,528 8,590 7,492
Construction revenues 34,323 44,184 11,779 23,356
Other sales-net 29,063 8,060
Other-net 259 29,773 215 43
--------- --------- --------- ---------
Total revenues 722,448 819,526 243,374 270,706
--------- --------- --------- ---------
Plant operating expenses 407,259 395,941 133,063 128,617
Construction costs 34,677 51,884 13,345 20,954
Depreciation and amortization 73,461 74,985 23,309 25,051
Debt service charges-net 63,367 65,014 20,429 21,925
Other operating costs and expenses 25,016 48,833 6,063 19,281
Net loss (gain) on sale of businesses 24,057 (3,872) (93) (1,680)
Costs of goods sold 34,081 12,540
Selling,administrative and general expenses 45,636 54,761 13,630 16,129
Project development costs 3,054 4,580 413 1,668
Other-net 16,906 12,812 (15,115) 5,649
Write down of assets held for use 100,647
Write-down of and obligations related to assets held for sale 40,000 20,408 18,717
--------- --------- --------- ---------
Total costs and expenses 834,080 759,427 195,044 268,851
--------- --------- --------- ---------
Operating income (loss) (111,632) 60,099 48,330 1,855
Interest expense (net of interest income
of $1,770, $7,363, $614 and $1,207
respectively and excluding post-petition
contractual interest expense
of $3,100 and $700 for the nine and three
month periods ended in 2002) (26,287) (21,867) (9,863) (7,287)
Reorganization items (32,803) (16,837)
--------- --------- --------- ---------
Income (loss) before income taxes, minority interests
and the cumulative effect of change in accounting principle (170,722) 38,232 21,630 (5,432)
Income taxes 2,004 (15,793) (2,292) 971
Minority interests (6,342) (4,728) (1,879) (1,701)
--------- --------- --------- ---------
Income (loss) from operations before change in accounting principle (175,060) 17,711 17,459 (6,162)
Cumulative effect of change in accounting principle (7,842)
--------- --------- --------- ---------
Net Income (Loss) (182,902) 17,711 17,459 (6,162)
--------- --------- --------- ---------
Other Comprehensive Income (Loss), Net of Tax:
Foreign currency translation adjustments (net of
income taxes of ($415), $585, $0 and $160, respectively (1,094) (2,230) 306 (141)
Less reclassification adjustment for translation
adjustment included in loss from operations 1,233
Unrealized holding losses arising during period (320) (143)
--------- --------- --------- ---------
Other comprehensive income (loss) (181) (2,230) 163 (141)
--------- --------- --------- ---------
Comprehensive Income (loss) $(183,083) $ 15,481 $ 17,622 $ (6,303)
========= ========= ========= =========
BASIC EARNINGS (LOSS) PER SHARE
Income(loss) from operations $ (3.52) $ 0.36 $ 0.35 $ (0.12)
Cumulative effect of change in accounting principle (0.16)
--------- --------- --------- ---------
Net Income (Loss) per share $ (3.68) $ 0.36 $ 0.35 $ (0.12)
========= ========= ========= =========
DILUTED EARNINGS (LOSS) PER SHARE
Income(loss) from operations $ (3.52) $ 0.35 $ 0.35 $ (0.12)
Cumulative effect of change in accounting principle (0.16)
--------- --------- --------- ---------
Net Income (Loss) per share $ (3.68) $ 0.35 $ 0.35 $ (0.12)
========= ========= ========= =========
See notes to condensed consolidated financial statements.
COVANTA ENERGY CORPORATION (DEBTOR IN POSSESSION) AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2002 2001
----------------------------------------------------
(In Thousands of Dollars, Except per Share Amounts)
Assets
Current Assets:
Cash and cash equivalents $ 112,061 $ 86,773
Restricted funds held in trust 122,820 93,219
Receivables (less allowances of $17,138 and $16,444, respectively) 261,033 306,712
Deferred income taxes 27,500 27,500
Prepaid expenses and other current assets 88,304 102,470
Assets held for sale 8,140 67,948
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Total current assets 619,858 684,622
Property, plant and equipment-net 1,677,100 1,901,311
Restricted funds held in trust 170,192 167,009
Unbilled service and other receivables 151,742 150,825
Unamortized contract acquisition costs-net 56,237 82,325
Goodwill-net 9,878
Other intangible assets-net 7,770 8,439
Investments in and advances to investees and joint ventures 171,171 183,231
Other assets 58,038 59,512
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Total Assets $ 2,912,108 $ 3,247,152
=========== ===========
Liabilities and Shareholders' Equity (Deficit)
Liabilities:
Current liabilities:
Current portion of long-term debt $ 20,332 $ 13,089
Current portion of project debt 114,788 113,112
Convertible subordinated debentures 148,650
Accounts payable 15,529 37,142
Federal and foreign income taxes payable 6,341 5,955
Obligations related to assets held for sale 217,206
Accrued expenses 279,388 362,388
Deferred income 41,340 42,694
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Total current liabilities 477,718 940,236
Long-term debt 22,472 298,602
Project debt 1,182,476 1,302,381
Deferred income taxes 267,154 323,669
Deferred income 153,701 161,525
Other liabilities 91,209 174,345
Liabilities subject to compromise 859,933
Minority interests 34,005 40,150
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Total liabilities 3,088,668 3,240,908
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Shareholders' Equity (Deficit):
Serial cumulative convertible preferred stock,
par value $1.00 per share;
authorized, 4,000,000 shares; shares
outstanding : 33,049 and 33,480,
respectively, net of treasury shares of 29,820 33 34
Common stock,par value $.50 per share;authorized,
80,000,000 shares; shares outstanding: 49,827,651
and 49,835,076, respectively, net of
treasury shares of 4,121,950 and 4,111,950, respectively 24,914 24,918
Capital surplus 188,214 188,371
Notes receivable from key employees for common stock issuance (870) (870)
Unearned restricted stock compensation (207) (664)
Deficit (388,180) (205,262)
Accumulated other comprehensive loss (464) (283)
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Total Shareholders' Equity (Deficit) (176,560) 6,244
----------- -----------
Total Liabilities and Shareholders' Equity (Deficit) $ 2,912,108 $ 3,247,152
=========== ===========
See notes to condensed consolidated financial statements.
COVANTA ENERGY CORPORATION (DEBTOR IN POSSESSION) AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
For The Nine months ended For The Year ended
September 30, 2002 December 31, 2001
Shares Amounts Shares Amounts
---------------------------------------------------------------------
(In Thousands of Dollars, Except Share and Per Share Amounts)
Serial Cumulative Convertible Preferred Stock,
par value $1.00 per share;
authorized, 4,000,000 shares:
Balance at beginning of period 63,300 $ 64 65,402 $ 66
Shares converted into common stock (431) (1) (2,102) (2)
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Total 62,869 63 63,300 64
Treasury shares (29,820) (30) (29,820) (30)
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Balance at end of period(aggregate involuntary
liquidation value-2002, $666,000) 33,049 33 33,480 34
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Common Stock, par value $.50 per share;
authorized, 80,000,000 shares:
Balance at beginning of year 53,947,026 26,974 53,910,574 26,956
Exercise of stock options 23,898 12
Conversion of preferred shares 2,575 1 12,554 6
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Total 53,949,601 26,975 53,947,026 26,974
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Treasury shares at beginning of year 4,111,950 2,056 4,265,115 2,133
(Issuance) cancellation of restricted stock 10,000 5 (114,199) (57)
Exercise of stock options (38,966) (20)
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Treasury shares at end of period 4,121,950 2,061 4,111,950 2,056
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Balance at end of period 49,827,651 24,914 49,835,076 24,918
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Capital surplus:
Balance at beginning of period 188,371 185,681
Exercise of stock options 776
Issuance (cancellation) of restricted stock (157) 1,918
Conversion of preferred shares (4)
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Balance at end of period 188,214 188,371
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Notes receivable from key employees for common stock issuance (870) (870)
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Unearned Restricted Stock Compensation:
Balance at beginning of period (664)
Issuance (cancellation) of restricted common stock 162 (1,567)
Amortization of unearned restricted stock compensation 295 903
--------------- -------------------
Balance at end of period (207) (664)
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Earned Surplus (Deficit):
Balance at beginning of period (205,262) 25,829
Net loss (182,902) (231,027)
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Total (388,164) (205,198)
-------------------
Preferred dividends per share $.46875 and $1.875, respectively 16 64
--------------- -------------------
Balance at end of period (388,180) (205,262)
--------------- -------------------
Cumulative Translation Adjustment-Net (144) (283)
---------------
Net Unrealized Loss on Securities Available for Sale (320)
--------------- -------------------
CONSOLIDATED SHAREHOLDERS' EQUITY (DEFICIT) $ (176,560) $ 6,244
=============== ===================
See notes to condensed consolidated financial statements.
COVANTA ENERGY CORPORATION (DEBTOR IN POSSESSION) AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
2002 2001
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(In Thousands of Dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(182,902) $ 17,711
Adjustments to Reconcile Net Income (loss) to Net Cash
Provided by Operating Activities:
Reorganization items 32,803
Payment of reorganization items (18,957)
Depreciation and amortization 73,461 74,985
Deferred income taxes (8,258) 5,266
Provision for doubtful accounts 11,842 16,756
Bank fees 23,685 7,501
Obligation related to assets held for sale 40,000 20,408
Write down of assets held for use 100,647
Other (5,794) (5,367)
Management of Operating Assets and Liabilities:
Decrease (Increase) in Assets:
Receivables 32,936 (38,337)
Other assets 8,961 (34,917)
Increase (Decrease) in Liabilities:
Accounts payable 28,907 (9,669)
Accrued expenses (8,651) 5,655
Deferred income (2,495) (11,507)
Other liabilities (34,677) 5,070
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Net cash provided by operating activities 91,508 53,555
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of businesses 36,164 22,045
Proceeds from sale of property, plant and equipment 305 932
Investments in facilities (13,360) (53,304)
Other capital expenditures (2,337) (5,449)
Decrease (increase) in other receivables (142) 3,212
Distributions from investees and joint ventures 15,463 24,257
Increase in investment in and advances to
investees and joint ventures (574) (14,485)
--------- ---------
Net cash provided by (used in) investing activities 35,519 (22,792)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
New debt 4,781 16,306
Funds held in trust (40,533) (34,912)
Restricted cash 194,118
Payment of debt (62,569) (223,991)
Dividends paid (16) (49)
Proceeds from exercise of stock options 808
Other-net (3,402) (2,415)
--------- ---------
Net cash used in financing activities (101,739) (50,135)
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 25,288 (19,372)
Cash and Cash Equivalents at Beginning of Period 86,773 80,643
--------- ---------
Cash and Cash Equivalents at End of Period $ 112,061 $ 61,271
========= =========
See notes to condensed consolidated financial statements.
ITEM 1 - NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation:
The accompanying unaudited Condensed Consolidated Financial Statements (the
"Financial Statements") have been prepared in accordance with the instructions
to Form 10-Q. As permitted by the rules and regulations of the Securities and
Exchange Commission ("SEC"), the accompanying unaudited consolidated financial
statements contain certain condensed financial information and exclude certain
footnote disclosures normally included in annual audited consolidated financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America ("GAAP"). In the opinion of management, the
accompanying Financial Statements contain all adjustments, including normal
recurring accruals, necessary to present fairly the financial position as of
September 30, 2002 and results of operations for the three and nine months
periods and cash flows for the nine months periods ended September 30, 2002 and
2001. These Financial Statements should be read in conjunction with the audited
Consolidated Financial Statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2001, filed with the SEC on July 19, 2002 and in the Company's Form 10-Q for the
three month period ended March 31, 2002, filed with the SEC on September 13,
2002, and for the six months period ended June 30, 2002, filed with the SEC on
November 13, 2002.
The preparation of financial statements 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 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 assets
held for sale and related liabilities, estimated useful lives of long-lived
assets, allowances for doubtful accounts receivable, and liabilities for workers
compensation, severance, restructuring and certain litigation.
The 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 power
generation projects and provides related infrastructure services. The Company
also offers single source design, build and 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 of which Covanta
owns less than 20% which are accounted for using the equity method. Covanta has
significant influence over the operations of these companies through
representation on the Boards of Directors, shareholder rights, and ownership in
the operators of the energy facilities. All inter-company transactions and
balances have been eliminated.
On April 1, 2002 (the "Petition Date"), Covanta Energy Corporation and 123 of
its domestic subsidiaries (collectively the "Debtors") 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 other subsidiaries and joint venture partnerships
were not included in the filing. See below for a more detailed discussion of the
Chapter 11 Cases.
The Financial Statements have been prepared on a "going concern" basis in
accordance with GAAP. 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
the terms of, and if necessary renew, the Debtor in Possession Credit Facility
(see Liquidity/Cash Flow below), 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 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 Financial Statements also have been prepared in accordance with The American
Institute of Certified Public Accountants Statement of Position 90-7 ("SOP
90-7"), "Financial Reporting by Entities in Reorganization under the Bankruptcy
Code." Accordingly, all pre-petition liabilities believed to be subject to
compromise have been segregated in the unaudited Condensed Consolidated Balance
Sheet and classified as Liabilities Subject to Compromise, at the estimated
amount of allowable claims. Liabilities not believed to be subject to compromise
are separately classified as current and non-current. Revenues, expenses,
including professional fees, realized gains and losses, and provisions for
losses resulting from the reorganization are reported separately as
Reorganization Items. Also, interest expense is 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. Cash used for reorganization items is disclosed separately
in the unaudited Condensed Consolidated Statements of Cash Flows.
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 assets held for sale in its December 31, 2000
consolidated financial statements. These non-core businesses are reported in the
Other segment for the year ended December 31, 2001 and for the periods ended
September 30, 2002. See Item 2 (Management Discussion and Analysis of Financial
Condition and Results of Operations) for additional data regarding segments.
In accordance with Statement of Financial Accounting Standards No. 144 (see
below), prior period amounts related to assets held for sale and related
liabilities have been reclassified in the 2001 Condensed Consolidated Balance
Sheet.
Changes in Accounting Principles:
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 Income (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 $0.9 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
carrying value of this asset and liability increased to $19.2 million at
September 30, 2002 and was $16.4 million at September 30, 2001.
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 (the "FASB").
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 $0.2 million and $0.6 million for the three
and nine months ended September 30, 2002, respectively. 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. 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."
On June 30, 2002, the Company completed the required impairment evaluation of
goodwill in conjunction with its adoption of SFAS No. 142. As a result of
current risks and other conditions in its Energy business and based upon the
expected present value of future cash flows, the Company determined that $7.8
million of goodwill related to its Energy business was impaired and was
therefore written-off. As required by SFAS No 142, this adjustment has been
accounted for as a cumulative effect change in accounting principle as of
January 1, 2002, which had no tax impact.
A reconciliation of reported net earnings to the amounts adjusted for the
exclusion of goodwill amortization is as follows (in thousands):
3 Months Ended 9 Months Ended
-------------------------- ---------------------------
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
--------- --------- ---------- ----------
Reported net income (loss)
before change in accounting
principle $ 17,459 $ (6,162) $(175,060) $ 17,711
Add: Goodwill amortization,
net of tax - 200 - 601
--------- --------- --------- --------
Adjusted net income (loss) $ 17,459 $ (6,362) $(175,060) $ 18,312
========= ========== ========== ========
Excluding goodwill amortization, reported net earnings per share would not have
changed for the three month period ended September 30, 2001 and would have
increased by $0.01 per share for the nine month period then ended.
Identifiable intangibles consist primarily of contract acquisition costs and
deferred financing costs and are amortized over approximately six to
twenty-seven years.
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
assets held for sale. SFAS No. 144 requires that assets held for sale be
measured at the lower of carrying amount or fair value less associated selling
expenses. It also broadens this reporting 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 on January 1, 2002 did not have a
material effect on the Company's financial position and results of operations
but has required certain balance sheet reclassifications of these assets and
liabilities at December 31, 2001 in order to conform with the September 30, 2002
presentation.
In light of its Chapter 11 bankruptcy filing and proceedings, the Company
reviewed the recoverability of its long-lived assets as of June 30, 2002. As a
result of the review based upon the future cash flows, the Company recorded, in
write down of assets held for use, in the Condensed Consolidated Statement of
Operations and Comprehensive Loss, a pre-tax impairment charge totaling $100.6
million related to one domestic and two international projects.
The impairment related to the domestic Energy project results from the Company's
current inability to improve the operations of, or restructure, the project in
order to meet substantial future lease payments. This impairment charge was
$22.1 million and resulted in a tax benefit of $7.7 million.
The impairment related to the Magellan Cogeneration Energy project in the
Philippines is due to a substantial second quarter governmental imposed
reduction of national electricity tariffs, the duration of which is impossible
to estimate at this time. The Company recorded a pre-tax impairment charge of
$41.3 million related to the net book value of the assets of this project.
Although this project has $32.1 million of non-recourse debt, in accordance with
SFAS No.144, the Company based the impairment loss upon the measurement of the
assets at their fair market value. Accordingly, in the future if there were a
foreclosure on or sale of the project, a significant book gain could be
recognized on the extinguishment of the $32.1 million of non-recourse debt.
The impairment related to the Bataan Cogeneration Energy project in the
Philippines results from the fact that the plant sells a portion of its power at
a discount to the national tariff. Based on the current operating environment,
including the tariff reduction described above, the Company no longer expects
the current contract for the Bataan project to be extended beyond its current
term or to be able to recover the project's value. Therefore, a pre-tax
impairment charge of $37.2 million related to the net book value of the assets
of this project was recorded.
The Company will continue to consider alternatives to maximize the value of
these projects.
New Accounting Pronouncements:
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 obligation 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 April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS No. 4
("Reporting Gains and Losses from Extinguishment of Debt"), No. 44 ("Accounting
for Intangible Assets of Motor Carriers") and No. 64 ("Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements"), Amendment of SFAS No. 13
("Accounting for Leases") and Technical Corrections." The provisions of SFAS No.
145 related to the rescission of SFAS No. 4 require application in fiscal years
beginning after May 15, 2002. Any gain or loss on extinguishment of debt that
was classified as an extraordinary item in prior periods presented that does not
meet the current criteria for classification as an extraordinary item shall be
reclassified. The provisions of this Statement related to SFAS No. 13 and the
technical corrections are effective for transactions occurring after May 15,
2002. All other provisions of SFAS No. 145 shall be effective for financial
statements issued on or after May 15, 2002. Early application of the provisions
of SFAS No. 145 is encouraged and may be as of the beginning of the fiscal year
or as of the beginning of the interim period in which SFAS No. 145 was issued.
The Company has adopted the currently required provisions of SFAS No. 145 noted
above without impact on its financial position or results of operations. The
Company is assessing, but has not yet determined, the impact of the remaining
required provisions.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". The provisions
of SFAS No. 146 are effective for exit or disposal activities initiated after
December 31, 2002. Early application is encouraged. Previously issued financial
statements shall not be restated. The provisions of EITF Issue No. 94-3 shall
continue to apply for an exit activity initiated under an exit plan that met the
criteria of that issue prior to the initial application of SFAS No. 146. The
Company does not expect the adoption of SFAS No. 146 to have a material effect
on its financial position and results of operations.
Bankruptcy Proceedings
The Debtors 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 that were intended to enable the
Debtors to operate in the normal course of business during the Chapter 11 Cases.
Among other things, 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.
Specifically with respect to post-petition financing, on April 5, 2002, the
Bankruptcy Court 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 the lenders who had participated in the Master
Credit Facility (the "DIP Lenders"), and to grant first priority mortgages,
security interests, liens and super priority claims on substantially all of the
domestic assets of the Debtors, other than most assets related to its power
production and waste-to-energy facilities which are subject to the liens of
others in connection with such facilities. On July 26, 2002, the Bankruptcy
Court overruled certain objections by holders of minority interests in two
limited partnerships who disputed the inclusion of their limited partnerships in
the DIP Credit Facility. The Bankruptcy Court overruled these objections by an
order dated August 2, 2002, although one of the objectors has appealed the
order.
The Debtors are currently operating their businesses as debtors in possession
pursuant to the Bankruptcy Code. Pursuant to the Bankruptcy Code, pre-petition
obligations of the Debtors, including obligations under debt instruments,
generally may not be enforced against the Debtors, and any actions to collect
pre-petition indebtedness are automatically stayed, unless the stay is lifted by
the Bankruptcy Court. The obligations of, and the ultimate payments by, the
Debtors under pre-petition commitments may be substantially altered. This could
result in claims being liquidated in Chapter 11 Cases at less than their face
value. However, as authorized by the Bankruptcy Court, the Debtors have
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 potential claim for damages for the resulting breach thereof. In
general, 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 pre-petition basis. The Debtors are in
the process of reviewing their executory contracts and unexpired leases to
determine which, if any, they will assume or 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 or the cost of curing existing default for any
assumed contracts. See below for a description of Energy projects that could
result in rejection if planned restructurings are not achieved. Based on a
preliminary review of claims filed to date, the amount of the claims filed or to
be filed by the creditors either in respect of purported rejection damages or
cure costs under the applicable provision of the Bankruptcy Code appear to be
significantly higher than the amount of the liabilities recorded by the Debtors.
The Debtors intend to contest claims to the extent they exceed the amounts the
Debtors believe are due.
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 required by 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
has commenced a lawsuit in state court with respect to such disputes, as well as
the client community's right to terminate. This matter was removed to federal
court in the Northern District of New York, where the client community
successfully moved to have the case remanded back to state court rather than to
the Bankruptcy Court as requested by the Company. In addition, the client
community has sought and obtained from the same federal court an injunction
preventing the Company from proceeding with an adversary proceeding in the
Bankruptcy Court seeking a determination that the automatic stay applies to this
litigation, or other related relief. The Company has appealed the issuance of
this injunction. If the outcome of this matter is determined adversely to the
Company, the contract could be terminated and the operating subsidiary and the
Company, as guarantor, could incur substantial, pre-petition termination
obligations, and the Company's operating subsidiary could lose its ownership
interest in and its rights to operate the project. The Company continues to
believe that further proceedings in this matter are stayed by its bankruptcy
filing.
The project discussed in the preceding paragraph and three other Energy projects
may require restructuring in order for the Company's operating subsidiaries (all
of which are now operating as debtors in possession under the Bankruptcy Code)
to emerge from Chapter 11. With respect to these projects, there are ongoing
discussions with the client communities, or other interested parties, to
restructure the project in a manner that will permit each operating subsidiary
to reorganize. In each case, such a restructuring would require approval of the
Bankruptcy Court. There can be no assurance that the Company's efforts in this
regard will result in a final agreement on restructuring any of these four
projects, and the Company is unable to assess the likelihood of a restructuring
in any of these situations.
If the Company were unable to restructure any of these four projects, it is
possible that the Company would be forced to reject the related executory
contracts, thereby creating substantial termination liabilities. Because the
Company is unable to predict the probability of successful restructuring it
cannot estimate the likelihood that such liabilities will be incurred and
therefore the impact the restructuring process will have on the Company's
assets. Were these liabilities to be incurred, they would be treated as
unsecured, pre-petition claims in the bankruptcy proceeding.
The contracts for each of these four projects provide different measures of
damages for their breach and the amount of damages that would be incurred under
each is difficult to estimate because it would be based on choices of remedies
made by the respective counter-parties and the Company's success in asserting
offsets for some of these damages. However, if one of these projects were
rejected the claim could be $35 million or more, and if all were rejected, the
rejection claims could exceed $300 million.
In addition, depending upon which projects were unable to be restructured and
the Company's overall tax position upon emergence from the bankruptcy
proceeding, the Company could incur substantial federal and state tax
liabilities, based on the difference between the unsatisfied debt obligations on
these facilities and the tax basis of these facilities. Such taxes may be a
priority administrative bankruptcy claim in the bankruptcy proceedings. At
September 30, 2002, these four projects had a net book value of approximately
$30 million. Lastly, the Company could lose its ownership interest in these
project assets.
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, have requested and obtained an extension of the
exclusivity period and may further request that the Bankruptcy Court extend such
exclusivity period and may seek further extensions in the future. The
exclusivity period currently expires on November 27, 2002. On October 21, 2002
the Debtors filed a motion seeking a further extension of the exclusivity period
through March 27, 2003.
If the Debtors fail to file a plan of reorganization during the exclusivity
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 voting classes
before the expiration of the applicable period or if any party in interest
successfully moves for the termination of exclusivity, 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 one or more impaired classes
of creditors or equity holders if certain requirements of the Bankruptcy Code
are met. As a result of the amount of pre-petition indebtedness and the
availability of the "cram down" provisions, the holders of the Company's capital
stock are likely to receive no distributions on account of their equity
interests under the plan of reorganization. Because of such possibility, the
holders of the Company's capital stock are not expected to receive any value for
their shares following the Chapter 11 process.
Since the Petition Date, the Debtors have been conducting their businesses in
the ordinary course. The Debtors have begun to develop a plan of reorganization
premised upon a streamlined, core Energy operation. In addition, in order to
enhance the value of the Company's core business, on September 23, 2002,
management announced an overall approximate 25% reduction in core overhead
expense, including a substantial reduction in non-plant personnel, closure of
satellite development offices and reduction in all other costs not directly
related to maintaining operations at their current high levels. As part of the
reduction in force, waste to energy and domestic independent power headquarters
management were combined and numerous other structural changes were instituted
in order to make management more efficient in the provision of service. Numerous
non-core assets have been disposed of or otherwise eliminated, and efforts are
on-going to dispose of interests and liabilities relating to the Arrowhead Pond
in Anaheim, California (the "Arrowhead Pond"), the Corel Centre near Ottawa,
Canada (the "Centre") and the Ottawa Senators Hockey Club of the National Hockey
League (the "Team") and the remaining aviation fueling business.
Management has worked extensively with its various creditor constituencies to
communicate its business plans pre and post emergence and is in the early stages
of formulating exit scenarios. The Company, various creditors and the investment
firm of Kohlberg Kravis Roberts & Co. ("KKR") continue to discuss terms upon
which KKR might formulate an acquisition structure that would be acceptable and
achievable for the Company and their various creditor constituencies, generally
along the lines of the previously disclosed non-binding KKR letter of intent.
The Company and various creditors are also analyzing other alternatives,
including the Company continuing as a stand-alone entity. Any proposal for the
acquisition of the Company would be subject to agreement on the price and terms
of such transaction between the Company and the prospective purchaser. Were an
agreement reached, it would be subject to Bankruptcy Court review, in which
creditors and other claimants would have an opportunity to oppose such
transaction, and procedures intended to confirm the fairness of the transaction.
Therefore, whether any acquisition will occur, the price and terms at which such
transaction would be accomplished and its impact on various claimants in the
Chapter 11 proceedings is uncertain.
During 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.
The Company is in the process of reconciling recorded pre-petition liabilities
with claims filed by creditors with the Bankruptcy Court. Differences resulting
from that reconciliation process are recorded as adjustments to pre-petition
liabilities. The Company recently began this process and has not yet determined
the reorganization adjustments. Based on claims received to date, the amount
of the claims filed or to be filed by the creditors will be significantly higher
than the amount of the liabilities recorded by the Debtors. The Debtors intend
to contest claims to the extent they exceed the amounts the Debtors believe may
be due.
In accordance with SOP 90-7, the Company has segregated and classified certain
income and expenses as reorganization items. The following reorganization items
were incurred during the three and six month periods ended September 30, 2002,
(in thousands):
Three months Six months
Ended Ended
------------ ----------
Legal and professional fees $ 9,976 $19,553
Severance, retention and office closure costs 6,430 6,430
Lease rejection expenses - 600
Write off of deferred financing costs - 2,078
Bank fees related to DIP Credit Facility 431 4,142
--------- ---------
Total $16,837 $32,803
========= =========
Lease rejection expenses primarily relates to the lease of office space in New
York City that was rejected pursuant to an order entered by the Bankruptcy Court
on July 26, 2002. The lease rejection claim will be treated as a general
unsecured claim to be resolved in the Company's bankruptcy proceedings.
The write-off of deferred financing costs relate almost equally to unamortized
costs incurred in connection with the issuance of the Company's (i) adjustable
rate revenue bonds and (ii) subordinated convertible debentures. The adjustable
rate revenue bonds were secured by letters of credit. Beginning in April 2002,
as a result of the Company's failure to renew these letters of credit, the
trustees for those 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. The bonds were
redeemed and the proceeds of the letters of credit were used to repay the bonds.
The Company expects that its subordinated convertible debentures are
significantly impaired in light of the amount likely to be available to pay
claims and the debentures' subordinated status.
Also in accordance with SOP 90-7, interest expense of $0.7 and $3.1 million for
the three and six months ended September 30, 2002, respectively, has not been
recognized on the Company's subordinated convertible debentures and
approximately $10.2 million of other unsecured debt due to the seller of certain
independent power projects as the Company currently believes this interest will
not ultimately be paid.
Pursuant to SOP 90-7, the Company has segregated and classified certain
pre-petition obligations as liabilities subject to compromise. Liabilities
subject to compromise have been recorded at the likely allowed claim amount. The
following table sets forth the estimated liabilities of the Company subject to
compromise as of September 30, 2002, (in thousands):
September 30,
2002
----
Debt $ 264,271
Accounts payable 46,333
Other liabilities 143,606
Obligations related to assets held for sale 257,073
Convertible Subordinated Debentures 148,650
--------
Total $ 859,933
=========
As also required by SOP 90-7, below are the condensed combined financial
statements of the Debtors since the date of the bankruptcy filing (Debtors'
Statements). The Debtors' Statements have been prepared on the same basis as the
Company's Financial Statements (see below).
DEBTORS' CONDENSED COMBINED STATEMENTS OF OPERATIONS
For the Three and Six Month Periods Ended
September 30, 2002
(In Thousands)
Three Months Ended Six Months Ended
September 30, 2002 September 30, 2002
------------------ ------------------
Total revenues $152,813 $307,908
Operating costs and expenses 121,087 246,815
Cost allocation from non-Debtor subsidiaries 6,309 14,220
Write down of assets held for use 22,195
Write down of and obligations related to assets
held for sale 40,000
Equity in earnings of non-Debtor subsidiaries
(net of taxes of $2,248 and $11,354) 19,125 (61,880)
------- -------
Operating income (loss) 44,542 (77,202)
Reorganization items (16,837) (32,803)
Interest expense, net (9,678) (18,107)
------- -------
Income (loss) before income taxes (excluding
taxes applicable to non-Debtor subsidiaries)
and minority interests 18,027 (128,112)
Income tax benefit (44) 5,780
Minority interests (524) (1,776)
------- -------
Net Income (loss) $ 17,459 $(124,108)
======= =======
DEBTORS' CONDENSED COMBINED BALANCE SHEET
As of September 30, 2002
(In thousands)
Assets:
Current assets $ 441,635
Property, plant and equipment-net 1,184,342
Investments in and advances to investees and joint ventures 3,815
Other assets 365,822
Investments in and advances to non-Debtor subsidiaries, net 96,166
-----------
Total Assets $ 2,091,780
===========
Liabilities:
Current liabilities $ 306,863
Long-term debt 22,451
Project debt 889,603
Deferred income taxes 120,004
Other liabilities 68,480
Liabilities subject to compromise 859,933
Minority interests 1,,006
-----------
Total liabilities 2,268,340
Shareholders' Deficit: (176,560)
-----------
Total Liabilities and Shareholders' Deficit $ 2,091,780
===========
DEBTORS' CONDENSED COMBINED STATEMENT OF CASH FLOWS
For the Six Months Ended September 30, 2002
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by operating activities $ 45,080
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash used in investing activities (8,004)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net cash used in financing activities (19,947)
------------
Net Increase in Cash and Cash Equivalents 17,129
------------
Cash and Cash Equivalents at Beginning of Period 65,791
------------
Cash and Cash Equivalents at End of Period $ 82,920
============
The Debtors' Statements are presented on the equity method for the non-Debtor
subsidiaries. Under this method, the net investments in and advances to
non-Debtor subsidiaries, are recorded at cost and adjusted for the Debtors'
share of the subsidiaries' cumulative results of operations, capital
contributions, distributions and other equity changes. The Debtors' Statements
also include allocation of $14.2 million of costs incurred by the non-Debtor
subsidiaries that provide significant support to the Debtors. All of the assets
and liabilities of the Debtors are subject to revaluation upon emergence from
bankruptcy.
Assets Held for Sale and Related Liabilities:
All non-core businesses, including remaining Entertainment and Aviation
businesses, are classified as assets held for sale in the Condensed Consolidated
Balance Sheets. Those businesses held for sale at December 31, 2001 and
September 30, 2002 include the Company's interest in certain entertainment
assets in Argentina, Anaheim, California and Ottawa, Canada, and the Port
Authority of New York and New Jersey related component of its aviation fueling
business. The other non-core businesses classified as assets held for sale at
December 31, 2001 were its Metropolitan Entertainment subsidiary
("Metropolitan") a concert promotion business, and CGS, a Spanish environmental
consulting business. Both these businesses were sold prior to the commencement
of the Chapter 11 proceeding. Generally, a future sale by debtors of assets held
for sale will require Bankruptcy Court approval and is subject to the notice and
hearing requirements of the Bankruptcy Code.
The Company sold CGS in January 2002, but received no proceeds. In March 2002,
the sale of substantially all of the assets of Metropolitan closed and the
Company received gross cash proceeds of $3.1 million. On September 5, 2002 the
Company sold Casino Iguazu (one of the entertainment assets in Argentina) for
$3.5 million in cash. The proceeds from those sales, after estimated sale costs,
approximated the December 31, 2001 carrying value.
The prior period amounts of net loss (gain) on sale of business have been
reclassified in the 2001 condensed consolidated financial statements to conform
with the current period presentation.
Subject to obtaining Bankruptcy Court approval, the Company expects to dispose
of the remaining Entertainment and Aviation businesses as part of its plan of
reorganization and emergence from the Chapter 11 process. The successful
completion of the disposition processes for remaining non-core assets and the
financial impact may be affected by general economic conditions in the markets
in which these assets must be sold as well as necessary regulatory and third
party consents.
The Company is 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 the 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 amount of which cannot be determined. The
lease transaction documents require the Company to provide additional letter of
credit coverage from time to time. The additional amount required as of
September 30, 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 defaults, parties may
exercise remedies, including drawing on the letters of credit related to the
lease transaction and recovering fees to which the Company may be entitled for
managing the Arrowhead Pond. The parties to the lease transaction had agreed
previously to delay the exercise of remedies for the existing defaults until
after October 21, 2002. Although the Company has attempted to extend this
standstill and explored other alternatives related to the lease transaction for
the Arrowhead Pond, an extension of the standstill or other resolution was not
agreed upon prior to its expiration. Notwithstanding the expiration of the
standstill, the parties have not at this time sought to exercise remedies while
discussions concerning resolution continue. Were the parties to exercise
remedies, the amounts that would come due would be pre-petition secured
obligations either to the obligor or to the bank honoring a drawn letter of
credit.
To reflect the Company's estimate of its total exposure upon exercise of
remedies by the parties to the lease transaction as a result of the occurrence
of an event of default, the Company has recorded a pre-tax $40.0 million
impairment charge which is included in Liabilities Subject to Compromise in the
September 30, 2002 unaudited Condensed Consolidated Statement of Operations and
Comprehensive Loss and Balance Sheet. The resulting tax benefit of $14.0 million
has been reflected in Liabilities Subject to Compromise. However, in view of the
proposed disposal of these interests, 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 and the deferred tax.
The Company has guaranteed a series of subordinated debt of the Centre in the
amount of $45.3 million that is also subject to a put right to the Company
pursuant to the terms of the underlying agreements. This amount has not been put
to the Company, although the holder has the right to do so. However, the holders
of this debt demanded payment of approximately $25.0 million of this amount from
the Company's other lenders pursuant to certain loss sharing arrangements under
the Inter-Creditor Agreement among the Company's Master Credit Facility lenders.
Of this $25.0 million amount, on June 3, 2002, $9.2 million was paid to the
holders of this debt. The holders of this debt and the Master Credit Facility
lenders obligated to make such loss sharing payments dispute how much of the
balance is due. This dispute is the subject of a contested proceeding in the
Bankruptcy Court. Under the Company's arrangement with its banks, the amount
paid by them must be reimbursed by the Company. Accordingly this $9.2 million,
and any additional amount ultimately paid to the holders of this debt, is deemed
to be a pre-petition secured obligation of the Company.
The primary obligor entered into a series of foreign exchange currency swap
agreements, which fixed at $149.0 million the Company's obligations under its
guarantees of the Canadian dollar denominated senior term debt and subordinated
debt on the Centre. These swap agreements, also guaranteed by the Company, would
have expired on December 23, 2002, contemporaneously with the related debt
obligations. However, in connection with the Company's bankruptcy, the
counter-party to the swap agreements terminated the swaps in May 2002 resulting
in $17.5 million being due, as a pre-petition secured obligation, to the
counter-party from the Company as guarantor.
Assets held for sale and related liabilities at September 30, 2002 and December
31, 2001 were as follows (in thousands):
September 30, December 31,
2002 2001
---- ----
Current Assets $ 3,657 $ 57,556
Property, Plant and Equipment - Net 1,326 4,044
Other Assets 3,157 6,348
--------- ---------
Assets Held for Sale $ 8,140 $ 67,948
========= =========
Current Liabilities $ - $(216,859)
Other Liabilities - (347)
--------- ---------
Liabilities Related to Assets Held for Sale $ - $(217,206)
========= =========
As of September 30, 2002, in accordance with SOP 90-7, $257.0 million of
liabilities related to assets held for sale have been classified as liabilities
subject to compromise in the condensed consolidated balance sheet. In addition,
$60.6 million of deferred tax assets related to assets held for sale have been
reclassified within deferred tax liabilities in the condensed consolidated
balance sheet in order to match the long-term classification of the liabilities
that give rise to these assets.
In accordance with the provisions of SFAS Nos. 121 and 144, 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
and the loss before income taxes for the three month and nine month periods
ended September 30, 2002 by $0.2 and $0.4 million, respectively.
During the first quarter of 2001, the Company sold its Rome, Italy Aviation
Ground Operations for gross proceeds of $9.9 million resulting in a realized
gain of $1.9 million. There were no sales during the second quarter of 2001.
During the remainder of 2001, the Company sold several other aviation assets
including its ground businesses in Spain 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 ("Port Authority"). Gross cash proceeds in 2001 from the
sales of businesses that were classified as assets held for sale were
approximately $28.9 million.
During 2001, the Company had also 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. The Company is reviewing this contract in light of its
Chapter 11 filing.
Earnings (Loss) Per Share:
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------------------
2002 2001
-------------------------------------------------------------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
(In thousands, except share and per share amounts)
Income (loss) from operations
before cumulative effect of
change in accounting principle $ 17,459 $ (6,162)
Less: preferred stock dividend - 16
----------- -----------
Basic Earnings (Loss) Per Share 17,459 49,802 $ 0.35 (6,178) 49,703 $ (0.12)
--------- -------
Effect of Dilutive Securities:
Stock options (A) (A)
Restricted stock 26 (A)
Convertible preferred stock 198 - (A)
6% convertible debentures (A) (A)
5 3/4% convertible debentures (A) (A)
-------------------------- --------------------------
Diluted Earnings (Loss) Per Share $ 17,459 50,026 $ 0.35 $ (6,178) 49,703 $ (0.12)
------------------------------------------- -------------------------------------------
(A) Antidilutive
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------------------
2002 2001
-------------------------------------------------------------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
(In thousands, except share and per share amounts)
Income (loss) from operations
before cumulative effect of
change in accounting principle $ (175,060) $ 17,711
Less: preferred stock dividend 16 49
----------- -----------
Basic Earnings (Loss) Per Share (175,076) 49,791 $ (3.52) 17,662 49,659 $ 0.36
--------- -------
Effect of Dilutive Securities:
Stock options (A) 169
Restricted stock (A) 70
Convertible preferred stock (A) 49 141
6% convertible debentures (A) (A)
5 3/4% convertible debentures (A) (A)
-------------------------- --------------------------
Diluted Earnings (Loss) Per Share $ (175,076) 49,791 $ (3.52) $ 17,711 50,039 $ 0.35
------------------------------------------- -------------------------------------------
(A) Antidilutive
Basic earnings per common share was computed by dividing net income (loss),
reduced by preferred stock dividend requirements, by the weighted average of the
number of shares of common stock outstanding during each period.
Diluted earnings per common share was computed on the assumption that all
convertible debentures, convertible preferred stock, restricted stock and stock
options converted or exercised during each period, or outstanding at the end of
each period were converted at the beginning of each period or the date of
issuance or grant, if dilutive. This computation provides for the elimination of
related convertible debenture interest and preferred dividends.
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
3,653,000 and 3,704,000 for the three and nine month periods ended September 30,
2002 and 2,614,000 and 2,589,000 for the three and nine months ended September
30, 2001, respectively. Shares of common stock to be issued, assuming conversion
of convertible preferred stock, the 6% convertible debentures, the 5 3/4%
convertible debentures, stock options and unvested restricted stock issued to
employees and directors were not included in computation of diluted earnings per
share if to do so would have been antidilutive.
The common stock excluded from the calculation were 2,175,000 in the third
quarter of 2002 and in the third quarter of 2001 for the 6% convertible
debentures; 1,524,000 in the third quarter of 2002 and the third quarter of 2001
for the 5 3/4% convertible debentures; 0 in the third quarter of 2002 and 2001
for stock options, 198,000 and 0 in the third quarter of 2002 and the third
quarter of 2001, respectively for convertible preferred stock; and 26,000 and 0
in the third quarter of 2002 and the third quarter of 2001, respectively for
unvested restricted stock issued to employees.
The common stock excluded from the calculation were 2,175,000 for the nine
months ended September 30,2002 and for the nine months ended September 30,2001
for the 6% convertible debentures; 1,524,000 for the nine months ended September
30,2002 and for the nine months ended September 30,2001 for the 5 3/4%
convertible debentures; 0 and 169,000 for the nine months ended September
30,2002 and the third quarter ended September 30,2001, respectively for stock
options, 0 and 141,000 for the nine months ended September 30,2002 and the third
quarter ended September 30,2001, respectively for convertible preferred stock;
and 0 and 70,000 for the nine months ended September 30,2002 and the third
quarter ended September 30,2001, respectively for unvested restricted stock
issued to employees.
Special Charges:
As a result of the Company's plan to dispose of its aviation and entertainment
businesses, close its New York City headquarters, and its plan to exit other
non-core businesses, the Company incurred various expenses in 1999 and
subsequent periods. These expenses have been recognized in its continuing and
discontinued operations. In addition, the Company incurred various expenses in
2000 relating to its decisions to reorganize its development office in Hong Kong
and its Energy headquarters in New Jersey. Certain of those charges related to
severance costs for its New York City employees and Energy employees, contract
termination costs of its former Chairman and Chief Executive Officer, office
closure costs, and professional services related to the Energy reorganization.
The following is a summary of those costs and related payments made during the
three and nine months ended September 30, 2002 (expressed in thousands of
dollars):
Adjustments During Payments During
Balance at the Three Months Ended the Three Months Ended Balance at
June 30, 2002 September 30, 2002 September 30, 2002 September 30, 2002
-------------- ------------- ------------- --------------
Severance for approximately
216 New York City employees $ 15,000 $ (13,400) $ - $ 1,600
Severance for approximately
80 Energy employees 2,500 - 2,500
Severance for
71 employees terminated
post petition 5,000 5,000
Contract termination settlement 400 400
Bank fees 34,000 - - 34,000
Office closure costs 600 730 1,330
---------- ---------- --------- ----------
$ 52,500 $ (7,670) $ $ 44,830
========== ========== ========= ==========
Adjustments During Payments During
Balance at the Nine Months Ended the Nine Months Ended Balance at
Dec. 31, 2001 September 30, 2002 September 30, 2002 September 30, 2002
------------- ---------------- --------------- ----------------
Severance for approximately
216 New York City employees $ 17,500 $ (15,100) $ (800) $ 1,600
Severance for approximately
80 Energy employees 3,800 (1,300) 2,500
Severance for
71 employees terminated
post petition 5,000 5,000
Contract termination settlement 400 400
Bank fees 11,000 24,000 (1,000) 34,000
Office closure costs 600 730 1,330
---------- ---------- --------- ----------
$ 33,300 $ 14,630 $ (3,100) $ 44,830
========== ========== ========= ==========
The bank fees relate to the Company's Master Credit Facility (see Liquidity/Cash
Flow). These fees were payable in March 2002 but remain unpaid and therefore
will be resolved through the Company's bankruptcy proceedings.
All 80 of the Energy employees included above were terminated during 2001. At
September 30, 2002, only 11 New York employees remained employed by the Company.
The unpaid balances (due on or after April 1, 2002 for severance and other
payments to these Energy employees and New York City employees terminated prior
to the Company's filing of its Bankruptcy petition) will be resolved through the
Company's bankruptcy proceedings.
On September 23, 2002, the Company announced a reduction in force of
approximately 60 Energy non-plant employees as discussed above in Bankruptcy
Proceedings. In accordance with the severance and retention plan approved by the
Bankruptcy Court on September 20, 2002, these and the remaining New York City
employees may be entitled to aggregate severance payments of approximately $5.0
million. This amount was recognized as reorganization costs and the prior
severance accrual totaling approximately $17.5 million at September 30, 2002 was
reduced by $13.4 million as a credit to operating expense in the third quarter
of 2002 in accordance with EITF 94-3. In addition, the Company accrued office
closure and outplacement cost of $0.7 million as of September 30, 2002
Pursuant to the key employee retention plan approved by the Bankruptcy Court on
September 20, 2002, retention payments of approximately $3.6 million in the
aggregate for approximately 72 key employees have begun to be recognized during
the third quarter of 2002. The first payment of $1.2 million was made and
recognized on September 30, 2002. Future payments in the aggregate of
approximately $1.2 million and $1.2 million are expected to be paid to eligible
key employees remaining with the Company on September 30, 2003 and upon
emergence of the Company from bankruptcy, respectively. In the event of
emergence from bankruptcy on or prior to September 30, 2003, the $2.4 million
remaining to be paid under the retention plan would be paid on such emergence.
The costs of the retention program will be accrued on a straight line basis
from September 30, 2002 through September 30, 2003.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward Looking Statements
This report may contain forward-looking statements relating to future events and
future performance of the Company within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934
including, without limitation, statements regarding the Company's expectations,
beliefs, intentions or future strategies that are signified by the words
"expects," "anticipates," "intends," "believes" or similar language. Actual
results could differ materially from those anticipated in such forward-looking
statements. All forward-looking statements included in this document are based
on information available to the Company on the date hereof, and the Company
assumes no obligation to update any forward-looking statements. The Company
cautions investors that its business and financial performance are subject to
very substantial 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.
Operations:
The following discussion should be read in conjunction with the financial
statements and the notes to those statements and other financial information
appearing and referred to elsewhere in this report.
Revenues and income (loss) from continuing operations by segment for the nine
months and the three months ended September 30, 2002 and 2001 (expressed in
thousands of dollars) were as follows:
Information Concerning Nine Months Ended September 30, Three Months Ended September 30,
Business Segments 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------
Revenues:
Energy $ 707,922 $ 742,328 $ 240,473 $ 247,495
Other 14,526 77,198 2,901 23,211
--------- --------- --------- ---------
Total Revenues $ 722,448 $ 819,526 $ 243,374 $ 270,706
========= ========= ========= =========
Income (loss) from Operations:
Energy $ 97,108 $ 120,316 $ 39,789 $ 38,563
Other (58,323) (40,852) (2,473) (28,161)
Write down of assets held for use (100,647) - -
Net gain (loss) on sale of businesses (24,057) 3,872 93 1,680
--------- --------- --------- ---------
Operating income (loss) (85,919) 83,336 37,409 12,082
Corporate unallocated income
and expenses-net (25,713) (23,237) 10,921 (10,227)
Interest-net (26,287) (21,867) (9,863) (7,287)
Reorganization items (32,803) - (16,837) -
--------- --------- --------- ---------
Income (loss) before income taxes, minority
interests and the cumulative effect of
change in accounting principle $(170,722) $ 38,232 $ 21,630 $ (5,432)
========= ========= ========= =========
Quarter Ended September 30, 2002 vs. Quarter Ended September 30, 2001
As discussed below, total revenues for the third three months of 2002 were $27.3
million lower than the comparable period of 2001 reflecting a decrease in Other
segment revenues of $20.3 million combined with a decrease in Energy revenue of
$7.0 million. Corporate unallocated income and expenses - net decreased by $21.1
million in the third quarter of 2002 compared to the same period in 2001 due to
the decrease in selling, administrative and general and other expenses discussed
below.
Service revenues in the third quarter of 2002 decreased $17.8 million compared
to the third quarter of 2001. Energy service revenues in 2002 decreased $5.8
million primarily due to a decrease of $2.2 million due to a reduction in
revenue from the closing of the environmental services business. The Other
segment's service revenues decreased $12.0 million due to the wind-down of many
non-core businesses.
Electricity and steam sales revenue increased $8.9 million for the three month
period ended September 30, 2002 compared to the same period in 2001,
attributable mainly to a $15.0 million increase due to the completion of an
Energy facility in India which came online during the fourth quarter of 2001
offset by a $11.0 million decrease due to the sale of an Energy facility in
Thailand during the first quarter of 2002.
Construction revenues for the three months ended September 30, 2002 decreased
$11.6 million compared to the same period in 2001 primarily from a $7.2 million
decrease related to the wind down of construction at the Tampa facility and a
$4.6 million reduction attributable to the substantial completion of various
projects.
Other sales - net for the third quarter of 2002 decreased $8.1 million compared
to the third quarter of 2001 due mainly to the sale of the Datacom business in
November 2001.
Other - net for the three months ended September 30, 2002 were comparable to the
same period in 2001.
As discussed below, total costs and expenses in the third quarter of 2002
decreased by $73.8 million compared to the third quarter of 2001.
Costs and expenses, other than those discussed below, but including depreciation
and amortization, debt service charges, project development cost and net
interest expense for the three months ended September 30, 2002 were comparable
to the same period of 2001.
Plant operating costs increased by $4.4 million for the three months ended
September 30, 2002 compared to the comparable period of 2001 primarily due to a
$10.8 million increase related to the completion of an Energy facility in India
which came online during the fourth quarter of 2001 offset by a $7.2 decrease in
costs related to the sale of an Energy facility in Thailand during the first
quarter of 2002
Construction costs decreased by $7.6 million for the three months ended
September 30, 2002 compared to the comparable period of 2001. The decrease is
mainly attributable to a $5.1 million decrease related to the wind down of
construction at the Tampa facility and a $2.5 million reduction attributable to
the substantial completion of various projects.
Other operating costs and expenses decreased by $13.2 million for the three
months ended September 30, 2002 compared to the comparable period of 2001 due to
the wind-down of many non-core businesses.
Costs of goods sold for the third quarter of 2002 decreased by $12.5 million
compared to the third quarter of 2001 due to the sale of the Datacom business in
November 2001.
Selling, administrative and general expenses for the third quarter of 2002
decreased $2.5 million compared to the third quarter of 2001 due to the
wind-down of many non-core businesses.
Other expenses - net for the three months ended September 30, 2002 compared to
the same period in 2001 decreased by $20.8 million primarily due to a $5.6
million reduction of other expenses related to the wind down of many non-core
businesses and $13.4 million decrease related to the reversal of a pre-petition
severance accrual during the quarter. See Special charges in the footnotes.
Write-down of net assets held for sale in the three months ended September
30,2001 relates to the Company's investments in Datacom and CGS.
The effective tax rate for the three months ended September 30, 2002 was 10.6%
compared to 17.9% for the same period of 2001. This decrease in the effective
rate is primarily due to deductions and foreign losses included in the book loss
in the current year period for which certain tax benefits were not recognized
compared to pre-tax earnings in the prior period for which certain tax
provisions were recorded.
See Change in Accounting Principle, Bankruptcy Proceedings and Assets Held for
Sale and Related Liabilities for a discussion of the changes since December 31,
2001 in Assets Held for Sale and Liabilities Related to Assets Held for Sale.
Nine Months Ended September 30, 2002 vs. Nine Months Ended September 30, 2001
As discussed below, total revenues for the first nine months of 2002 were $97.0
million lower than the comparable period of 2001 reflecting a decrease in Other
segment revenues of $62.7 million combined with a decrease in Energy revenue of
$34.4 million. Corporate unallocated income and expenses - net increased by $2.5
million in the third quarter of 2002 compared to the same period in 2001 due to
the decreases in selling, administrative and general and other expenses
discussed below
Service revenues in the first nine months of 2002 decreased $42.9 million
compared to the first nine months of 2001. Energy service revenues in 2002
decreased $12.4 million primarily due to a decrease of $2.3 million related
lower energy rates in California and a decrease of $4.8 million due to a
reduction in revenue from the closure of the environmental services business.
The Other segment's service revenues decreased $30.5 million due to the
wind-down of many non-core businesses.
Electricity and steam sales revenue increased $16.8 million for the nine month
period ended September 30, 2002 compared to the same period in 2001,
attributable mainly to a $41.2 million increase due to the completion of an
Energy facility in India which came online during the fourth quarter of 2001 and
a $12.9 million increase due to the completion of another Energy facility in
India which came online during the third quarter of 2001 offset by a $21.5
million decrease due to the sale of an Energy facility in Thailand during the
first quarter of 2002, and a $12.2 million decrease at a California Energy
facilities due to a substantial reduction of energy rates in California.
Construction revenues for the nine months ended September 30, 2002 decreased
$9.9 million from the comparable period in 2001. The decrease is the result of
the substantial completion of other projects offset by $8.2 million increase
attributable to the Company's desalination project in Tampa, Florida.
Other sales - net for the first nine months of 2002 decreased $29.1 million
compared to the first nine months of 2001 due mainly to the sale of the Datacom
business in November 2001.
Other - net for the third quarter of 2002 decreased $29.5 million compared to
the third quarter of 2001 due mainly to revenues in 2001, having included a
$19.6 million insurance settlement and other matters related to the Lawrence,
Massachusetts facility, $5.7 million of development fees and other matters
related to an Energy plant in The Philippines, and insurance proceeds related to
a waste wood plant.
As discussed below, total costs and expenses for the nine month period ended
September 30, 2002 increased by $74.7 million compared to the same period of
2001.
Costs and expenses, other than those discussed below, but including depreciation
and amortization, debt service charges, project development cost and net
interest expense, for the nine months ended September 30, 2002 were comparable
to the same period of 2001.
Plant operating costs increased by $11.3 million for the nine months ended
September 30, 2002 compared to the comparable period of 2001 primarily due to a
$26.4 million increase in plant operating expenses related to the completion of
an Energy facility in India which came online during the fourth quarter of 2001
and a $9.6 million increase due to the completion of another Energy facility in
India which came online during the second quarter of 2001 offset by a $12.3
decrease in costs related to the sale of an Energy facility in Thailand during
the first quarter of 2002 and the effect of increased provisions for doubtful
accounts of approximately $8.0 million related mainly to receivables from
California utilities during 2001. (See Receivables from California Utilities for
further discussion).
Construction costs decreased by $17.2 million for the nine months ended
September 30, 2002 compared to the comparable period of 2001. The decrease is
mainly attributable to the substantial completion of various projects.
Other operating costs and expenses decreased by $23.8 million for the nine
months ended September 30, 2002 compared to the comparable period of 2001 due to
the wind-down of many non-core businesses.
Costs of goods sold for the nine months ended September 30, 2002 decreased by
$34.1 million compared to the same period of 2001 due to the sale of the Datacom
business in November 2001.
Net loss on sale of businesses for the nine months ended September 30, 2002 of
$24.1 million was primarily related to the sale of Energy assets in Thailand and
a realized foreign currency loss related to the sale of CGS, also previously
part of the Energy segment. Net gain on sale of business for the nine months
ended September 30, 2001 of $1.9 million related to the sale of the Company's
aviation ground handling operations at the Rome, Italy airport, previously part
of the Other segment.
Selling, administrative and general expenses for the third quarter of 2002
decreased by $9.1 million compared to the third quarter of 2001 due to the
wind-down of many non-core businesses.
Other expenses - net for the nine months ended September 30, 2002 compared to
the same period in 2001 increased by $4.1 million due to fees related to $34.0
million in fees related to the Master Credit Facility (see Special Charges) and
pre-filing bankruptcy related costs offset by to a $12.8 million reduction of
other expenses related to the wind down of many non-core businesses and $13.4
million decrease related to the reversal of a pre-petition severance accrual
during the nine month period ended September 30, 2002. See Special charges in
the footnotes.
The Company recorded a $40.0 million pre-tax impairment charge at September 30,
2002 related to the Company's lease transaction with the Arrowhead Pond, as
compared to a pre-tax write down of $20.4 million during 2001, which relates to
the Company's investments in Datacom and CGS. The Company also took a pre-tax
write down of $1.7 million related to the Company's investment in its Australian
venue management business.
As discussed in Changes in accounting principle, the Company recorded a $100.6
million pre-tax impairment charge at September 30, 2002 related to Energy
facilities.
The effective tax rate for the nine months ended September 30, 2002 was 1.2%
compared to 41.3% for the same period of 2001. This decrease in the effective
rate is primarily due to deductions and foreign losses included in the book loss
in the current year period for which certain tax benefits were not recognized
compared to pre-tax earnings in the prior period for which certain tax
provisions were recorded.
Property, plant and equipment - net decreased $224.2 million during the first
nine months of 2002 due mainly to the sale of $82.5 million of Thailand fixed
assets in March 2002, a $93.8 million write-down of fixed assets that were
impaired under FASB 144 and depreciation expense of $65.0 million for the
period.
See Basis of Presentation and Bankruptcy Filing and Assets Held for Sale and
Related Liabilities for a discussion of the changes since December 31, 2001 in
Assets Held for Sale and Liabilities Related to Assets Held for Sale.
Capital Investments and Commitments:
For the nine months ended September 30, 2002, capital investments amounted to
$10.6 million, virtually all of which related to Energy.
At September 30, 2002, capital commitments amounted to $3.6 million for normal
replacement of equipment. Other capital commitments for Energy as of September
30, 2002 amounted to approximately $12.9 million. This amount includes a
commitment to pay, $5.3 million, $3.3 million and $2.0 million in 2007, 2008 and
2009, respectively for a service contract extension at an energy facility. In
addition, this amount includes $2.3 million for costs of completion of an
oil-fired project in India, which commenced operations in September 2001.
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.
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 potential claim for damages for the resulting breach thereof. In
general, 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 pre-petition 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 assume or
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 or the cost of curing
existing default for any assumed contracts. See below for a description of
Energy projects that could result in rejection if planned restructurings are not
achieved. Based on a preliminary review of claims filed to date, the amount of
the claims filed or to be filed by the creditors either in respect of purported
rejection damages or cure costs under the applicable provision of the Bankruptcy
Code appear to be significantly higher than the amount of the liabilities
recorded by the Debtors. The Debtors intend to contest claims to the extent they
exceed the amounts the Debtors believe are due.
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 required by 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
has commenced a lawsuit in state court with respect to such disputes, as well as
the client community's right to terminate. This matter was removed to federal
court in the Northern District of New York, where the client community
successfully moved to have the case remanded back to state court rather than to
the Bankruptcy Court as requested by the Company. In addition, the client
community has sought and obtained from the same federal court an injunction
preventing the Company from proceeding with an adversary proceeding in the
Bankruptcy Court seeking a determination that the automatic stay applies to this
litigation, or other related relief. The Company has appealed the issuance of
this injunction. If the outcome of this matter is determined adversely to the
Company, the contract could be terminated and the operating subsidiary and the
Company, as guarantor, could incur substantial, pre-petition termination
obligations, and the Company's operating subsidiary could lose its ownership
interest in and its rights to operate the project. The Company continues to
believe that further proceedings in this matter are stayed by the bankruptcy
filing.
The project discussed in the preceding paragraph and three other Energy projects
may require restructuring in order for the Company's operating subsidiaries (all
of which are now operating as debtors in possession under the Bankruptcy Code)
to emerge from Chapter 11. With respect to these projects, there are ongoing
discussions with the client communities, or other interested parties, to
restructure the project in a manner that will permit each operating subsidiary
to reorganize. In each case, such a restructuring would require approval of the
Bankruptcy Court. There can be no assurance that the Company's efforts in this
regard will result in a final agreement on restructuring any of these four
projects, and the Company is unable to assess the likelihood of a restructuring
in any of these situations.
If the Company is unable to restructure any of these four projects, it is
possible that the Company would be forced to reject the related executory
contracts, thereby creating substantial termination liabilities. Because the
Company is unable to predict the probability of successful restructuring it
cannot estimate the likelihood that such liabilities will be incurred and
therefore the impact the restructuring process will have on the Company's
assets. Were these liabilities to be incurred, they would be treated as
unsecured, pre-petition claims in the bankruptcy proceeding.
The contracts for each of these four projects provide different measures of
damages for their breach and the amount of damages that would be incurred under
each is difficult to estimate because it would be based on choices of remedies
made by the respective counter-parties and the Company's success in asserting
offsets for some of these damages. However if one of these projects were
rejected the claim could be $35 million or more, and if all were rejected the
rejection claims could exceed $300 million.
In addition, depending upon which projects were unable to be restructured and
the Company's overall tax position upon emergence from the bankruptcy
proceeding, the Company could incur substantial federal and state tax
liabilities, based on the difference between the unsatisfied debt obligations on
these facilities and the tax basis of these facilities. Such taxes may be a
priority administrative bankruptcy claim in the bankruptcy proceedings. At
September 30, 2002, these four projects had a net book value of approximately
$30 million. Lastly, the Company could lose its ownership interest in these
project assets.
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 Chapter 11 Proceeding stays
the client's right to terminate under the agreement.
In addition at September 30, 2002, excluding letters of credit and the
liabilities included in the Condensed Consolidated Balance Sheet, the Company
has other recourse commitments of approximately $161.2 million related to surety
performance bonds, $119.4 million for operating leases and $54.4 million for
other guarantees, all mainly related to Energy.
Liquidity/Cash Flow:
At September 30, 2002, the Company had approximately $112.1 million in cash and
cash equivalents, of which $0.5 million related to assets held for sale and
$26.6 million related to cash held in foreign bank accounts. On April 8, 2002
the Company paid approximately $4.0 million in fees related to its DIP Credit
Facility discussed below.
Net cash provided by operating activities for the first nine months ended
September 30, 2002 was $91.5 million compared to $53.6 million with the first
nine months of 2001. The primary increase was the result of a reduction in
receivables.
Net cash provided by investing activities was $58.3 million higher than the
comparable period of 2001 due to increased gross proceeds from the sale of
businesses of $14.1 million (see below), a decrease in distributions from
investees and joint ventures of $8.8 million and decreased investments and
capital expenditures of $43.1 million.
Net cash used in financing activities for the first nine months of 2002 was
$101.7 million compared to cash used in financing activities of $50.1 million in
the first nine months of 2001. This increase in cash used of $51.6 million is
due primarily to decreased receipts of restricted cash of $194.1 million, offset
by a decrease in debt payments of $161.4 million and a reduction of new
borrowings of $11.5 million.
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 was scheduled to mature on May 31, 2002 without being fully discharged by
the DIP Credit Facility discussed below. This, as well as the non-compliance of
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, acts as a stay of enforcement of any remedies under the Master Credit
Facility against any debtor company.
In connection with the bankruptcy petition, Covanta Energy Corporation and most
of its subsidiaries 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 DIP Credit Facility,
and on May 15, 2002 a final order approving the DIP Credit Facility. On July 26,
2002, the Bankruptcy Court overruled objections by holders of minority interests
in two limited partnerships who disputed the inclusion of limited partnerships
in the DIP Credit Facility. The Bankruptcy Court overruled these objections by
an order dated August 2, 2002, although the holders of such interests at one of
the limited partnerships have appealed the order. The DIP Credit Facility terms
are described below.
The DIP Credit Facility as amended, which provides for the continuation of
approximately $245.6 million of letters of credit previously provided under the
Master Credit Facility and a $38.2 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 pre-petition 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 March 31, 2002, letters of credit had been issued under the Master Credit
Facility for the Company's benefit using up most of the available line under
that facility. The Master Credit Facility also provided for the coordinated
administration of letters of credit issued to secure performance under energy
contracts (totaling $203 million), letters of credit issued to secure
obligations relating to the Entertainment and Aviation businesses (totaling $153
million) largely with respect to the Arrowhead Pond letters of credit issued in
connection with the Company's insurance program (totaling approximately $39
million), and letters of credit used for credit support of the Company's
adjustable rate revenue bonds (totaling $127 million). As described in
bankruptcy proceedings above, during the three months ended June 30, 2002, the
$125.1 million in letters of credit supporting the Company's adjustable rate
revenue bonds were drawn.
Of these remaining outstanding letters of credit at September 30, 2002,
approximately $120 million of secured indebtedness that was included in the
Company's balance sheet and $87 million relate to other obligations. These
letters of credit were generally available for drawing upon if the Company
defaulted on the obligations secured by the letters of credit or failed to
provide replacement letters of credit as the current ones expire. The balance of
$188 million related principally to letters of credit securing the Company's
obligation under Energy contracts to pay damages.
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 which were substantially exacerbated for energy
companies by the bankruptcy of Enron Corporation.
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 to 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-ranging search
for alternatives, ultimately the Company was unable to identify any option that
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 its review,
the Company:
(1) Determined that reorganization under the Bankruptcy Code
represents the only viable avenue 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 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 (collectively, the "Debtors"), filed for protection under
the Bankruptcy Code and accordingly did not make the interest payment on the
Company's 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 the 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 $38.2 million, divided
into $24 million commitments for cash borrowings under a revolving credit line
(subject to advance limits established on a monthly basis) and $14.2 million
commitments for the issuance of new letters of credit. The Tranche B Facility
consists of letters of credit to replace certain existing letters of credit.
Borrowings under the Tranche A Facility are subject to compliance with 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.
On April 8, 2002, under its DIP Credit Facility, the Company paid a one-time
facility fee of approximately $1.0 million equal to 2% of the amount of Tranche
A commitments, $2.5 million of agent fees and $0.5 million of lender advisor
fees.
In addition, the Company will pay a commitment fee based on utilization of the
facility of, 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,
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 DIP Credit Facility, as amended, includes the following
reporting covenants:
1. Cash flow: (a) biweekly operating and variance reports and
monthly compliance reports, and (b) monthly budget and 13 week
forecast updates;
2. Financial statements: (a) provide quarterly financial statements
within 60 days of the end of each of the Company's first three fiscal
quarters, or in lieu thereof, a copy of its Quarterly Report on Form
10Q (b) provide annual audited financial statements within 120 days of
the end of the Company's fiscal year or in lieu thereof, a copy of its
Annual Report on Form 10K and (c) deliver a schedule setting forth the
quarterly minimum cumulative consolidated operating income for April
1, 2002 through March 31, 2003. To then remain in compliance,
quarterly operating income cannot be less than the amount provided.
3. Other: (a) deliver, when available, the Chapter 11 restructuring plan,
and (b) provide other information as reasonably requested by the DIP
Lenders.
Currently, the Company is in compliance with all of the covenants of the DIP
Credit Facility, as amended.
The Company has not made any cash borrowings under its DIP Credit Facility, as
amended, but approximately $4.9 million in new letters of credit have been
issued under the Tranche A of the Credit facility.
The Company has also received notices of default related to certain indebtedness
of the Company (see Part II - Item 3 - Default Under Senior Securities).
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, and assuming its extension as required, 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 renewal of the DIP Credit Facility, if necessary, 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 that were intended to enable the Debtors to operate in the normal course
of business during the Chapter 11 Cases. Among other things, 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.
Although as of September 30, 2002 the Company had not determined to sell any of
its remaining Asian Energy assets, the Company may consider a variety of
different strategies with respect to these assets. 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 approximately $187.5 million net book value at
September 30, 2002. The ultimate sale of these assets, if any, would be subject
to approval by the DIP Credit Facility lenders and may be subject to approval by
the Bankruptcy Court.
As a result of recent changes in the domestic and international insurance
markets, the amount and types of coverage available have been reduced. Although
these developments affect the property and casualty markets generally, terrorism
and sabotage coverage particularly is available only in limited amounts and at
significant cost. The Company has obtained insurance for its assets and
operations that provide coverage for what the Company believes are probable
maximum losses, subject to self-insured retentions and policy limits which the
Company believes to be appropriate. However, the insurance obtained does not
cover the Company for all possible losses.
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 (the "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 March 2002, SCE
secured financing which allowed it to pay in full, with interest, all
outstanding receivables due to the Company.
In July 2001, the Company also entered into agreements with PG&E on similar
terms. These agreements also contain the CPUC approved price and term, both of
which were effective immediately. PG&E agreed that the amount owed to the
Company will earn interest at a rate to be determined by the bankruptcy court
overseeing the PG&E bankruptcy and they agreed to assume the Company's power
purchase agreements, as amended, and elevate the outstanding payables to
priority administrative claim status. Bankruptcy court approval was obtained 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 in cash immediately. The balance, $4.9 million (related to
receivables regarding 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 $1.5 million represents
the 10% discount charged by the financial institution.
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 pre-petition 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
overseeing the PG&E bankruptcy approved the Supplemental Agreements and monthly
installments have been received by the Company from February 28, 2002 to and
including September 28, 2002. Pursuant to the terms of the escrow agreements,
starting in October 2002 the $4.9 million has begun to be released to the
Company. As of October 31, 2002, the financial institution has been paid in
full. The Company will receive a portion of escrowed funds each month through
January 31, 2003, at which time the escrowed funds will have been fully paid to
the Company.
As stated earlier, SCE has paid 100% of their past due receivables and PG&E has
paid two-thirds of their past due receivables through September 28, 2002, in
accordance with a bankruptcy court approved twelve-month payment schedule. The
Company believes it will ultimately receive payment of all these outstanding
receivables less discounts charged by the financial institutions.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Except as discussed in the following paragraphs, there have been no significant
changes in the Company's market risk sensitive assets and liabilities for the
quarter ended September 30, 2002 from the amounts reported at December 31, 2001.
However, the sensitivity analyses reported at December 31, 2001 do not reflect
any changes due to the deterioration in the Company's 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 at December 31, 2001 may differ
significantly from those that would be used based on current information.
See Liquidity/Cash Flow and Part II Item 3 Defaults upon Senior Securities for a
discussion of the changes affecting the Company's debt repayment and defaults.
ITEM 4 - DISCLOSURE CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company carried out an
evaluation under the supervision and with the participation of the company's
management, including the Chief Executive Officer and Chief Accounting Officer,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures. Based upon and as of the date of that evaluation, the
Chief Executive Officer and the Chief Accounting Officer concluded that the
disclosure controls and procedures are effective in all material respects to
ensure that information required to be disclosed in the reports the Company
files and submits under the Exchange Act is recorded, processed, summarized and
reported as and when required.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
most recent evaluation of internal controls.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On April 1, 2002, the Debtors filed 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). Generally, all actions against the Debtors are stayed during the
pendency of the Chapter 11 proceedings.
The Company is party to a number of other claims, lawsuits and pending actions,
most of which are routine and all of which are incidental to its business. The
Company assesses the likelihood of potential losses on an ongoing basis and when
they are considered probable and reasonably estimable, records an estimate of
the ultimate outcome. If there is no single point estimate of loss that is
considered more likely than others, an amount representing the low end of the
range of possible outcomes is recorded. The final consequences of these
proceedings are not presently determinable, however, all such claims, lawsuits
and pending actions arising prior to April 1, 2002 against the Debtors shall be
resolved pursuant to the Company's confirmed plan of reorganization.
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, the Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA" or "Superfund") and the 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, which may result in fines, penalties, damages or other
sanctions, 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 parties
potentially responsible for contribution to 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 October 2002) will be approximately
$800,000 (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 litigation with American Airlines and United Airlines 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, as
described below. 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 and believes that
these indemnities are pre-petition unsecured obligations that are subject to
compromise.
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 Environmental Protection Agency
("EPA") named Ogden Martin Systems of Haverhill, Inc. as one of
2000 Potentially Responsible Parties ("PRPs") at the Beede Waste
Oil Superfund Site, Plaistow, New Hampshire (the "Site"). 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 $14.9 million, exclusive
of interest, and estimates that the total cost of cleanup of this
site will be an additional $70.0 million. 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. Ogden
Martin Systems of Haverhill isnot a debtor.
(ii) On April 9, 2001, Ogden Ground Services, Inc. and Ogden
Aviation, Inc. -, 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
"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 $200.0 million in response and investigation costs and
expects to spend an additional $250.0 million 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. Ogden Ground Services, Inc and
Ogden Aviation, Inc, have been sold and the Company has agreed to
indemnify the purchaser for certain environmental liabilities
relating to the disposed businesses. As noted above, the Company
believes that these indemnities are pre-petition unsecured
obligations that are subject to compromise.
(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. 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. Settlement discussions in this matter are
underway. Chinese Station and the Company's subsidiary which
owns a partnership interest in Chinese station are not debtors.
(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 airlines. 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 $1.5 million
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 $4.6 million 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 New York State Department of
Environmental Conservation. The estimate of those sums alleged in
the complaint is $70.0 million.
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
CompanyF has other defenses under its respective leases and
permits with the Port Authority. The matter has been stayed as a
result of the Company's Chapter 11 filing.
(v) On December 23, 1999 Allied Services, Inc. ("Allied")
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.
(b) Other Matters
(i) In 1985, 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 relating to asbestos
primarily from workplace 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 proceedings, 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 that 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.
(ii) As previously disclosed, the Company commenced
litigation challenging the client communities' notice purporting
to terminate its contract with the Company for the Onondaga
County, New York, waste to energy facility. On or about August
13, 2002 the federal court for the Northern District of New York
granted the Client Communities motion to remand the matter to
state court and denied the Company's motion to transfer the
matter to the Bankruptcy Court. In addition, the Client Community
has sought and obtained from the same federal court an injunction
preventing the Company from proceeding with an adversary
proceeding in the Bankruptcy Court seeking a determination that
the automatic stay applies to this litigation, or other related
relief. The Company has appealed the issuance of this injunction.
If the outcome of this matter is determined adversely to the
Company, the contract could be terminated and the operating
subsidiary and the Company, as guarantor, could incur
substantial, pre-petition termination obligations, and the
Company's operating subsidiary could lose its ownership interest
in and its rights to operate the project. The Company continues
to believe that further proceedings in this matter are stayed by
the bankruptcy filing.
(iii) As previously disclosed, in late 2000 Lake County,
Florida commenced a lawsuit in the state courts of Florida
against the Company's subsidiary that owns and operates its Lake
County waste to energy project. In the lawsuit, the County seeks
to have its agreement with the Company's subsidiary declared void
on various state constitutional and public policy grounds. The
County also seeks unspecified damages for amounts paid to the
Company since 1988. The Company's subsidiary is now operating its
business as a debtor-in-possession, and the lawsuit is stayed by
such subsidiary's and the Company's bankruptcy filings. The
Company believes that it has adequate defenses to the County's
claims for both declaratory judgment and damages. Were this
matter to be determined adversely to the Company, the Company and
its subsidiary could incur substantial, prepetition obligations
and such subsidiary could lose its right to own and operate the
project.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
(a) Indebtedness
As previously disclosed, on April 1, 2002, Covanta Energy Corporation
and certain of its domestic subsidiaries filed for reorganization under Chapter
11 of the United States Bankruptcy Code. With respect to the following
indebtedness, and in connection with its Chapter 11 filing, the Company has
ceased to pay principal and interest as they accrued. Enforcement of remedies
under these items of indebtedness as a result of defaults (including payment
defaults and any default purporting to occur as a result of the filing) is
stayed under the Bankruptcy Code and orders entered into by the Bankruptcy
Court.
Indebtedness Nature of Default Amount of Arrearage
9.25% Debentures Bankruptcy filing; non-payment of $10.0 million in interest, as of
($100 million principal) interest due March 1, 2002 September 30, 2002
6% Convertible Debentures Bankruptcy filing; non-payment of $5.1 million in interest, $85
($85 million principal) principal and interest due June million in principal, as of
1, 2002 September 30, 2002
5.75% Convertible Debentures Bankruptcy filing; non-payment of $3.5 million in interest, $63.6
($63.6 million principal) principal and interest due million in principal, as of
October 20, 2002 September 30, 2002
Master Credit Agreement Bankruptcy filing; non-payment of Approximately $239.5million
principal and interest due June principal, $10.1 million in
1, 2002; expiration of Master interest, as of September 30,
Credit Agreement without cash 2002; plus $397.7 million of
collateralizing outstanding unfunded cash collateral
letters of credit obligations with respect to
letters of credit
The Company continues to pay on a timely basis principal and interest on
indebtedness relating to its waste to energy facilities and classified on its
balance sheet as project debt. The project debt associated with the financing of
waste-to-energy facilities is generally arranged by municipalities through the
issuance by governmental entities of tax-exempt and taxable revenue bonds.
Payment obligations for the project debt associated with waste to energy
facilities are limited recourse to the revenues and property, plant and
equipment of the operating subsidiary and non-recourse to the Company, subject
to operating performance guarantees and commitments by the Company. The
automatic stay provided under the Bankruptcy Code and orders entered into by the
Bankruptcy Court would prevent the obligees from exercising remedies under any
of the project debt that might otherwise be deemed to be in default by reason of
the Chapter 11 filing.
In respect to the City of Anaheim, California $126,500,000 Certificates
of Participation (1993 Arena Financing Project), the City of Anaheim sent a
notice of default under the Management Agreement for the Arrowhead Pond of
Anaheim which could constitute a default under a letter of credit reimbursement
agreement with Credit Suisse First Boston. The outstanding principal amount of
the named securities is $115.8 million as of the date of this filing (supported
by a letter of credit that is included in the unfunded letters of credit
referred to above under "Master Credit Facility").
(b) Dividends on Preferred Stock
As disclosed in Note 16 to the Annual Report filed on Form 10-K, in
connection with its Chapter 11 filing, the Company suspended the declaration and
payment of dividends on its Series A $1.875 Cumulative Convertible Preferred
Stock. Under the terms governing the Series A $1.875 Cumulative Convertible
Preferred Stock, the dividends due for the second quarter of 2002 accumulate
without interest or penalty in the amount of $1.875 per share, currently
totaling $15,491.72 per quarter. Despite this accumulation of dividends, the
holders of the preferred shares are not expected to receive any future dividends
on or any value for these shares following the Chapter 11 process.
(c) Other Matters
The Company has also not made any distributions to its partners under
the agreements governing the Covanta Huntington Limited Partnership and the
Covanta Onondaga Limited Partnership. The amounts that would have been
distributed to the Company's partners in these two partnerships have been set
aside in segregated accounts pursuant to the Bankruptcy Court's order, and
distributions will not be paid to such partners until further order of the
Court.
SIGNATURES
Pursuant to the requirements 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.
Date: November 14, 2002 COVANTA ENERGY CORPORATION
(Registrant)
By: /s/ Scott G. Mackin
--------------------------------
Scott G. Mackin
President and Chief Executive
Officer
By: /s/ William J. Keneally
--------------------------------
William J. Keneally
Senior Vice President
and Chief Accounting Officer
Form of Certification Required
by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934
I, Scott G. Mackin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Covanta Energy
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ Scott G Mackin
----------------------------------------
Scott G Mackin
President and Chief Executive Officer
Form of Certification Required
by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934
I, Anthony J. Orlando, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Covanta Energy
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ Anthony J. Orlando
-------------------------------------------
Anthony J. Orlando
Senior Vice President, Waste to Energy
(Business and Financial Management, acting)
Form of Certification Required
by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934
I, William J. Keneally, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Covanta Energy
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ William J. Keneally
-----------------------------------------
William J. Keneally
Senior Vice President and
Chief Accounting Officer
Form of Certification Required
by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934
I, Louis M. Walters, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Covanta Energy
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ Louis M. Walters
-----------------------------------------
Louis M. Walters
Vice President and Treasurer