UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO ____________
COMMISSION FILE NUMBER: 1-3122
COVANTA ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-5549268
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(State or Other Jurisdiction (I.R.S. Employee
of Incorporation or Organization) Identification No.)
40 Lane Road, Fairfield, N.J. 07004
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code
(973) 882-9000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of each class Which Registered
------------------- ------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.50 per share
$1.875 Cumulative Convertible Preferred Stock (Series A)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES|X| NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K.|X|
The aggregate market value of registrant's voting stock and preferred stock held
by non-affiliates of the registrant as of the last business day of Covanta's
most recently completed second fiscal quarter, June 30, 2002, based on the
closing price of such stock on the National Quotation Bureau's Pink Sheets was
as follows:
Common Stock, par value $.50 per share $ 747,415
1.875 Cumulative Convertible
Preferred Stock (Series A) $ 11,567
The number of shares of the registrant's Common Stock outstanding as of June 30,
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 June 30,
2002 was 33,049 shares.
PART I
Item 1. BUSINESS
Covanta Energy Corporation (hereinafter, together with its consolidated
subsidiaries, referred to as "Covanta" or the "Company") develops, owns and
operates energy generating facilities and water and wastewater facilities in the
United States. The Company also owns and operates energy generating facilities
abroad.
Covanta Energy Corporation was known as Ogden Corporation prior to
March 13, 2001. The Company was incorporated in Delaware as a public utility
holding company on August 4, 1939. In 1948, the Company registered with the
Securities and Exchange Commission (the "SEC") as a closed-end investment
company. Following several acquisitions, the Company no longer qualified as an
investment company and from 1953 until 1999 operated as a diversified holding
company operating through subsidiaries. In May 1966, Ogden Corporation was
listed on the New York Stock Exchange.
Prior to September 1999, the Company conducted its business through
operating groups in three principal business units: Energy, Entertainment and
Aviation. In September 1999, the Company adopted a plan to discontinue its
Entertainment and Aviation operations, to pursue the sale or other disposition
of these businesses, to pay down corporate debt and to concentrate on businesses
previously conducted through its Ogden Energy Group, Inc. subsidiary. On March
13, 2001, the Company changed its name to "Covanta Energy Corporation." The
Company's plan to sell discontinued businesses was largely completed, other than
the disposition of businesses associated with the Arrowhead Pond of Anaheim
arena in Anaheim, California ("Arrowhead Pond"), the Corel Centre in Ottawa,
Canada (the "Centre") and the Ottawa Senators hockey team of the National Hockey
League (the "Team") (the Arrowhead Pond and the Centre hereinafter referred to
collectively as the "Arenas").
Presently, the Company's principal business units are Domestic Energy
and Water, International Energy, and Other (through which it will continue to
dispose of its remaining entertainment contracts and related obligations).
CHAPTER 11 REORGANIZATION
On April 1, 2002 (the "Petition Date"), Covanta Energy Corporation and
123 of its domestic subsidiaries filed voluntary petitions for reorganization
under Title 11, Chapter 11 of the United States Code (the "Bankruptcy Code") in
the United States Bankruptcy Court for the Southern District of New York (the
"Bankruptcy Court"). Since April 1, 2002, one additional subsidiary has filed a
petition for reorganization under Chapter 11 of the Bankruptcy Code. In
addition, four subsidiaries which had filed petitions on April 1, 2002 have been
sold as part of the Company's disposition of non-core assets, and are no longer
owned by the Company or part of the bankruptcy proceeding. It is possible that
additional subsidiaries will file petitions for reorganization under Chapter 11
and be included as part of the Company's plan of reorganization. The pending
bankruptcy cases (the "Chapter 11 Cases") are being jointly administered under
the caption "In re Ogden New York Services, Inc., et al., Case Nos. 02-40826
(CB) through 02-40949 (CB), 02-16322 (CB)." The debtors in the Chapter 11 cases
(collectively, the "Debtors") are currently operating their business as debtors
in possession pursuant to the Bankruptcy Code. 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.
As previously reported, the Debtors sought reorganization under the
Bankruptcy Code because of the significant liabilities associated with the
Arenas, the approaching maturity of subordinated debt and the inability to
secure outside funding for the approaching maturity, given the Arenas and
external market conditions. As debtors in possession, the Debtors are authorized
to continue to operate as an ongoing business, but may not engage in
transactions outside the ordinary course of business without the approval of the
Bankruptcy Court.
In conjunction with the bankruptcy filing, the Company announced its
intention to focus on the U.S. energy and water markets, expedite the
disposition of non-core assets and, as a result, reduce overhead costs and to
emerge from bankruptcy solely with its core Energy and Water assets.
The Debtors have obtained numerous orders from the Bankruptcy Court
that are intended to enable the Debtors to operate in the normal course of
business during the Chapter 11 Cases. Among other things, these orders authorize
(i) 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) payment of pre-petition employee
salaries, wages, health and welfare benefits, retirement benefits and other
employee obligations, (iii) payment of pre-petition obligations to certain
critical vendors to aid the Debtors in maintaining the operation of their
businesses, (iv) the use of cash collateral and the grant of adequate protection
to creditors in connection with such use, (v) the adoption of certain employee
benefit plans, including a key employee retention plan, and (vi) authorize
post-petition financing.
Specifically with respect to post-petition financing, on May 15, 2002,
the Bankruptcy Court entered 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 issued a memorandum decision
overruling 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 confirmed the memorandum decision in an
order dated August 2, 2002, although one of the objectors has appealed that
decision. The Debtors and the appealing objector have reached agreement under
which the appeal has been stayed.
A description of the DIP Credit Facility appears in Note 17 to the
Consolidated Financial Statements.
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, debt service has continued to be
paid 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. The Debtors are in the process
of reviewing their executory contracts and unexpired leases to determine which
they will assume or reject. As a condition to assuming a contract, the Debtor
must cure all existing defaults (including payment defaults). 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 the Debtors and their counterparties cannot reach
agreement on restructuring.
On June 14, 2002, the Debtors filed with the Bankruptcy Court their
schedules and statements of financial affairs setting forth, among other things,
their assets and liabilities, including a schedule of claims against the Debtors
(the "Schedules"). Since that time, the Debtors have filed an amendment to the
schedules and may file additional amendments in the future. All Schedules and
amendments thereto are subject to further amendment. On June 26, 2002, the
Bankruptcy Court entered an order establishing August 9, 2002 as the last day to
file proofs of claim against the Debtors, subject to exceptions stated in the
order. The Bankruptcy Court also established September 30, 2002 as the last date
to file proofs of claims by governmental units and November 15, 2002 as the last
date to file certain proofs of claims by current or former company employees. In
addition, pursuant to the Bankruptcy Court's order, the last date to file proofs
of claims in respect of amended schedules is 30 days after the Debtors serve
notice of such amended schedule to the affected creditor.
The Company is in the process of reconciling recorded pre-petition
liabilities with proofs of claim filed by creditors with the Bankruptcy Court.
Differences resulting from that reconciliation process are recorded as
adjustments to pre-petition liabilities. The Company has not yet determined the
reorganization adjustments. Based on proofs of claim 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.
Subject to any necessary Bankruptcy Court and DIP lender approvals,
the Company intends to dispose of all remaining non-core businesses in the
course of the bankruptcy proceedings.
See the discussion below under OTHER for a description of material
non-core business dispositions that occurred during 2002.
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 extensions of the exclusivity period and
may further request that the Bankruptcy Court extend such exclusivity period.
The exclusive period to file a plan currently expires on July 31, 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 may file a plan of reorganization. After a plan of reorganization has
been filed and the form of disclosure statement has been approved by 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. Generally speaking, creditors or
equity holders that will receive no distribution under a plan are presumed to
vote against such plan and are not sent a copy of the plan and disclosure
statement. 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 Code 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 distribution 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.
The Debtors have begun to develop a plan of reorganization premised
upon a core Energy operation. In addition, in order to enhance the value of the
Company's core business, on September 23, 2002, management announced a 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 improve management
efficiency. 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 Arenas.
The Company has not yet filed a plan of reorganization setting forth
its proposal for emergence from the Chapter 11 process. It is reviewing with its
secured and unsecured creditors various possible capital and debt structures for
the reorganized company. The restructured entity will focus on the U.S. energy
and water markets, predominately the waste-to-energy market.
Potential stand-alone reorganization structures may enhance Company
cash flows and thereby the value of the reorganized Company by which would
increase the recovery of the Company's creditors. Accordingly, the Company is
working with its creditors to determine the feasibility and benefits of such
structures.
As previously announced, contemporaneously with the commencement of the
Chapter 11 Cases, the Company executed a non-binding letter of intent with the
investment firm of Kohlberg, Kravis & Roberts & Co.("KKR") pursuant to which KKR
would acquire the Company. After conducting further due diligence, KKR made a
further proposal in the third quarter of 2002, substantially along the lines of
the Letter Of Intent. The Company sought to negotiate this proposal with KKR to
improve its terms for all creditors. However, since KKR's proposal is contingent
upon the Company's secured bank creditors providing new debt financing to the
Company upon emergence, KKR's discussions to date with respect to its proposal
have been conducted with the Company's bank secured creditors. Based on the
statements by the Company's secured bank creditors, the Company believes that
KKR has recently reduced the value of its offer and, as such, the Company
believes that KKR's recent proposal would result in recoveries that are inferior
to what the Company would obtain in a stand-alone structure.
As previously reported, on April 1, 2002, the New York Stock
Exchange, Inc. suspended trading of the Company's common stock and $1.875
cumulative convertible preferred stock and began processing an application to
the SEC to delist the Company from the New York Stock Exchange. The SEC by Order
dated May 16, 2002 granted the application of the New York Stock Exchange, Inc.
for removal of the Common Stock and $1.875 Cumulative Convertible Preferred
Stock of Covanta Energy Corporation from listing and registration on the New
York Stock Exchange under the Securities Exchange Act of 1934.
The removal from listing and registration on the New York Stock
Exchange of the above Classes of Stock of the Company became effective at the
opening of the trading session of May 17, 2002 pursuant to the order of the SEC.
Subject to the foregoing, the following describes the Company's
business currently being conducted during the Chapter 11 proceedings.
This Annual Report on Form 10-K includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Actual results
may differ materially from those contained in such forward-looking statements.
See "Cautionary Statements," below.
See "Note 30 to the Consolidated Financial Statements" for quantitative
segment information.
See "Note 30 to the Consolidated Financial Statements" for financial
information about geographic areas.
DOMESTIC ENERGY AND WATER BUSINESS
Since the early 1980s, the Company has engaged in developing, and in
some cases owning, energy-generating projects fueled by municipal solid waste,
and providing long term services from these projects to communities. Worldwide,
the Company owns or operates more large-scale (greater than 500 tons per day of
processing capacity) waste-to-energy facilities on a full-service basis (where
design, construction and operation services are provided) than any other
operator. In addition, since 1989, the Company has been engaged in developing,
owning and/or operating independent power production projects utilizing a
variety of fuels. The Company typically does not invest its own capital, or take
an ownership interest in, its water and wastewater businesses. In addition to
its headquarters in Fairfield, New Jersey, the Company's business is facilitated
through its Fairfax, Virginia office.
The Company conducts its domestic energy businesses through
wholly-owned subsidiaries. With respect to projects owned and operated by the
Company, it generally derives its returns from equity distributions and/or
operating fees. In some circumstances (particularly with respect to
waste-to-energy projects), the Company may also derive revenues from design and
construction-related activities. The Company's energy projects sell the energy
and steam they generate under long term contracts to utilities and the waste
related services they provide under long term contracts to utilities,
governmental and quasi governmental entities. In selected cases, such services
may be provided under short-term arrangements as well. Similarly, for water and
wastewater-related services, the Company seeks to operate under long term
contracts with governmental units or industrial users.
The Company presently has interests in domestic operating power
projects with an aggregate generating capacity of approximately 1114 Megawatts
("MW") (gross). The Company's net ownership in these facilities is 470 MW. The
Company has an operating role, and in some cases a design and construction role,
in water and wastewater projects with an aggregate processing capacity of
approximately 90 million gallons per day ("mgd"), all of which projects are in
the United States.
Since the Company began operating as a debtor in possession during
2002, it has undertaken only limited development activities. While the Chapter
11 Cases are pending, the Company's development activities will focus on a
limited number of water projects and waste-to-energy expansion opportunities
driven by the needs of existing client communities. (See discussion below under
General Approach to Domestic Projects, Waste-to-Energy Projects.)
(a) GENERAL APPROACH TO DOMESTIC PROJECTS.
The Company's operating power projects utilize a variety of energy
sources: water (hydroelectric), geothermal, municipal solid waste, wood, and
landfill gas.
Within the commercial parameters of each power project, the Company
attempts to sell the output or services (whether electricity, steam, waste
processing, or water and wastewater processing) under long term contracts, and
to structure the revenue components of such contracts to correspond to the
projects' cost structure (including changes to those costs due to inflation,
changes in law and other unforeseen circumstances) of constructing, financing,
operating and maintaining the projects. The Company sells substantially all its
generated electricity and steam from its power projects pursuant to contracts
and does not sell any material amount of energy on the open or spot markets. In
2002, approximately 88% of the Company's revenues overall were from long term
contracts. However, such contracted prices may adjust, based on the energy
purchaser's avoided cost. See (iii) Independent Power Projects - California
Power Purchase Agreement below. The Company does not engage in the energy
trading business, although at its Union County, New Jersey waste-to-energy
facility and the Gude landfill gas facility it sells its energy directly into
the electricity grid at current market prices but does not otherwise take
positions in energy commodities.
As described below, in its waste-to-energy projects and in some of its
water and wastewater projects, the Company typically performs its services on a
fixed fee basis, with bonus and penalty mechanisms based on plant performance.
For many of its independent power projects, the Company performs operation and
maintenance services on behalf of the project owner. Although all operation and
maintenance contracts are different, the Company typically performs these
services on a cost-plus-fixed-fee basis, with a bonus and limited penalty
payment mechanism related to specified benchmarks of plant performance.
Covanta generally financed the independent power projects it owns using
equity or capital commitments provided by it and other investors, combined with
non-recourse or limited recourse debt for which the lenders' source of payment
is project revenues and which is collateralized by project assets. Consequently,
the ability of the Company's project subsidiaries to receive cash out of the
Project and/or declare and pay cash dividends to the Company is subject to
certain limitations in the project loan and other documents. In one independent
power project and most waste to energy and water projects, cash receipts are
deposited directly with a trustee which distributes funds to the Company and/or
bondholders as prescribed in the bond indenture or relevant project documents.
For waste-to-energy projects owned by the Company, cash received (including debt
service reserves and other amounts held with respect to debt service) is
reflected as Restricted Funds held in trust on the Company's Consolidated
Balance Sheet. For such projects owned by the Company and for which debt service
is an explicit component of the Service Fee paid by the Client Community, in
accordance with generally accepted accounting principles ("GAAP"), revenues
include an annualized portion of the principal amount of the applicable Project
Bonds, even if the principal amount due, the Client Community varies over the
term of the Project Bonds. (See Note 1 to Financial Statements.)
The Company's power operations face a domestic market that is changing
and will continue to change in the years ahead. Due to the instability of the
California market in 2000, the precipitous drop in wholesale power prices and
the economic downturn in 2001, the degree to which increased competition and
reduced regulation in the electric power industry will be fostered is less
certain. Discussions are taking place at both the federal and state levels that
will shape the domestic power generation markets for the coming decade.
(i) Waste-to-Energy Projects.
The Company currently operates the waste-to-energy projects identified
below under "Domestic Project Summaries." The Company is not currently
constructing any new waste-to-energy projects. Most of the Company's operating
waste-to-energy projects were developed and structured contractually as part of
competitive procurements conducted by municipal entities. As a result, these
projects have many common features, which are described in subsection (A) below.
Certain of the more material projects which do not follow this model, or have
been or may be restructured, are described in subsection (B) below.
The domestic market for the Company's waste-to-energy services has
largely matured and is heavily regulated. Other than expansion opportunities for
existing projects in connection with which the Company's municipal clients have
encountered significantly increased waste volumes without corresponding
competitively-priced landfill availability, new opportunities for domestic
projects are expected to be scarce for the foreseeable future. This is the
result of a number of factors that have adversely affected communities'
willingness to make long term capital commitments to waste disposal projects,
including declining prices for energy and low alternative disposal costs.
Another factor adversely affecting demand for new waste-to-energy projects,
which also impacts existing projects, is a 1994 United States Supreme Court
decision invalidating state and local laws and regulations mandating that waste
generated within a given jurisdiction be taken to a designated facility. The
invalidation of such laws has created pressure on Client Communities as well as
the Company to lower costs or restructure contractual arrangements in order to
continue to attract waste supplies and ensure that revenues are sufficient to
pay for all project costs. See Approach to Projects, "Other Project Structures."
(A) Structurally Similar Waste-to-Energy Projects.
In addition to generating electricity or steam, the Company's
waste-to-energy power projects provide waste disposal services to municipal
clients. Generally, the Company provides these services pursuant to long term
service contracts ("Service Agreements") with local governmental units
sponsoring the project ("Client Communities"). Electricity, or in some cases
steam, is sold pursuant to long term power purchase agreements ("PPAs") with
local utilities or industrial customers, and most of the resulting revenues
reduce the overall cost of waste disposal services to the Client Communities.
Each Service Agreement is different to reflect the specific needs and
concerns of the Client Community, applicable regulatory requirements and other
factors. However, the following description sets forth terms that are generally
common to these agreements:
- The Company designs the facility, helps to arrange for
financing and then constructs and equips the facility on a
fixed price and schedule basis.
- The Company operates the facility and generally guarantees it
will meet minimum waste processing capacity and efficiency
standards, energy production levels and environmental
standards. The Company's failure to meet these guarantees or
to otherwise observe the material terms of the Service
Agreement (unless caused by the Client Community or by events
beyond its control ("Unforeseen Circumstances")) may result in
liquidated damages charged to the Company or, if the breach is
substantial, continuing and unremedied, the termination of the
Service Agreement. In the case of such Service Agreement
termination, the Company may be obligated to discharge project
indebtedness. Covanta Energy Corporation or an intermediate
holding company typically guarantees performance of the
Service Agreement.
- The Client Community is generally required to deliver minimum
quantities of municipal solid waste to the facility on a
put-or-pay basis and is obligated to pay a service fee for its
disposal, regardless of whether or not that quantity of waste
is delivered to the facility (the "Service Fee"). A put-or-pay
commitment means that the Client Community promises to deliver
a stated quantity of waste and pay an agreed amount for its
disposal. This payment is due even if the counterparty
delivers less than the full amount of waste promised. The
Service Fee escalates to reflect indices of inflation. In many
cases the Client Community must also pay for other costs, such
as insurance, taxes and transportation and disposal of the
residue to the disposal site. If the facility is owned by the
Company, the Client Community also pays as part of the Service
Fee an amount equal to the debt service due to be paid on the
bonds issued to finance the facility. Generally, expenses
resulting from the delivery of unacceptable and hazardous
waste on the site are also borne by the Client Community. In
addition, the contracts generally require that the Client
Community pay increased expenses and capital costs resulting
from Unforeseen Circumstances, subject to limits which may be
specified in the Service Agreement.
- The Client Community usually retains a portion of the energy
revenues (generally 90%) generated by the facility, and pays
the balance to the Company.
Financing for the Company's domestic waste-to-energy projects is
generally accomplished through the issuance of tax-exempt and taxable revenue
bonds issued by or on behalf of the Client Community. If the facility is owned
by a Company subsidiary, the Client Community loans the bond proceeds to the
subsidiary to pay for facility construction and pays to the subsidiary amounts
necessary to pay debt service. For such facilities, project-related debt is
included as a liability in Covanta's consolidated financial statements.
Generally, such debt is secured by the revenues pledged under the respective
indentures and is collateralized by the assets of the Company's subsidiary and
otherwise provides no recourse to Covanta, subject to construction and operating
performance guarantees and commitments.
(B) Other Waste-to-Energy Project Structures.
The Company owns one waste-to-energy facility in Massachusetts that is
not operated pursuant to a Service Agreement with a Client Community. In this
project, the Company assumed the project debt and risks relating to waste
availability and pricing, risks relating to the continued performance of the
electricity purchaser, as well as risks associated with unforeseen
circumstances. The Company retains all of the energy revenues from sales of
power and disposal fees for waste accepted at this facility. Accordingly, the
Company believes that this project carries both greater risks and greater
potential rewards than projects in which there is a Client Community.
In addition, the Company has restructured certain of its
waste-to-energy projects which originally were undertaken generally on the basis
described in (A) above. These are briefly described below:
- Union County, New Jersey.
In Union County, New Jersey, a municipally-owned facility has been
leased to the Company, and the Client Community has agreed to deliver
approximately 50% of the facility's capacity on a put-or-pay basis. The balance
of facility capacity is marketed by the Company at its risk. The Company
guarantees its subsidiary's contractual obligations to operate and maintain the
facility, and on one series of subordinated bonds, its obligation to make lease
payments which are the sole source for payment of principal and interest on that
series of bonds. The current outstanding principal amount of the subordinated
bonds, sold to refinance a portion of the original bonds used to finance the
facility, is $18,640,000. In connection with this restructuring, the Client
Community assigned to the Company the long term power contract with the local
utility. As part of this assignment, the power contract was amended to give the
Company the right to sell all or a portion of the plant's output to other
purchasers. The Company elected to sell all of the project's power to Sempra
Energy Trading Corporation ("Sempra") under a three-year arrangement which
Sempra sought to terminate on April 1, 2002 as a result of the Chapter 11 filing
described above. The matter remains in dispute. Since April 2002, the Company
has sold its output directly into the regional electricity grid, with no
material loss of revenue. The Company may enter into contracts similar to the
Sempra contract if it believes doing so would enhance this project's revenues.
- Tulsa, Oklahoma.
In Tulsa, Oklahoma, the Client Community and the Company's subsidiary
in 1999 replaced the prior Service Agreement with a new arrangement pursuant to
which the Company was required to fund the cost of the facility's Clean Air Act
retrofit; the Client Community committed to deliver a defined quantity of waste
on a put-or-pay basis, for a fee per ton; and the parties agreed to share
certain excess revenues from facility operations. In addition, the Company no
longer has the right to require an adjustment to fees to cover the costs of
unforeseen circumstances, but it may terminate the contract if the Client
Community declines to accept such increases. Under the new contract, the Client
Community has accepted the obligation to repay bonds issued to finance the
facility, including prepayment as a result of termination of the Service
Agreement, regardless of the reasons for the termination. This project is owned
by a third party lessor, and the Company's subsidiary leases the facility
pursuant to a lease that expires in 2012. The Service Agreement expires in 2007.
The agreement pursuant to which this project sells steam to an industrial
investor expires in 2006. The agreement pursuant to which this project sells
steam to an industrial customer expires in 2006. The Company believes that its
operating subsidiary for this project will have difficulty reorganizing
successfully unless the lease is restructured. It is uncertain at this time
whether such a restructuring is feasible.
- Warren County, New Jersey.
Changes in law have reduced the ability of New Jersey municipalities to
direct waste to designated facilities. As a result, the Warren County, New
Jersey facility has not been able to attract waste at prices sufficient to
permit the payment of its debt service, and since late 1999, the Client
Community has requested and received financial assistance from the State of New
Jersey in order to pay semi-annual debt service. The parties have agreed that
while restructuring alternatives are explored, available project revenues will
be applied to pay project expenses other than debt service, including operating
fees to the Company's subsidiary. The Company has offered to market the
facility's capacity, at its risk, in a restructuring plan that includes state
assistance with debt retirement. The Warren County restructuring is subject to
several conditions precedent, some of which are beyond the control of the
Company, notably the securing of state funds. The bonds issued to finance the
facility are insured and otherwise secured by a mortgage on the facility and
security interests in related assets. The bonds are non-recourse to the Company.
As previously reported, during 2002, the State of New Jersey enacted
legislation authorizing the New Jersey Economic Development Agency to refinance
portions of county solid waste facility debt (L. 2001, Ch. 401). This
legislation would have allowed the state to repay the majority of debt remaining
on the Warren project, and until the third quarter of 2002, all parties expected
that the project's debt would be restructured in this manner. The sunset
provision in this law occurred without implementation. The state has continued
to provide funds to pay principal and interest payments as they became due. If a
restructuring is not achieved, or if the state fails to continue to pay project
debt service and the project defaults on its debt, the bond insurer could
foreclose on its mortgage and take title to the project. At this time it is
uncertain whether the parties will be able to restructure the Warren project
debt in a manner which will permit the Company's operating subsidiary to operate
the facility on a profitable basis. The lack of such a restructuring could
jeopardize plans of the Company's subsidiary for this project to reorganize
successfully and emerge from bankruptcy.
Lastly, two of the Company's waste-to-energy projects structured as
described in (A) above are currently involved in litigation and may be
restructured as part of resolving the litigation while the Company is in
bankruptcy. These projects are briefly described below:
- Lake County, Florida.
In Lake County, Florida, the Client Community expressed its intent to
reduce or terminate its continuing payment obligations with respect to the
facility and expressed its desire to restructure its relationship with the
Company's subsidiary to substantially reduce its payment obligation or to
institute condemnation proceedings to purchase the facility from the Company. In
late 2000, discussions regarding a mutually acceptable resolution of these
matters ended, and the County commenced a court action seeking to have the
Service Agreement declared void on various state constitutional and public
policy grounds. The County also seeks unspecified damages for amounts paid to
the Company since 1988. The case is at a very preliminary stage, and is now
stayed by the bankruptcy proceeding. The Company and Lake County are discussing
a settlement of the litigation which would involve a sale of the facility to
Lake County and a material restructuring of the commercial contracts between
them. A sale would result in a substantial net loss and the Company would agree
to a restructuring only if doing so enhanced creditor recovery. It is uncertain,
at this time, whether the parties will be able to reach agreement on this
matter. In the absence of such agreement, the Company likely would assume the
Service Agreement but has yet to make a final determination. Rejection would
result in substantial unsecured termination damages.
- Onondaga County, New York.
A public authority in Onondaga County, New York (the "Agency") and the
Company have several commercial disputes between them. Among these is a January
16, 2002 demand by the Agency to provide 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 Agency 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 million under the
terms of the agreement. The Company commenced a lawsuit in state court with
respect to such disputes, as well as the Agency's right to terminate. Following
the commencement of the Chapter 11 Cases, the Company removed the case to the
federal court in the Northern District of New York and further requested that
the matter be transferred to the Bankruptcy Court. On the motion of the Agency,
the case was remanded back to state court. In addition, the Agency 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 applied to the litigation, or other
related relief. The Company appealed the issuance of the district court's
injunction to the Court of Appeals for the Second Circuit and in January 2003
the injunction was vacated. The Bankruptcy Court thereafter issued an order
declaring that the the Agency's post-petition prosecution of the state court
lawsuit violated the automatic stay imposed pursuant to the Bankruptcy Code and
preliminarily enjoined and restrained further prosecution of the lawsuit against
the Company. The Agency has appealed the Bankruptcy Court's order. 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. In addition, the Company could incur substantial
obligations to the limited partners in the project.
(ii) Water and Wastewater Projects.
The Company's water and wastewater operations are conducted through
wholly-owned subsidiaries. The Company seeks to design, construct, maintain, and
operate water and wastewater treatment facilities and distribution and
collection networks in the United States.
The Company participates in projects in which, under contracts with
municipalities, it privatizes water and/or wastewater facilities by agreeing to
build new facilities or substantially augment existing facilities, and to
operate and maintain the facilities under long term contracts.
Under contractual arrangements, the Company may be required to warrant
certain levels of performance and may be subject to financial penalties or
termination if it fails to meet these warranties. Covanta Energy Corporation or
its intermediate holding companies may be required to guarantee the performance
of its subsidiary. The Company seeks to not take responsibility for conditions
that are beyond its control.
The Company's water and wastewater operations faces an immature but
developing domestic market for private water and wastewater services. Growth of
the privatized market has not been consistent and is constrained by a number of
factors, including water's status as a most elemental and key community resource
and the long history of entrenched municipal operation with corresponding public
sector employment. Additionally, Covanta's Chapter 11 status has negatively
impacted its reception in the marketplace.
(A) Water Projects in Construction
During 2001, the Company designed and began construction of a 25 mgd
potable water desalinization project on behalf of Tampa Bay Water Authority
("TBW"), a public authority serving a number of counties and municipalities in
the Tampa, Florida vicinity. Construction of the project is expected to be
completed, and operations expected to commence during 2003, but at a later date
than initially anticipated (see discussion below). The project will utilize a
reverse osmosis process, incorporate DualSandTM microfiltration technology as an
advance treatment and the Company will operate and maintain the project on
behalf of TBW pursuant to a 30-year contract.
During construction, the Company discovered previously unknown
underground obstructions at the project site that impaired construction
progress. As a result, in February 2003, the Company and TBW executed a contract
amendment that, among other things, provides for a 105 day extension to the
construction schedule (to May 15, 2003), a $500,000 cash payment to Covanta to
settle cost impact claims, and TBW to pay Covanta for potable water delivered
during the project's start-up. The amendment also makes provisions for Covanta
to meet certain interim water production milestones, with material penalties
payable for failure to deliver water at the rate of 21 mgd by March 29, 2003,
and relatively minor penalties applicable to other water delivery milestones for
prior periods. The Company anticipates that it will incur certain of these
penalties, which will be reflected in less construction profit recognized in
2003.
(B) Water Projects in Operation
As previously reported, since 1995,the Company has operated and
maintained water and wastewater treatment facilities on behalf of eight small
municipal and industrial customers in upstate New York. Some of these contracts
are short term agreements or may be terminated by the counterparty if it no
longer desires to continue receiving service from the Company. During 2002, one
such counterparty, Kendall Corporation, exercised its right to terminate the
Company's contract to operate a 0.2 mgd wastewater facility, opting instead to
operate the facility itself. The Company continues to operate facilities on
behalf of the other seven municipal and industrial customers treating water and
wastewater at a rate of approximately 67 mgd.
The Company also designed, built and now operates and maintains a 24
mgd potable water treatment facility and associated transmission and pumping
equipment that supplies water to residents and businesses in Bessemer, Alabama,
a suburb of Birmingham. Under a long term contract with the Governmental
Services Corporation of Bessemer, the Company received a fixed price for design
and construction of the facility, and it is paid a fixed fee plus pass-through
costs for delivering processed water to the City's water distribution system.
Construction was completed ahead of schedule during 2000.
Between 2000 and 2002, the Company was awarded contracts to supply its
patented DualSandTM microfiltration system ("DSS") to twelve municipalities in
upstate New York as the primary technological improvement necessary to upgrade
their existing water and wastewater treatment systems. Five of these upgrades
are being made in connection with the joint United States Environmental
Protection Agency and New York City Department of Environmental Protection
("NYCDEP") $1.4 billion program to protect and enhance the drinking water
supply, or watershed, for New York City.
DSS is a cost effective microfiltration system for municipal water and
wastewater treatment, desalinization pre-treatment, re-use, recycling and
industrial applications. Its primary purpose is to effect the removal of
nutrient and pathogenic pollutants. The Company's obligations in connection with
DSS typically include equipment supply and installation and, in some cases,
construction.
(iii) Independent Power Projects
Since 1989, the Company has been engaged in developing, owning and/or
operating twenty independent power production ("IPP") facilities utilizing a
variety of energy sources. The Company currently has an ownership interest in,
leases and operates the twenty hydroelectric, geothermal, wood and landfill gas
projects identified below under "Domestic Project Summaries." The electrical
output from each facility, with one exception, is sold to local utilities. The
Company's revenue from the IPP facilities is derived primarily from the sale of
energy and capacity.
The Company's ownership interest in the IPP facilities is held by
subsidiaries, which own an equity position either by direct ownership or
leasehold position or as partners in partnerships which directly own or lease
the facilities. Financing for the projects is, with the exception of the Heber
Geothermal Company ("HGC") and Heber Field Company ("HFC") projects,
non-recourse to Covanta Energy Corporation or intermediate holding companies.
The Company also receives revenue from providing operation and
maintenance services at many of the IPP facilities. These services are generally
provided by separate sole-purpose subsidiaries pursuant to operation and
maintenance ("O&M") agreements with the project companies. The costs and fees of
the operator generally have priority to any project debt.
California Power Purchase Agreements
- ------------------------------------
The electrical output of 17 of the Company's facilities located in
California is sold to utilities pursuant to California Public Utility Commission
approved PPAs. In most cases, the projects receive payment for both energy and
capacity (as opposed to delivered capacity). The term of each PPA varies but in
general runs for 20 to 30 years from the commercial operation date of the
facility.
In general, the first 10 to 15 years of each PPA contemplates payment
for energy by the utility at a scheduled fixed energy rate. One of the Company's
facilities is still in this fixed energy rate period (see geothermal discussion
below). After the fixed energy rate period of the PPA expires, the project
generally receives the utilities' short run avoided cost ("SRAC") for energy and
continues to receive a separate capacity payment. SRAC is a floating rate that
is set monthly, based on defined indices. In 2002 several of the Company's
projects located in California entered into PPA amendments allowing for a new
five-year fixed energy rate period. This fixed energy rate period for facilities
selling to Southern California Edison Company ("SCE") runs from May 2002 and
running through April of 2007. For facilities selling to Pacific Gas and
Electric Company ("PG&E"), the fixed energy rate period runs from July 2001 to
June 2006. Those projects will receive $53.70/Mwh for energy (see California
Conditions section).
The contracted capacity payment is determined by the terms of each
individual PPA. In most cases, the receipt of the capacity payment is subject to
the facility's demonstration of its ability to supply the capacity. If a
facility is unable to satisfy the conditions specified in its PPA for capacity,
the utility has the right to place the project on probation. If the project is
unable to demonstrate its ability to supply the PPA capacity during the
probation period, the utility has the right to derate the project's capacity to
the level it has demonstrated. If the PPA is terminated or the facility is not
able to demonstrate capacity at contracted levels for the balance of the PPA,
the project may be liable to the utility for an amount calculated to be the
overpayment by the utility for capacity. This capacity overpayment liability
increases through the mid-term of a PPA and then decreases to zero by the end of
PPA's term. Two of the Company's California facilities are parties to PPA's that
do not have contract capacity demonstration requirements. These two projects are
paid for as delivered capacity.
IPP Projects in operation.
- --------------------------
-Geothermal.
The Company owns and operates the 52 MW HGC facility. The output of the
HGC project is sold under a long term PPA (see discussion above) with the SCE.
The HGC project is currently in the first year of a five year fixed-price period
recently negotiated with SCE.
The Company is the sole lessee of the 48 MW Second Imperial Geothermal
Company ("SIGC") project. The Company operates the SIGC facility through a
separate O&M agreement. The output of the facility is sold under a long term PPA
(see discussion above) with SCE. The SIGC project is still on its original
fixed energy rate period under the PPA.
The Company also owns and operates the geothermal resource, HFC, which
is adjacent to and supplies geothermal fluid to both HGC and SIGC. HFC is the
lessee of the several hundred royalty leases which make up the Heber Known
Geothermal Resource Area. Heber Field's rights in the leases and the geothermal
leases themselves are valid so long as geothermal brine is produced. A royalty
is paid to the geothermal lease lessors each month. Approximately 100 royalty
lease lessors have filed proofs of claim in the Company's Chapter 11 proceedings
in amounts that far exceed the pre-petition amounts the Company believes are
due. The Company is currently reviewing the issues surrounding the lessors'
claims.
The Company also owns a 50% partnership interest in Mammoth-Pacific,
L.P. ("MPLP"), which owns three geothermal facilities with a gross capacity of
40 MW. The MPLP facilities are located on the eastern slopes of the Sierra
Nevada Mountains at Casa Diablo Hot Springs in California. The facilities have
contractual rights to the geothermal fluid resource for a term not less than the
term of the PPAs. All three facilities sell energy and capacity to SCE under
long term PPAs and have recently entered into PPA amendments calling for a five
year fixed-price for the energy sold. Through a separate subsidiary, the Company
provides O&M services to the partnership on a cost-reimbursement basis.
-Hydroelectric.
The Company owns 50% equity interests in two run-of-river hydroelectric
facilities, Koma Kulshan and Weeks Falls, which have a combined gross capacity
of 17 MW. Both Koma Kulshan and Weeks Falls are located in Washington State and
both sell energy and capacity to Puget Sound Power & Light Company under long
term PPAs. A subsidiary of the Company provides operation and maintenance
services to the Koma Kulshan partnership under a cost plus fixed fee agreement.
The New Martinsville facility is located in West Virginia on the Ohio
River. It is a 40 MW run-of-river project which the Company leases and operates.
The base lease term for this project expires in October 2003. Pursuant to the
terms of the lease, the Company has until May 30, 2003 to give notice of its
intention to renew the lease or terminate its participation in the project. The
termination of the Company's participation in New Martinsville would not have a
material effect on the Company. If the Company renews the lease, a subsidiary
would continue to operate the facility. Energy and capacity is sold by the
facility to Monongahela Power Company under a long term PPA.
-Wood.
The Company owns 100% interests in three wood-fired generation
facilities in northern California: Burney Mountain Power, Mt. Lassen Power, and
Pacific Oroville Power. A fourth facility, Pacific Ultra Power Chinese Station,
is owned by a partnership in which the Company holds a 50% interest. Fuel for
the facilities is procured from local sources primarily through short-term
supply agreements. The price of the fuel varies depending on time of year,
supply and price of energy. The four projects have a gross generating capacity
of 67 MW. All four projects sell energy and capacity to PG&E under long term
PPAs. Until July 2001 the facilities were receiving PG&E's SRAC for energy
delivered. However, beginning in July 2001 the four facilities entered into
five-year fixed energy rate periods pursuant to amendments of the PPAs.
-Landfill Gas.
The Company has interests in and operates eight landfill gas projects
which produce electricity by burning methane gas produced in sanitary landfills.
Seven of the projects are located in California: Otay, Oxnard, Penrose, Salinas,
Stockton, Santa Clara and Toyon. One project, Gude, is located in Maryland. The
eight projects have a total gross capacity of 36 MW. The PPA of the Gude
facility has expired and that facility is currently selling its output into the
regional utility grid. The Penrose and Toyon projects sell energy and as
delivered capacity to the local utility. The remaining five projects sell energy
and contracted capacity to various California utilities. The PPAs of Penrose and
Toyon expire in 2006. Salinas, Stockton and Santa Clara have PPAs which expire
in 2007. Otay and Oxnard have PPAs which expire in 2011. Upon the expiration of
the PPAs it is expected that these projects will enter into new off-take
arrangements or the projects will be shut down.
(b) DOMESTIC PROJECT SUMMARIES.
Summary information with respect to the Company's domestic projects(1)
that are currently operating or under construction is provided in the following
table:
DATE OF
ACQUISITION/
NATURE OF COMMENCEMENT
LOCATION SIZE INTEREST(1) OF OPERATIONS
A. HYDROELECTRIC
1. New Martinsville West Virginia 40MW Lessee/Operator 1991
2. Koma Kulshan(2) Washington 12MW Part Owner/Operator 1997
3. Weeks Falls(2) Washington 5MW Part Owner 1997
---
SUBTOTAL 57MW
B. GEOTHERMAL
1. Heber California 52MW Owner/Operator 1989
2. SIGC California 48MW Lessee/Operator 1994
3. Mammoth G1(2) California 10MW Part Owner/Operator 1997
4. Mammoth G2(2) California 15MW Part Owner/Operator 1997
5. Mammoth G3(2) California 15MW Part Owner/Operator 1997
----
SUBTOTAL 140MW
C. MUNICIPAL SOLID WASTE
1. Tulsa(3) Oklahoma 11MW Lessee/Operator 1986
2. Marion County Oregon 13MW Owner/Operator 1987
3. Hillsborough County Florida 29MW Operator 1987
4. Tulsa(4) Oklahoma N.A. Lessee/Operator 1987
5. Bristol Connecticut 16.3MW Owner/Operator 1988
6. Alexandria/Arlington Virginia 22MW Owner/Operator 1988
7. Indianapolis Indiana N.A. Owner/Operator 1988
8. Hennepin County(3) Minnesota 38.7MW Lessee/Operator 1989
9. Stanislaus County California 22.5MW Owner/Operator 1989
10. Babylon(5) New York 16.8MW Owner/Operator 1989
11. Haverhill Massachusetts 46MW Owner/Operator 1989
12. Warren County(6) New Jersey 13MW Owner/Operator 1988
13. Kent County Michigan 18MW Operator 1990
14. Wallingford(6) Connecticut 11MW Owner/Operator 1989
15. Fairfax County Virginia 79MW Owner/Operator 1990
16. Huntsville Alabama N.A. Operator 1990
17. Lake County Florida 14.5MW Owner/Operator 1991
18. Lancaster County Pennsylvania 35.7MW Operator 1991
19. Pasco County Florida 31.2MW Operator 1991
20. Huntington(7) New York 24.3MW Owner/Operator 1991
21. Hartford(8) Connecticut 68.5MW Operator 1987
22. Detroit(9) Michigan 68MW Lessee/Operator 1991
23. Honolulu(9) Hawaii 57MW Lessee/Operator 1990
24. Union County(10) New Jersey 44MW Lessee/Operator 1994
25. Lee County Florida 39.7MW Operator 1994
26. Onondaga County(7) New York 39.5MW Owner/Operator 1995
27. Montgomery County Maryland 55MW Operator 1995
----
SUBTOTAL 813.7MW
D. WOOD
1. Burney Mountain California 11.4MW Owner/Operator 1997
2. Pacific Ultrapower California 25.6MW Part Owner 1997
Chinese Station(2)
3. Mount Lassen California 11.4MW Owner/Operator 1997
4. Pacific Oroville California 18.7MW Owner/Operator 1997
------
SUBTOTAL 67.1MW
E. LANDFILL GAS
1. Gude Maryland 3MW Part Owner/Operator 1997
2. Otay California 3.7MW Part Owner/Operator 1997
3. Oxnard California 5.6MW Part Owner/Operator 1997
4. Penrose California 10MW Part Owner/Operator 1997
5. Salinas California 1.5MW Part Owner/Operator 1997
6. Santa Clara California 1.5MW Part Owner/Operator 1997
7. Stockton California 0.8MW Part Owner/Operator 1997
8. Toyon California 10MW Part Owner/Operator 1997
----
SUBTOTAL 36.1MW
------
TOTAL DOMESTIC MW IN OPERATION 1,113.9MW
F. WATER AND WASTEWATER
1. Bessemer Alabama 24 mgd Design/Build/Operate 2000
2. Clinton New York 2.5 mgd Operator 1995
3. Bristol/Myers Squibb New York 50 mgd Operator 2000
4. Chittenango New York 1.0 mgd Operator 1998
5. Canastata New York 2.5 mgd Operator 1998
6. Cortland New York 10 mgd Operator 1995
7. Mohawk New York 0.1 mgd Operator 1995
8. Kirkland New York 0.3 mgd Operator 1995
-------
TOTAL MGD IN OPERATION 90. mgd
DOMESTIC PROJECTS UNDER CONSTRUCTION:
1. Tampa Bay Florida 28 mgd Design/Build/Operate 2003 (est.)
------
TOTAL DOMESTIC PROJECTS
UNDER CONSTRUCTION 28 mgd
TOTAL DOMESTIC MW IN
OPERATION/CONSTRUCTION: 1,113.9
TOTAL DOMESTIC MGD IN
OPERATION/CONSTRUCTION: 118.
NOTES
(1) Covanta's ownership and/or operation interest in each facility listed
below extends at least into calendar year 2007 except: New
Martinsville, for which the initial term of the operation contract
terminates in 2003; Penrose, for which the initial term of the
operation contract terminates in 2006; Toyon for which the initial term
of the operation contract terminates in 2006; Bristol/Meyers Squibb,
for which the initial term of the operation contract terminates in
2003; and Clinton, Mohawk and Kirkland, for which the operation
contracts are renewable annually.
(2) The Company has a 50% ownership interest in the project.
(3) Facility is owned by an owner/trustee pursuant to a sale/leaseback
arrangement.
(4) Phase II of the Tulsa facility, which was financed as a separate
project, expanded the capacity of the facility from two to three units.
(5) Facility has been designed to allow for the addition of another unit.
(6) Company subsidiaries were purchased after completion and use a
mass-burn technology that is not the Martin Technology.
(7) Owned by a limited partnership in which the limited partners are not
affiliated with Covanta.
(8) Under contracts with the Connecticut Resource Recovery Authority, the
Company operates only the boiler and turbine for this facility.
(9) Operating contracts were acquired after completion. Facility uses a
refuse-derived fuel technology and does not employ the Martin
Technology.
(10) The Union County facility is leased to a Company subsidiary.
INTERNATIONAL ENERGY BUSINESS
As with its domestic business, the Company conducts its international
businesses through wholly-owned subsidiaries. Internationally, the Company
generally owns projects where its returns are primarily from equity
distributions and, to a lesser extent, operating fees. The Company's projects
sell the electricity and steam they generate under long term contracts or market
concessions to utilities, governmental agencies providing power distribution,
creditworthy industrial users, or local governmental units. In select cases,
such sales of electricity and steam may be provided under short-term
arrangements as well. Similarly, the Company seeks to obtain long term contracts
for fuel supply from reliable sources.
The Company presently has interests in international power projects
with an aggregate generating capacity of approximately 1137 MW (gross) either
operating or under construction. The Company's ownership in these facilities is
approximately 487 MW. In addition to its headquarters in Fairfield, New Jersey,
the Company's business is facilitated through its Fairfax, Virginia office and
field offices in Shanghai, China; Chennai, India; Manila, The Philippines; and
Bangkok, Thailand.
(a) GENERAL APPROACH TO INTERNATIONAL PROJECTS
In developing its international businesses, the Company has employed
the same general approach to projects as is described above with respect to
domestic projects. Given its plan to refocus its business in domestic markets,
no new international project development is anticipated during 2003. The Company
may consider divesting itself from some or all of its international portfolio.
The ownership and operation of facilities in foreign countries entails
significant political and financial uncertainties and other structuring issues
that typically are not involved in such activities in the United States. Key
international risk factors include unexpected changes in electricity tariffs,
conditions in financial markets, currency exchange rates, currency repatriation
restrictions, currency convertibility, expropriation, changes in laws and
regulations and political, economic or military instability, civil unrest and
expropriation. Such risks have the potential to cause substantial delays or
material impairment to the value of the project being developed or business
being operated.
Many of the countries in which the Company operates are lesser
developed countries or developing countries. The political, social and economic
conditions in some of these countries are typically less stable than those in
the United States. The financial condition and creditworthiness of the potential
purchasers of power and services provided by the Company (which may be a
governmental or private utility or industrial consumer) or of the suppliers of
fuel for projects in these countries may not be as strong as those of similar
entities in developed countries. The obligations of the purchaser under the PPA,
the service recipient under the related service agreement and the supplier under
the fuel supply agreement generally are not guaranteed by any host country or
other creditworthy governmental agency. The Company undertakes a credit analysis
of the proposed power purchaser or fuel supplier.
The Company's power projects in particular depend on reliable and
predictable delivery of fuel meeting the quantity and quality requirements of
the project facilities. The Company has typically sought to negotiate long term
contracts for the supply of fuel with creditworthy and reliable suppliers.
However, the reliability of fuel deliveries may be compromised by one or more of
several factors that may be more acute or may occur more frequently in
developing countries than in developed countries, including a lack of sufficient
infrastructure to support deliveries under all circumstances; bureaucratic
delays in the import, transportation and storage of fuel in the host country;
customs and tariff disputes; and local or regional unrest or political
instability. In most of the foreign projects in which the Company participates,
it has sought, to the extent practicable, to shift the consequences of
interruptions in the delivery of fuel, whether due to the fault of the fuel
supplier or due to reasons beyond the fuel supplier's control, to the
electricity purchaser or service recipient by securing a suspension of its
operating responsibilities under the applicable agreements and an extension of
its operating concession under such agreements and/or, in some instances, by
requiring the energy purchaser or service recipient to continue to make payments
in respect of fixed costs. In order to mitigate the effect of short-term
interruptions in the supply of fuel, the Company has endeavored to provide
on-site storage of fuel in sufficient quantities to address such interruptions.
Payment for services that the Company provides will often be made in
whole or part in the domestic currencies of the host countries. Conversion of
such currencies into U.S. dollars generally is not assured by a governmental or
other creditworthy country agency, and may be subject to limitations in the
currency markets, as well as restrictions of the host country. In addition,
fluctuations in the value of such currencies against the value of the U.S.
dollar may cause the Company's participation in such projects to yield less
return than expected. Transfer of earnings and profits in any form beyond the
borders of the host country may be subject to special taxes or limitations
imposed by host country laws. The Company has sought to participate in projects
in jurisdictions where limitations on the convertibility and expatriation of
currency have been lifted by the host country and where such local currency is
freely exchangeable on the international markets. In most cases, components of
project costs incurred or funded in the currency of the United States are
recovered without risk of currency fluctuation through negotiated contractual
adjustments to the price charged for electricity or service provided. This
contractual structure may cause the cost in local currency to the project's
power purchaser or service recipient to rise from time to time in excess of
local inflation, and consequently there is risk in such situations that such
power purchaser or service recipient will, at least in the near term, be less
able or willing to pay for the project's power or service.
The Company has sought to manage and mitigate these risks through all
means that it deems appropriate, including: political and financial analysis of
the host countries and the key participants in each project; guarantees of
relevant agreements with creditworthy entities; political risk and other forms
of insurance; participation by international finance institutions, such as
affiliates of the World Bank, in financing of projects in which it participates;
and joint ventures with other companies to pursue the development, financing and
construction of these projects. The Company determines which mitigation
measures to apply based on its balancing of the risk presented, the
availability of such measures and their cost. In 2002, the Company began
divesting its interests in some of its foreign projects in an effort to
concentrate its business domestically. To this end, on March 28, 2002, the
Company sold its interests in two 122 MW gas-fired combined cycle facilities in
Thailand, the Sahacogen facility and the Rojana Power facility, and its interest
in the operating company to its local partners in the respective projects.
In addition, the Company has generally participated in projects which
provide services that are treated as a matter of national or key economic
importance by the laws and politics of the host country. There is therefore a
risk that the assets constituting the facilities of these projects could be
temporarily or permanently expropriated or nationalized by a host country, or
made subject to local or national control.
The following is a description of the Company's international power
projects, by fuel type:
(i) Waste-to-Energy.
During 2000, the Company acquired a 13% equity interest in an 15 MW
mass-burn waste-to-energy project near the Municipality of Trezzo sull' Adda in
the Lombardy Region of Italy (the "Trezzo Project"), which will burn up to 500
tons per day of municipal solid waste. The remainder of the equity in the
project is held by TTR Tecno Trattamento Rifiuti S.r.l., a subsidiary of Falck
S.p.A. ("Falck"). On reaching full commercial operation, the Trezzo Project will
be operated by Ambiente 2000 S.r.l. ("A2000"), an Italian special purpose
limited liability company of which the Company owns 40%. The solid waste supply
for the project comes from municipalities and privately owned waste management
organizations under long term contracts. The electrical output from the Trezzo
project is sold at governmentally established preferential rates under a long
term purchase contract to Italy's state-owned grid operator, Gestore della Rete
di Trasmissione Nazionale S.p.A ("GRTN"). The project closed its limited
recourse financing in February 2001, started accepting waste in September 2002,
successfully passed its performance tests in early 2003 and is expected to reach
full commercial operation during the second quarter of 2003 upon completion of
outstanding works. The late completion of the plant by the engineering,
procurement and construction contractor, Protecma, represents a non-compliance
with the terms of the non-recourse project financing arrangements for the
project, and discussions are currently in progress with the banking consortium
with regard to courses of action against the contractor to ensure that further
delays are minimized.
In January 2001, A2000 also entered into a 15-year O&M Agreement with
E.A.L.L Energia Ambiente Litorale Laziale S.r.l., an Italian limited liability
company owned by CMI S.p.A. to operate and maintain a 10 MW waste-to-energy
facility capable of processing up to 300 metric tons per day of refuse-derived
fuel in the Municipality of San Vittore del Lazio (Frosinone), Italy. The San
Vittore project has a 15-year waste supply agreement with Reclas S.p.A. (mostly
owned by regional municipalities), and a long term power off-take contract with
GRTN. The project is now in its first year of operation, and is being operated
by its German construction contractor, Lurgi. There was a significant delay in
starting up the plant after construction was complete due to a legal action by
an environmental group that has subsequently been overturned. The plant is
currently operating at partial-load, producing approximately 3MW, due to delays
in obtaining a permit for the construction of a new transmission line. The O&M
Agreement provides that A2000 takes over the operation and maintenance of the
project at final acceptance under the terms of the engineering, procurement and
construction contract for the project, such final acceptance requiring the plant
to have performed over 12 months at specified levels of output. Due to the
partial loading of the plant to date, it is unlikely that A2000 will take over
the operation and maintenance role for the project until late 2003 at the
earliest.
(ii) Independent Power Production
- Hydroelectric.
The Company operates the Don Pedro project and the Rio Volcan
facilities in Costa Rica through an operating subsidiary pursuant to long term
contracts. The Company also has a nominal equity investment in each project. The
electric output from both of these facilities is sold to Instituto Costarricense
de Electricidad, a Costa Rica national electric utility.
Through its investment in Empresa Valle Hermoso (see discussion below
under "Natural Gas") the Company had acquired a small (less than 7%) ownership
interest in a hydroelectric project in Rio Yura, Bolivia. In June 2001, an
expansion and refurbishment of the existing Rio Yura facilities was completed
increasing the previously reported 12 MW output to 18 MW. The Rio Yura project
sells its output to mining companies, local residents and the national grid. On
December 5, 2002, the Company sold its interests in Empresa Valle Hermoso.
- Coal.
A consortium, of which the Company is a 26% member, owns a 510 MW
(gross) coal-fired electric generating facility in The Philippines (the "Quezon
Project"). The project first generated electricity in October 1999, and full
commercial operation occurred during the fourth quarter of 2000. The other
members of the consortium are an affiliate of International Generating Company,
an affiliate of General Electric Capital Corporation, and PMR Limited Co., a
Philippines partnership. The consortium sells electricity to Manila Electric
Company ("Meralco"), the largest electric distribution company in The
Philippines, which serves the area surrounding and including metropolitan
Manila. Under a PPA expiring in 2025, Meralco is obligated to take or pay for
stated minimum annual quantities of electricity produced by the facility at an
all-in tariff which consists of capacity, operating, energy, transmission and
other fees adjusted to inflation, fuel cost and foreign exchange fluctuations.
The consortium has entered into two coal supply contracts expiring in 2015 and
2022. Under these supply contracts, cost of coal is determined using a base
energy price adjusted to fluctuations of specified international benchmark
prices. The Company is operating the project through a local subsidiary under a
long term agreement with the consortium. The financial condition of Meralco has
been recently stressed by the failure of regulators to grant tariff increases to
allow Meralco to achieve rates of return permitted by law. See Item 7,
Management's Discussion and Analysis. The Company has obtained political risk
insurance for its equity investment in this project.
The Company has majority equity interests in three coal-fired
cogeneration facilities in three different provinces in the People's Republic of
China. Two of these projects are operated by the project entity, in which the
Company has a majority interest. The third project is operated by an affiliate
of the minority equity shareholder. Parties holding minority positions in the
projects include a private company, a local government enterprise and affiliates
of the local municipal government. While the steam produced at each of the three
projects is intended to be sold under long term contracts to the industrial
hosts, in practice, steam has been sold on either a short term basis to local
industries or the industrial host, in each case at varying rates and quantities.
For each of these projects, the electric power is sold at "average grid rate" to
a subsidiary of the Provincial Power Bureau as well as industrial customers. The
Company has obtained political risk insurance for its equity investment in these
projects.
- Natural Gas.
In 1998, the Company acquired an equity interest in a barge-mounted 120
MW diesel/natural gas-fired facility located near Haripur, Republic of
Bangladesh. This project began commercial operation in June 1999, and is
operated by a subsidiary of the Company. The Company owns approximately 45% of
the project company equity. An affiliate of El Paso Energy Corporation owns 50%
of such equity, and the remaining interest is held by Wartsila North America,
Inc. The electrical output of the project is sold to the Bangladesh Power
Development Board ("BPDB") pursuant to a PPA with minimum energy off-take
provisions at a tariff divided into a fuel component and an "other" component.
The fuel component reimburses the fuel cost incurred by the project up to a
specified heat rate. The "other" component consists of a pre-determined base
rate adjusted to actual load factor and foreign exchange fluctuations. The PPA
also obligates the BPDB to supply all the natural gas requirements of the
project at a pre-determined base cost adjusted to fluctuations on actual landed
cost of the fuel in Bangladesh. The BPDB's obligations under the agreement are
guaranteed by the Government of Bangladesh. In 1999, the project received $87
million in financing and political risk insurance from the Overseas Private
Investment Corporation. The Company obtained separate political risk coverage
for its equity interest in this project.
During 2002, the Company was unable to renew a letter of credit related
to this project in the approximate amount of $600,000, the purpose of which was
to partially backstop the project entity's obligations under the PPA. As a
result, El Paso agreed to temporarily provide this letter of credit, until the
next renewal in July, 2003. In the event the Company is unable to reinstitute
this letter of credit or provide suitable alternate security, El Paso may
attempt to exercise certain rights to trap project cash flows otherwise intended
for the Company, or to purchase the Company's equity interest in the project. It
is uncertain at this time whether the Company will be able to reinstate this
letter of credit or provide alternate security, or whether El Paso will attempt
to exercise remedies if the Company cannot do so.
In 1999, the Company acquired ownership interests in two 122 MW
gas-fired combined cycle facilities in Thailand: the Sahacogen facility and the
Rojana Power facility. On March 28, 2002 the Company sold all its interests in
both facilities as well as its interest in the operating company to its local
partners in the respective projects.
The Company owned an approximately 12% interest in Empresa Valle
Hermoso ("EVH") which was formed by the Bolivian government as part of the
capitalization of the government-owned utility ENDE. EVH owns and operates 182
MW of gas-fired generating capacity. The Company also participated in a joint
venture that supplied EVH with management services support. On December 5, 2002,
the Company sold its interests in Empresa Valle Hermoso.
The Company owns a 50% equity interest in a 15 MW natural gas-fired
cogeneration project in the Province of Murcia, Spain (the "Linasa Project").
The Linasa Project is operated by a subsidiary of the Company. The electrical
output of the Linasa Project is being sold under a long term purchase contract
to the Spanish electrical utility, Iberdrola, at governmentally-established
preferential rates for cogeneration projects (currently expected to extend until
2007) and at market rates thereafter. The thermal output and a portion of the
electrical output from the Linasa Project are being sold to the Company's 50%
partner, Industria Jabonera LINA S.A., a soap and detergent manufacturer, under
a long term energy service agreement. The natural gas that fuels the project is
supplied by BP under a five-year supply contract at a set discount off the
Spanish governments quarterly regulated maximum natural gas price.
- Diesel/Heavy Fuel Oil.
The Company owns interests in three diesel engine facilities in The
Philippines.
The Bataan Cogeneration project is a 65 MW facility that is owned by
the Company and has a contract to sell its electrical output to the National
Power Corporation (with which it also has entered into a fuel management
agreement for fuel supply) and the Bataan Export Processing Zone Authority. This
contract expires in 2004. The Company also operates this project. After this
date, the Company believes that the projects revenues will not be sufficient to
cover its costs. As a result, the Company wrote off its investment in this
project in 2002.
The Company owns a minority interest in the Island Power project, a 7
MW facility that has a long term power contract with the National Power
Corporation. The Company does not believe its equity interest in this project
has any value and in 1998 wrote off its investment. This project is not operated
by the Company. The Company is exploring means of divesting its interest in this
facility to the holders of the majority interest. It is uncertain at this time
whether the Company would realize any value from such a sale.
A Company subsidiary owns and operates the Magellan cogeneration
project, a 63 MW diesel engine electric generating facility located in the
province of Cavite, The Philippines. This project sells a portion of its energy
and capacity to the National Power Corporation and a portion to the Cavite
Export Processing Zone Authority ("PEZA") pursuant to long term PPAs. On January
3, 2002, PEZA, the main power off-taker for this project, served the project
with notice of termination of the PPA for alleged non-performance by the
project. The Company has sought a court injunction against termination of the
PPA and to require arbitration of the dispute which involves alleged
non-reliable operations and alleged improper substitution of National Power
Corporation power for Magellan production. On February 6, 2002, The Regional
Trial Court, National Capital Judicial Region, Branch 115, Pasay City issued a
temporary restraining order barring PEZA from terminating the PPA. On April 5,
2002 after a series of hearings, such Court replaced such temporary restraining
order with a preliminary injunction. Such preliminary injunction restrains PEZA
from terminating the PPA until such time as the merits of the case are resolved.
If such case were ultimately to be decided in favor of PEZA, the project would
lose not only the PPA but also that portion of the plant site under lease from
PEZA as such lease is tied to the PPA. Under current high fuel pricing and low
PEZA tariff conditions, the Company believes that the project revenues will be
insufficient to cover both operating costs and debt service beyond 2003. As a
result, the Company wrote off its investment in this project in 2002.
In 1999, the Company acquired the rights to contruct and own an equity
interest in a 105 MW heavy fuel oil-fired generating facility located near
Samalpatti, Tamil Nadu, India. This project achieved commercial operation during
the first quarter of 2001. The project is operated by a subsidiary of the
Company. The Company owns a 60% interest in the project company. Shapoorji
Pallonji Infrastructure Capital Co. Ltd. and its affiliates own 29% of such
equity with the remainder of 11% being held by Wartsila India Power Investment,
LLC. The electrical output of the project is sold to the Tamil Nadu Electricity
Board ("TNEB") pursuant to a long term agreement with a tariff with a fuel
pass-through at a specified heat rate, a fixed operation and maintenance cost,
and return on equity. TNEB obligations are guaranteed by the government of the
State of Tamil Nadu. Bharat Petroleum Corporation, Ltd. supplies the oil
requirements of the project through a fifteen-year fuel supply agreement based
on market prices.
In 2000, the Company acquired a controlling interest in its second
Indian project, the 106 MW Madurai project located at Samayanallur in the State
of Tamil Nadu, India. The project began commercial operation in the fourth
quarter of 2001. The Company owns approximately 75% of the project equity, and
operates the project through a subsidiary. The balance of the project ownership
interests are held by individuals who originally developed the project. The
electrical output of the project is sold to the Tamil Nadu Electricity Board
("TNEB") pursuant to a long term agreement with a tariff with a fuel
pass-through tariff at a specified heat rate, operation and maintenance cost,
and return on equity. TNEB obligations are guaranteed by the government of the
State of Tamil Nadu. Indian Oil Corporation, Ltd. supplies the oil requirements
of the project through a fifteen-year fuel supply agreement based on market
prices.
Due to a lack of funds and generally poor financial condition, the TNEB
has failed to pay the full amount due under the PPAs for both the Samalpatti and
Madurai projects. To date, the TNEB has paid that portion of its payment
obligations (approximately 89% with respect to Samalpatti, and 86% with respect
to Madurai) representing each project's operating costs, fuel costs and debt
service. The TNEB has indicated a desire to renegotiate tariffs for both
projects.
(b) INTERNATIONAL PROJECT SUMMARIES.
Summary information with respect to the Company's projects(1) that are
currently operating or under construction is provided in the following table:
DATE OF
ACQUISITION/
NATURE OF COMMENCEMENT
LOCATION SIZE INTEREST(1) OF OPERATIONS
A. HYDROELECTRIC
1. Rio Volcan Costa Rica 16MW Part Owner/Operator 1997
2. Don Pedro Costa Rica 16MW Part Owner/Operator 1996
----
SUBTOTAL 32MW
B. NATURAL GAS
1. Haripur(3) Bangladesh 120MW Part Owner/Operator 1999
2. Linasa(2) Spain 15MW Part Owner/Operator 2000
----
SUBTOTAL 135MW
C. COAL
1. Quezon(4) The Philippines 510MW Part Owner/Operator 2000
2. Lin'an(5) China 24MW Part Owner/Operator 1997
3. Huantai(5) China 36MW Part Owner 1997
4. Yanjiang(6) China 24MW Part Owner/Operator 1997
----
SUBTOTAL 594MW
D. DIESEL/HEAVY FUEL OIL
1. Island Power The Philippines 7MW Part Owner 1996
Corporation(7)
2. Bataan Cogeneration The Philippines 65MW Owner/Operator 1996
3. Magellan Cogeneration The Philippines 63MW Owner/Operator 1999
4. Samalpatti(5) India 05MW Part Owner/Operator 2001
5. Madurai(8) India 106MW Part Owner/Operator 2001
-----
SUBTOTAL 346MW
E. WASTE TO ENERGY
1. Trezzo Italy 15MW Part Owner/Operator 2003 (est.)
2. San Vittore Italy 15MW Operator 2002
TOTAL INTERNATIONAL MW
IN OPERATION 1,137MW
NOTES
(1) Covanta's ownership and/or operation interest in each facility listed
below extends at least into calendar year 2007.
(2) The Company has a 50% ownership interest in the project.
(3) The Company has an approximate 45% interest in this project. This
project is capable of operating through combustion of diesel oil in
addition to natural gas.
(4) The Company has an approximate 26% ownership interest in this project.
(5) The Company has a 60% ownership interest in this project.
(6) The Company has a 96% ownership interest in this project.
(7) The Company has an approximate 40% ownership interest in this project.
(8) The Company has an approximate 75% interest in this project.
(9) The Company has a 40% interest in the operator Ambiente 2000 S.r.l.
("A2000"). Operation by A2000 begins one year after the project begins
commercial operation provided certain performance criteria are
satisfied.
OTHER
As of December 31, 2002, the principal Entertainment assets that remain
unsold are the businesses associated with the Arenas. (See Part II, Footnote 4
to the Consolidated Financial Statements Management's Discussion and Analysis of
Financial Condition and Results of Operations, Discontinued Operations and Net
Assets Held For Sale.)
On December 31, 2001, the Company sold the major portion of its
aviation fueling business. The sale included all of Covanta's aviation fueling
operations at 19 airports in the United States, Canada and Panama, but did not
include Covanta's operations at the three major New York City area airports. On
December 31, 2002, pursuant to an order of the Bankruptcy Court, the Company
sold the fueling and fuel facility management businesses at the three major New
York City area airports.
Also, pursuant to orders of the Bankruptcy Court, the Company sold its
interests in Casino Iguazu, a casino and hotel complex on September 5, 2002 and
La Rural Fairgrounds and Exhibition Center on December 4, 2002, both of which
are located in Argentina.
On January 9, 2003, the Team filed for protection with the Ontario
Superior Court of Justice and was granted protection under Canada's Companies'
Creditors Arrangement Act ("CCAA"). PricewaterhouseCoopers Inc. was appointed as
monitor under the CCAA insolvency proceedings and is supervising endeavors to
sell the Team's franchise under the direction of the Ontario Superior Court of
Justice. The Team's senior secured lenders, Canadian Imperial Bank of Commerce
and Fleet National Bank, arranged for senior debtor-in-possession financing to
the Team, for a total commitment of about $17,500,000, of which approximately
$14,450,000 was drawn as of March 20, 2003. The Company, as senior secured
creditor to Palladium Corporation, is pursuing possibilities for a sale of its
interests in the Corel Centre arena.
The Company is exploring possibilities for the disposition of its
interest in the Anaheim Arena.
CAUTIONARY STATEMENTS
Certain statements made in this Annual Report on Form 10-K and the
documents incorporated by reference in this Annual Report are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements include, without limitation, statements regarding
Covanta's expectations, beliefs, intentions or future strategies and statements
that contain such words as "expects," "anticipates," "intends," "believes" and
other similar expressions. Such forward-looking statements are inherently
uncertain, and actual results may 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 updated any forward-looking statements.
The Company cautions investors that its business and financial performances are
subject to very substantial risks and uncertainties.
Factors that could cause actual results to differ materially from those
suggested by any such statements include, but are not limited to, those
discussed or identified from time to time in the Company's public filings with
the SEC and, more generally, general economic conditions, including changes in
interest rates and the performance of the financial markets; changes in domestic
and foreign laws, regulations, and taxes; changes in competition and pricing
environments; and regional or general changes in asset valuations.
MARKETS, COMPETITION AND GENERAL BUSINESS CONDITIONS
(a) GENERAL BUSINESS CONDITIONS.
Covanta's business can be adversely affected by general economic
conditions, war, inflation, adverse competitive conditions, governmental
restrictions and controls, change in law, natural disasters, energy shortages,
fuel cost and availability, weather, the adverse financial condition of
customers and suppliers, various technological changes and other factors over
which Covanta has no control.
Other than expansions of certain waste-to-energy facilities, geothermal
facilities and continued development of certain water/wastewater projects as
described above under General Approach to Domestic Projects, the Company does
not expect to engage in material development activity until it emerges from
Chapter 11.
The Company expects upon emergence from Chapter 11 that competition for
new projects will be intense in all domestic markets in which the Company
conducts or intends to conduct its businesses, and its businesses will be
subject to a variety of competitive and market influences. The costs of
developing new projects include staffing costs, contract and site acquisition,
feasibility and environmental studies, technical, legal and financial analysis,
and in some cases the preparation of extensive proposals in response to public
or private requests for proposals. Development of some projects involves
substantial risks which are not within the Company's control. Success of a
project may depend upon obtaining acceptable contractual arrangements and
financing, appropriate sites, acceptable licenses, environmental permits and
governmental approvals in a timely manner. Even after the required contractual
arrangements are achieved, implementation of a project is often subject to
substantial conditions that may be outside the control of the Company. In some,
but not all, circumstances, the Company will make contractual arrangements for
the partial recovery of development costs if a project fails to be implemented
for reasons beyond the Company's control.
Once a project is financed and constructed, Covanta's business can be
impacted by a variety of risk factors which can affect profitability over the
life of a project. Some of these risks are at least partially within the
Company's control, such as successful operation in compliance with law and the
presence or absence of labor difficulties or disturbances. Other risk factors
are largely out of the Company's control and may have an adverse impact on a
project over a long term operation. These risks include changes in law, severe
weather and related casualty events, and the emergence of technologies that
offer less expensive means of generating electricity or of providing water or
wastewater treatment services.
(b) TECHNOLOGY.
(i) Waste-to-Energy
The Company has the exclusive right to market in the United States the
proprietary mass-burn technology of Martin GmbH fur Umwelt und Energietechnik
("Martin"). All of the waste-to-energy projects that the Company has constructed
use the Martin technology, although the Company does own and/or operate some
projects using other technologies. The principal feature of the Martin
technology is the reverse-reciprocating stoker grate upon which the waste is
burned. The patent for the basic stoker grate technology used in the Martin
technology expired in 1989, and there are various other expired and unexpired
patents relating to the Martin technology. The Company believes that it is
Martin's know-how and worldwide reputation in the waste-to-energy field, and the
Company's know-how in designing, constructing and operating waste-to-energy
facilities, rather than the use of patented technology, that is important to the
Company's competitive position in the waste-to-energy industry in the United
States. The Company does not believe that the expiration of the patent covering
the basic stoker grate technology or patents on other portions of the Martin
technology will have a material adverse effect on the Company's financial
condition or competitive position.
The Company believes that mass-burn technology is now the predominant
technology used for the combustion of solid waste. The Company believes that the
Martin technology is a proven and reliable mass-burn technology, and that its
association with Martin has created significant name recognition and value for
the Company's domestic waste-to-energy business.
The Company's rights to the Martin technology are provided pursuant to
an agreement between Martin and the Company (the "Cooperation Agreement"). The
Cooperation Agreement gives the Company exclusive rights to market the Martin
technology in the United States, Canada, Mexico, Bermuda, certain Caribbean
countries, most of Central and South America and Israel. Martin is obligated to
assist the Company in installing, operating and maintaining facilities
incorporating the Martin technology. The 15-year term of the Cooperation
Agreement renews automatically each year unless notice of termination is given,
in which case the Cooperation Agreement would terminate 15 years after such
notice. Additionally, the Cooperation Agreement may be terminated by either
party if the other fails to remedy a material default within 90 days of notice.
The Cooperation Agreement is also terminable by Martin if there is a change of
control of the Company (as defined in the Cooperation Agreement). Termination
would not affect the rights of the Company to design, construct, operate,
maintain or repair waste-to-energy facilities for which contracts have been
entered into or proposals made prior to the date of termination.
(ii) Water and Wastewater
During 1999, the Company purchased a controlling interest in DSS
Environmental, Inc., which owns the patent for the DualSandTM filtration
technology. The Company believes that this technology offers superior
performance at a competitive cost, and that it will have wide application for
both water and wastewater projects. During 2001 and 2002, Covanta was awarded
several small projects in upstate New York for the supply of DualSandTM systems
to municipalities and other entities that are improving existing systems. The
Company believes that its ability to offer the DualSandTM system, and the
system's scalability, will enhance its competitiveness elsewhere in North
America where larger water and wastewater systems are required.
(c) CALIFORNIA CONDITIONS.
As previously mentioned, significant market disruptions occurred in the
California electricity markets in 2001. The electric industry restructuring
enacted by the California legislature failed during the last half of 2000,
resulting in both SCE and PG&E being unable to meet their obligations to pay for
electricity purchased from the Company's projects. SCE did not pay the Company
for electricity delivered from November 2000 to March 2001. PG&E did not pay the
Company for electricity delivered from December 2000 to April 2001. The majority
of Covanta's projects in both PG&E's and SCE's service territories entered into
agreements in late 2001, whereby the projects agreed to forego lawsuits and
claims against the utilities in exchange for PPA amendments providing for five
years of fixed pricing. SCE paid the receivable in full plus interest on March
2, 2002. In February 2002, the PG&E bankruptcy court approved a payment plan by
which, starting on February 28, 2002, PG&E made a lump sum interest payment and
the balance of the receivable, plus interest, was to be paid in twelve equal
installments. PG&E made the final payment in February 2003.
EMPLOYEE LABOR RELATIONS
Covanta and its subsidiaries currently employ approximately 2,100 U.S.
and foreign employees in its core energy business.
Certain employees of Covanta are employed pursuant to collective
bargaining agreements with various unions. During 2000, Covanta successfully
renegotiated collective bargaining agreements in certain of its business sectors
with no strike-related loss of service. Covanta considers relations with its
employees to be good and does not anticipate any significant labor disputes in
2003.
ENVIRONMENTAL REGULATORY LAWS
(a) DOMESTIC.
Covanta's business activities in the United States are pervasively
regulated pursuant to federal, state and local environmental laws. Federal laws,
such as the Clean Air Act and Clean Water Act, and their state counterparts,
govern discharges of pollutants to air and water. Other federal, state and local
laws comprehensively govern the generation, transportation, storage, treatment
and disposal of solid and hazardous waste, and also regulate the storage and
handling of petroleum products (such laws and the regulations thereunder,
"Environmental Regulatory Laws").
The Environmental Regulatory Laws and other federal, state and local
laws, such as the Comprehensive Environmental Response Compensation and
Liability Act ("CERCLA" or "Superfund") (collectively, "Environmental
Remediation Laws"), make Covanta potentially liable on a joint and several basis
for any onsite or offsite environmental contamination which may be associated
with the Company's activities and the activities at sites, including landfills,
which the Company's subsidiaries have owned, operated or leased or at which
there has been disposal of residue or other waste handled or processed by such
subsidiaries or at which there has been disposal of waste generated by the
Company's activities. Through its subsidiaries, the Company leases and operates
a landfill in Haverhill, Massachusetts. Some state and local laws also impose
liabilities for injury to persons or property caused by site contamination. Some
Service Agreements provide for indemnification of the operating subsidiaries
from some such liabilities. In addition, other subsidiaries involved in landfill
gas projects have access rights to landfills pursuant to certain leases at
landfill sites which permit the installation, operation and maintenance of
landfill gas collection systems. A portion of these landfill sites is and has
been a federally-designated "Superfund" site. Each of these leases provide for
indemnification of the Company subsidiary from some liabilities associated with
these sites.
The Environmental Regulatory Laws require that many permits be obtained
before the commencement of construction and operation of waste-to-energy,
independent power and water and wastewater projects, and further require that
permits be maintained throughout the operating life of the facility. There can
be no assurance that all required permits will be issued or re-issued, and the
process of obtaining such permits can often cause lengthy delays, including
delays caused by third-party appeals challenging permit issuance. Failure to
meet conditions of these permits or of the Environmental Regulatory Laws and the
corresponding regulations can subject an operating subsidiary to regulatory
enforcement actions by the appropriate governmental unit, which could include
fines, penalties, damages or other sanctions, such as orders requiring certain
remedial actions or limiting or prohibiting operation. To date, Covanta has not
incurred material penalties, been required to incur material capital costs or
additional expenses, nor been subjected to material restrictions on its
operations as a result of violations of environmental laws, regulations or
permits.
The Environmental Regulatory Laws and federal and state governmental
regulations and policies governing their enforcement are subject to revision.
New technology may be required or stricter standards may be established for the
control of discharges of air or water pollutants for storage and handling of
petroleum products or chemicals or for solid or hazardous waste or ash handling
and disposal. Thus, as new technology is developed and proven, it may be
required to be incorporated into new facilities or major modifications to
existing facilities. This new technology may often be more expensive than that
used previously.
The Environmental Remediation Laws prohibit disposal of hazardous waste
other than in small, household-generated quantities at the Company's municipal
solid waste facilities. The Service Agreements recognize the potential for
improper deliveries of hazardous wastes and specify procedures for dealing with
hazardous waste that is delivered to a facility. Although certain Service
Agreements require the Company's subsidiary to be responsible for some costs
related to hazardous waste deliveries, to date no operating subsidiary has
incurred material hazardous waste disposal costs.
Domestic drinking water facilities developed in the future by the
Company will be subject to regulation of water quality by the EPA under the
Federal Safe Drinking Water Act and by similar state laws. Domestic wastewater
facilities are subject to regulation under the federal Clean Water Act and by
similar state laws. These laws provide for the establishment of uniform minimum
national water quality standards, as well as governmental authority to specify
the type of treatment processes to be used for public drinking water. Under the
federal Clean Water Act, the Company may be required to obtain and comply with
National Pollutant Discharge Elimination System permits for discharges from its
treatment stations. Generally, under its current contracts, the Client Community
is responsible for fines and penalties resulting from the delivery to the
Company's treatment facilities of water not meeting standards set forth in those
contracts.
(b) INTERNATIONAL.
Among the Company's objectives is providing energy generating and other
infrastructure through environmentally protective project designs, regardless of
the location of a particular project. This approach is consistent with the
increasingly stringent environmental requirements of multilateral financing
institutions, such as the World Bank, and also with the Company's experience in
domestic waste-to-energy projects, where environmentally protective facility
design and performance is required. Compliance with environmental standards
comparable to those of the United States may be conditions to the provision of
credit by multilateral banking agencies as well as other lenders or credit
providers. The laws of other countries also may require regulation of emissions
into the environment, and provide governmental entities with the authority to
impose sanctions for violations, although these requirements are generally not
as rigorous as those applicable in the United States. As with domestic project
development, there can be no assurance that all required permits will be issued,
and the process can often cause lengthy delays.
ENERGY AND WATER REGULATIONS
The Company's businesses are subject to the provisions of federal,
state and local energy laws applicable to the development, ownership and
operation of their domestic facilities and to similar laws applicable to their
foreign operations. Federal laws and regulations applicable to many of the
Company's domestic energy businesses impose limitations on the types of fuel
used, prescribe the degree to which these businesses are subject to federal and
state utility-type regulation and restrict the extent to which these businesses
may be owned by one or more electric utilities. State regulatory regimes govern
rate approval and the other terms and conditions pursuant to which utilities
purchase electricity from independent power producers, except to the extent such
regulation is governed by federal law.
Pursuant to the federal Public Utility Regulatory Policies Act
("PURPA"), the Federal Energy Regulatory Commission (the "FERC") has promulgated
regulations that exempt qualifying facilities ("QFs") (facilities meeting
certain size, fuel and ownership requirements from compliance with certain
provisions of the Federal Power Act (the "FPA"), the Public Utility Holding
Company Act of 1935 ("PUHCA"), and certain state laws regulating the rates
charged by, or the financial and organizational activities of, electric
utilities. PURPA was enacted in 1978 to encourage the development of
cogeneration facilities and other facilities making use of non-fossil fuel power
sources, including waste-to-energy facilities. The exemptions afforded by PURPA
to QFs from regulation under the FPA and PUHCA and most aspects of state
electric utility regulation are of great importance to the Company and its
competitors in the waste-to-energy and independent power industries.
Except with respect to waste-to-energy facilities with a net power
production capacity in excess of 30 MW (where rates are set by the FERC), state
public utility commissions must approve the rates, and in some instances other
contract terms, by which public utilities purchase electric power from QFs.
PURPA requires that electric utilities purchase electric energy produced by QFs
at negotiated rates or at a price equal to the incremental or "avoided" cost
that would have been incurred by the utility if it were to generate the power
itself or purchase it from another source. PURPA does not expressly require
public utilities to enter into long term contracts to purchase the output
supplied by QFs. Many state public utility commissions have approved longer-term
PPAs as part of their implementation of PURPA.
Under PUHCA, any entity owning or controlling 10% or more of the voting
securities of a "public utility company" or company which is a "holding company"
of a public utility company is subject to registration with the SEC and
regulation by the SEC unless exempt from registration. Under PURPA, most
projects that satisfy the definition of a "qualifying facility" are exempt from
regulation under PUHCA. Under the Energy Policy Act of 1992, projects that are
not QFs under PURPA but satisfy the definition of an "exempt wholesale
generator" ("EWG") are not deemed to be public utility companies under PUHCA.
Finally, projects that satisfy the definition of "foreign utility companies" are
exempt from regulation under PUHCA. The Company believes that all of its
operating projects involved in the generation, transmission and/or distribution
of electricity, both domestically and internationally, qualify for an exemption
from PUHCA and that it is not and will not be required to register with the SEC
under PUHCA.
In the past, Congress has considered legislation to repeal PURPA
entirely, or at least to repeal the obligation of utilities to purchase power
from QFs. There is continuing support for grandfathering existing QF contracts
if such legislation is passed. Various bills have also proposed repeal of PUHCA.
Repeal of PUHCA would allow both independent power producers and vertically
integrated utilities to acquire electric assets throughout the United States
that are geographically widespread, eliminating the current requirement that the
utility's electric assets be capable of physical integration. Also, registered
holding companies would be free to acquire non-utility businesses, which they
may not do now, with certain limited exceptions. With the repeal of PURPA or
PUHCA, competition for independent power generators from utilities would likely
increase. This is likely to have little or no impact on Covanta's existing
projects, but may mean additional competition from highly capitalized companies
seeking to develop projects in the U.S.
In addition, the FERC, many state public utility commissions and
Congress have implemented or are considering a series of proposals to
restructure the electric utility industry in the United States to permit utility
customers to choose their utility supplier in a competitive electric energy
market. The FERC has issued a series of orders requiring utilities to offer
wholesale customers and suppliers open access on their transmission lines on a
comparable basis to the utilities' own use of the line. All public utilities
have already filed "open access" tariffs to implement this requirement. As the
trend toward increased competition continues, the utilities contend that they
are entitled to recover from departing customers their fixed costs that will be
"stranded" by the ability of their wholesale customers (and perhaps eventually,
their retail customers) to choose new electric power suppliers. These include
the costs utilities are required to pay under many QF contracts which the
utilities view as excessive when compared with current market prices. Many
utilities are therefore seeking ways to lower these contract prices, or rescind
or buy out these contracts altogether, out of concern that their shareholders
will be required to bear all or part of such "stranded" costs. Regulatory
agencies to date have recognized the continuing validity of approved PPAs, and
have rejected attempts by some utilities to abrogate these contracts. At the
same time, regulatory agencies have encouraged renegotiations of power contracts
where rate payer savings can be achieved as a result. The Company anticipates
that the regulatory impetus to restructure "above market" PPAs will continue in
many of the jurisdictions where it owns or operates generating facilities.
Future U.S. electric rates may be deregulated in a restructured U.S. electric
utility industry and increased competition may result in lower rates and less
profit for U.S. electricity sellers developing new projects. Falling electricity
prices and uncertainty as to the future structure of the industry can be
expected to inhibit U.S. utilities from entering into long term power purchase
contracts. On the other hand, deregulation could open up markets for the sale of
electricity, including retail markets, previously available only to regulated
utilities. While the impact of the recent California situation (See Markets,
Competition And General Business Conditions, above) cannot be predicted, it has
led some states and their public service commissions to re-examine the timing,
nature and desirability of electric utility restructuring.
The Company presently has ownership and operating interests in electric
generating projects outside the United States. Most countries have expansive
systems for the regulation of the power business. These generally include
provisions relating to ownership, licensing, rate setting and financing of
generating and transmission facilities.
Covanta's water and wastewater business may be subject to the
provisions of state and local utility laws applicable to the development,
ownership and operation of water supply and wastewater facilities. Whether such
laws apply depends upon the local regulatory scheme as well as the manner in
which the Company provides its services. Where such regulations apply, they may
relate to rates charged, services provided, accounting procedures, acquisitions
and other matters. In the United States, rate regulations have typically been
structured to provide a predetermined return on the regulated entities'
investments. The regulated entity benefits from efficiencies achieved during the
period for which the rate is set.
Item 2. PROPERTIES
During 2000, Covanta moved its executive offices from New York City to
Fairfield, New Jersey. The Company's executive offices are now located at 40
Lane Road, Fairfield, New Jersey, in an office building located on a 5.4 acre
site owned by Covanta Projects, Inc. It also leases 11,615 square feet of office
space in Fairfax, Virginia.
The following table summarizes certain information relating to the
locations of the properties owned or leased by Covanta Energy Group, Inc. or its
subsidiaries:
APPROXIMATE
SITE SIZE
LOCATION (IN ACRES)(1) SITE USE NATURE OF
INTEREST(2)
1. Fairfield, New Jersey 5.4 Office space Own
2. Fairfax, Virginia 11,615 ft.2 Office space Lease
3. Marion County, Oregon 15.2 Waste-to-energy facility Own
4. Alexandria/Arlington, Virginia 3.3 Waste-to-energy facility Lease
5. Bristol, Connecticut 18.2 Waste-to-energy facility Own
6. Bristol, Connecticut 35 Landfill Lease
7. Indianapolis, Indiana 23.5 Waste-to-energy facility Lease
8. Stanislaus County, California 16.5 Waste-to-energy facility Lease
9. Babylon, New York 9.5 Waste-to-energy facility Lease
10. Haverhill, Massachusetts 12.7 Waste-to-energy facility Lease
11. Haverhill, Massachusetts 16.8 RDF processing facility Lease
12. Haverhill, Massachusetts 20.2 Landfill Lease
13. Lawrence, Massachusetts 11.8 RDF power plant (closed) Own
14. Lake County, Florida 15 Waste-to-energy facility Own
15. Wallingford, Connecticut 10.3 Waste-to-energy facility Lease
16. Fairfax County, Virginia 22.9 Waste-to-energy facility Lease
17. Union County, New Jersey 20 Waste-to-energy facility Lease
18. Huntington, New York 13 Waste-to-energy facility Lease
19. Warren County, New Jersey 19.8 Waste-to-energy facility Lease
20. Hennepin County, Minnesota 14.6 Waste-to-energy facility Lease
21. Tulsa, Oklahoma 22 Waste-to-energy facility Lease
22. Onondaga County, New York 12 Waste-to-energy facility Lease
23. New Martinsville, West Virginia N/A Hydroelectric power generating Lease
24. Heber, California 8 Geothermal resource field Own
25. Heber, California 18 Geothermal power plant Own
26. Heber, California 40 Geothermal power plant Lease
27. Bataan, The Philippines 3,049 m2 Diesel power plant Lease
28. Zhejiang Province, 33,303 m2 Coal-fired Land Use Right
People's Republic of China cogeneration facility reverts to China Joint
Venture Partner upon
termination of Joint
Venture Agreement.
29. Shandong Province, 33,303 m2 Coal-fired Land Use Right
People's Republic of China cogeneration facility reverts to China Joint
Venture Partner upon
termination of Joint
Venture Agreement.
30. Jiangsu Province, 65,043.33 m2 Coal-fired Land Use Right
People's Republic of China cogeneration facility reverts to China Joint
Venture Partner upon
termination of Joint
Venture Agreement.
31. Casa Diablo Hot Springs, 1,510 Geothermal projects Land Use Rights from
California Geothermal
Resource Lease
32. Rockville, Maryland N/A Landfill gas project Lease
33. San Diego, California N/A Landfill gas project Lease
34. Oxnard, California N/A Landfill gas project Lease
35. Sun Valley, California N/A Landfill gas project Lease
36. Salinas, California N/A Landfill gas project Lease
37. Santa Clara, California N/A Landfill gas project Lease
38. Stockton, California N/A Landfill gas project Lease
39. Los Angeles, California N/A Landfill gas project Lease
40. Burney, California 40 Wood waste project Lease
41. Jamestown, California 26 Wood waste project Own (50%)
42. Westwood, California 60 Wood waste project Own
43. Oroville, California 43 Wood waste project Lease
44. Whatcom County, Washington N/A Hydroelectric project Own (50%)
45. Weeks Falls, Washington N/A Hydroelectric project Lease
46. Cavite, The Philippines 13,122 m2 Diesel project Lease
47. Cavite, The Philippines 10,200 m2 Diesel Power Plant Lease
48. Manila, The Philippines 468 m2 Office space Lease
49. Bangkok, Thailand 675.63 m2 Office space Lease
50. Chennai, India 1797 ft2 Office space Lease
51. Samalpatti, India 2,546 ft2 Office space Lease
52. Samayanallur, India 1,300 ft2 Office space Lease
53. Samayanallur, India 17.09 Heavy fuel oil project Lease
54. Samayanallur, India 2.3153 Heavy fuel oil project Lease
55. Samalpatti, India 30.3 Heavy fuel oil project Lease
56. Shanghai, China 144.7 m2 Office space Lease
57. Burney, California 3,000 ft2 Office space Lease
58. East Syracuse, New York 6,200 ft2 Office space Lease
- -----------------
(1) All sizes are in acres unless otherwise indicated.
(2) All ownership or leasehold interests relating to projects are subject
to material liens in connection with the financing of the related
project, except those listed above under items 12, 29-32, and 34-41. In
addition, all leasehold interests extend at least as long as the term
of applicable project contracts, and several of the leasehold interests
are subject to renewal and/or purchase options.
ITEM 3. LEGAL PROCEEDINGS
On April 1, 2002, Covanta Energy Corporation and 123 of its domestic
subsidiaries filed voluntary petitions for reorganization under the Bankruptcy
Code in the Bankruptcy Court. Since April 1, 2002, one additional subsidiary has
filed a petition for reorganization under Chapter 11 of the Bankruptcy Code. In
addition, four subsidiaries which had filed petitions on April 1, 2002 have been
sold as part of the Company's disposition of non-core assets, and are no longer
owned by the Company or part of the bankruptcy proceeding. It is possible that
additional subsidiaries will file petitions for reorganization under Chapter 11
and be included as part of the Company's plan of reorganization. The Chapter 11
Cases are being jointly administered under the caption "In re Ogden New York
Services, Inc., et al., Case No. 02-40826 (CB) through 02-40949 (CB) and
02-16322 (CB)." The debtors in the Chapter 11 cases (collectively, the
"Debtors") are currently operating their business as debtors in possession
pursuant to the Bankruptcy Code.
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.
On December 31, 2002, the Company divested its remaining Aviation
assets, consisting of fueling operations at three airports. Ogden New York
Services, Inc., a subsidiary of Covanta Energy Corporation, retained certain
environmental liabilities relating to the John F. Kennedy International Airport,
described below. In addition, the Company agreed to indemnify the buyer for
various other liabilities, including certain environmental matters; however, the
buyer's sole recourse is an offset right against payments it owes the Company,
under a $2.6 million promissory note delivered as part of the consideration for
this sale.
Prior to filing for Chapter 11 reorganization on April 1, 2002, the
Company agreed to indemnify various other 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. To date such indemnification has been sought with respect to alleged
environmental damages at the Miami Dade International 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 believes that these indemnities are pre-petition unsecured
obligations that are subject to compromise.
Motions for relief from the Chapter 11 automatic stay have been filed
with the Bankruptcy Court by a group of plaintiffs, led by Martin County Coal
Corporation, to join Ogden Environmental and Energy Services (OEES), a
subsidiary of the Company, as a third party defendant to several pending
Kentucky state court litigations arising from an October 2000 failure of a mine
waste impoundment that resulted in the release of approximately 250 million
gallons of coal slurry. Plaintiffs allege that OEES is liable to Martin County
Coal in an unspecified amount for contribution and/or indemnification arising
from an independent contractor agreement to perform engineering and
technological services with respect to the impoundment from 1994 to 1996. OEES
has not been a party to the underlying litigations to date, some of which have
been pending for two years, and is in the process of analyzing the claims
against it and an appropriate response.
The potential costs related to all of the foregoing matters and the
possible impact on future operations are uncertain due in part to the complexity
of governmental laws and regulations and their interpretations, the varying
costs and effectiveness of cleanup technologies, the uncertain level of
insurance or other types of recovery and the questionable level of the Company's
responsibility. Although the ultimate outcome and expense of any litigation,
including environmental remediation, is uncertain, the Company believes that the
following proceedings will not have a material adverse effect on the Company's
consolidated financial position or results of operations.
(a) Environmental Matters
(i) On June 8, 2001, the EPA named Ogden Martin Systems of
Haverhill, Inc. as one of 2,000 Potentially Responsible
Parties ("PRPs") at the Beede Waste Oil Superfund Site,
Plaistow, New Hampshire (the "Site"). The EPA alleges that the
Haverhill facility disposed of 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 $17 million and
estimates that the total cost of cleanup of this site will be
approximately $65 million. A PRP group has formed and the
Company is participating in PRP group discussions towards
settlement of the EPA's claims. To date, the Company has not
received any settlement proposals from EPA. 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 PRPs, the Company's
share of liability, if any, cannot be determined at this time.
Ogden Martin Systems of Haverhill is not a Chapter 11 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 million in response and investigation costs
and expects to spend an additional $250 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
has been sold and the Company has agreed to 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. Ogden Aviation, Inc. is a Chapter 11 debtor.
(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 a petition for review of the
order pending. Settlement discussions in this matter are
underway. Chinese station and the Company's subsidiary which
owns a partnership interest in Chinese station are not Chapter
11 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 approximately $1.9 million in technical contractor
costs and 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 past and future
cleanup costs and legal fees incurred in connection with 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 $74.5 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
Company 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 a subsidiary of the Company 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 the subsidiary of the Company generated hazardous
substances at 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 the subsidiary of the
Company and over 90 other third-party defendants for costs
incurred and to be incurred in the 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. In addition to the foregoing, eleven claims of
unliquidated amounts have been filed in the Chapter 11
proceedings, each of which purports to assert that the Company
is liable for asbestos-related damages, apparently in reliance
upon theories of successor liability. 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. To the extent that claims are made
against such manufacturing subsidiaries or the Company that
are insured under occurrence based policies which the Company
had in place prior to its sale of its interests in these
companies, the Company must pay retentions of between $250,000
and $500,000 per occurrence depending on the policy year. The
policies have no aggregate limits of retention amounts. For
claims filed against the manufacturing subsidiaries, the
Company is entitled to reimbursement of such amounts from
Avondale. To date, there is an outstanding amount overdue from
Avondale for such reimbursement in excess of $2 million and
the Company has accordingly not paid the related self-insured
retention to the insurer. The Company believes that its
obligation to pay self-insured retentions to Travelers are
pre-petition claims and will be resolved in the Chapter 11
proceeding.
(ii) As previously disclosed, the Company commenced litigation
challenging an effort by a public authority located in
Onondaga County, New York (the ""Agency") to terminate its
contract with the Company for a waste-to-energy facility. On
or about August 13, 2002 the federal court for the Northern
District of New York granted the Agency's motion to remand the
matter to state court and denied the Company's motion to
transfer the matter to the Bankruptcy Court. The Agency
sought, in late 2002, a ruling from the state court confirming
its termination of its contract with the Company's operating
subsidiary, and at the same time obtained an order from the
U.S. District Court (NDNY) preventing the Company from seeking
to challenge its effort to confirm its alleged termination of
the contract. The District Court's order has been vacated by
the U.S. Court of Appeals for the 2nd Circuit, and the
Bankruptcy Court has issued a ruling that the Agency's efforts
in state court violated the automatic stay, and enjoined it
from proceeding further with such efforts. The Agency has
appealed a portion of the Bankruptcy Court's order to the U.S.
District Court (SDNY). The Agency has also filed a request
with the Bankruptcy Court asking that the automatic stay be
lifted to permit the state court action to proceed, which was
denied without prejudice on procedural grounds. Settlement
discussions have occurred among interested parties which would
involve a substantial restructuring of the project. It is
uncertain at this time whether they will be able to reach
agreement on this matter, or in the absence of an agreement
whether the Company's operating subsidiaries will be able to
successfully reorganize. 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. In addition, the Company could incur substantial
obligations to the limited partners in the project.
(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 the 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,
pre-petition obligations and such subsidiary could lose its
right to own and operate the project.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of Covanta during
the fourth quarter of 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Covanta Energy Corporation (Debtor in Possession) and Subsidiaries
PRICE RANGE OF STOCK AND DIVIDEND DATA
2002 2001
- ---------------------------------------------------------------------------
High Low High Low
Common:
First Quarter .............. $5.49 $0.56 $18.125 $15.00
Second Quarter.............. 0.09 0.015 22.85 16.05
Third Quarter............... 0.028 0.008 18.84 9.71
Fourth Quarter.............. 0.015 0.005 15.25 3.18
-------------------------------------------
Preferred:
First Quarter............... $16.10 $15.00 $100.00 $ 95.00
Second Quarter.............. 2.50 0.25 130.00 110.00
Third Quarter............... 0.35 0.35 105.00 90.00
Fourth Quarter.............. 0.25 0.25 81.00 75.00
-------------------------------------------
The information above reflects the high and low closing sale price for the
shares of the Company's common and $1.875 cumulative convertible preferred stock
on the New York Stock Exchange (the "Exchange") for 2001 and the first quarter
of 2002, and the high and low bid prices for such stock on the National
Quotation Bureau's Pink Sheets for the last three quarters of 2002. Such
over-the-counter quotations reflect inter-dealer prices without retail mark up,
mark down or commission and may not represent actual transactions.
On April 1, 2002, Covanta Energy Corporation and several of its domestic
subsidiaries filed for reorganization under Chapter 11 of the Bankruptcy Code.
On the same day, the New York Stock Exchange suspended trading of the Company's
common stock and $1.875 cumulative convertible preferred stock and began
processing an application to the SEC to delist the Company from the Exchange.
The SEC granted the application for the removal by Order dated May 16, 2002 and
issued an order removing the Company's stock from listing and registration on
the Exchange effective May 17, 2002. Since this date, the Company's shares are
traded on the National Quotation Bureau's Pink Sheets.
As of March 14, 2003 there were approximately 4,703 common stockholders and 619
preferred stockholders. See Statement of Shareholders Equity (Deficit) for
additional information related to common and preferred stock.
The Company suspended its common stock dividend in 1999. Quarterly dividends of
$.46875 per share were paid for the first quarter of 2002 and for the four
quarters of 2001 and 2000 on the $1.875 preferred stock. With the filing of
voluntary petitions for reorganization under Chapter 11 on April 1, 2002,
payments of preferred stock dividends were suspended.
In 1998, the Company's Board of Directors increased the authorization to
purchase shares of the Company's common stock up to a total of $200 million.
Through December 31, 1999, 2.2 million shares of common stock were purchased for
a total cost of $58.9 million. No shares have been purchased since February 22,
1999.
ITEM 6...SELECTED FINANCIAL DATA
Covanta Energy Corporation (Debtor in Possession) and Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
(In thousands of dollars, except per-share amounts)
TOTAL REVENUES FROM CONTINUING OPERATIONS.................. $ 920,280 $1,022,023 $ 953,449 $ 981,649 $ 904,342
---------- ---------- ---------- ---------- -----------
Income (loss) from continuing operations before
cumulative effect of change in accounting principle.... (153,187) (234,729) (89,782) (40,466) 37,248
Income (loss) from discontinued operations................. (17,866) 3,702 (139,503) (37,675) 49,722
Cumulative effect of change in accounting principle........ (7,842) (3,820)
---------- ---------- ---------- ---------- -----------
Net income (loss).......................................... (178,895) (231,027) (229,285) (81,961) 86,970
---------- ---------- ---------- ---------- -----------
BASIC EARNINGS (LOSS) PER SHARE:
Income (loss) from continuing operations before
cumulative effect of change in accounting principle.... (3.08) (4.73) (1.81) (0.82) 0.74
Income (loss) from discontinued operations................. (0.36) 0.08 (2.82) (0.77) 1.00
Cumulative effect of change in accounting principle........ (0.16) (0.08)
---------- ---------- ---------- ---------- -----------
Total...................................................... (3.60) (4.65) (4.63) (1.67) 1.74
---------- ---------- ---------- ---------- -----------
DILUTED EARNINGS (LOSS) PER SHARE:
Income (loss) from continuing operations before
cumulative effect of change in accounting principle.... (3.08) (4.73) (1.81) (0.82) 0.73
Income (loss) from discontinued operations................. (0.36) 0.08 (2.82) (0.77) 0.98
Cumulative effect of change in accounting principle........ (0.16) (0.08)
---------- ---------- ---------- ---------- -----------
Total...................................................... (3.60) (4.65) (4.63) (1.67) 1.71
---------- ---------- ---------- ---------- -----------
TOTAL ASSETS............................................... 2,840,107 3,247,152 3,298,828 3,728,658 3,649,044
---------- ---------- ---------- ---------- -----------
LONG-TERM DEBT (LESS CURRENT PORTION AND LIABILITIES
SUBJECT TO COMPROMISE)................................. 1,151,996 1,600,983 1,749,164 1,884,427 1,864,772
---------- ---------- ---------- ---------- -----------
SHAREHOLDERS' EQUITY (DEFICIT)............................ (172,313) 6,244 231,556 442,001 549,100
---------- ---------- ---------- ---------- -----------
SHAREHOLDERS' EQUITY (DEFICIT) PER COMMON SHARE........... (3.47) 0.11 4.65 8.92 11.20
---------- ---------- ---------- ---------- -----------
CASH DIVIDENDS DECLARED PER COMMON SHARE................... 0.625 1.25
---------- --------- ---------- ---------- -----------
Net loss in 2002 includes net after-tax charges of $123.4 million, or $2.48 per
diluted share, reflecting the write-down of and obligations related to assets
held for sale and assets held for use and $35.9 million, or $0.72 per diluted
share, of restructuring costs, both within continuing operations, $17.9 million
or $0.36 per diluted share, for discontinued operations of two international
energy subsidiaries and a $7.8 million or $0.16 per diluted share for the
cumulative effect of change in accounting principle related to the write-off of
goodwill. Net loss in 2001 includes net after-tax charges of $212.7 million, or
$4.28 per diluted share, reflecting the write-down of and obligations related to
assets held for sale and income from discontinued operations $3.7 million, or
$0.08 per diluted share. Net loss in 2000 includes net after-tax charges of
$56.0 million, or $1.13 per diluted share, reflecting the write-down of assets
held for sale and $60.4 million, or $1.22 per diluted share, reflecting costs
associated with non-energy businesses, and organizational streamlining costs
composed of $45.5 million, or $0.92 per diluted share, for continuing operations
and $14.9 million, or $0.30 per diluted share, for discontinued operations. Net
loss in 1999 includes net after-tax charges of $97.8 million, or $1.99 per
diluted share, reflecting costs associated with then existing non-core
businesses and impairment of certain assets, composed of $62.5 million, or $1.27
per diluted share, for continuing operations and $35.3 million, or $0.72 per
diluted share, for discontinued operations and a $3.8 million or $0.08 per
diluted share for the cumulative effect of change in accounting principle
related to the write-off of start up costs. Additionally, the Company has
reclassified equity in income from unconsolidated investments, which were
previously included in revenues (See Note 1 to the consolidated financial
statements).
ITEM 7. 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, the Company's
reorganization and ability to continue as a going concern, 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.
The following discussion and analysis also should be read in conjunction with
the Company's Consolidated Financial Statements and Notes thereto.
REORGANIZATION
On April 1, 2002, the Company and 123 of its domestic subsidiaries filed
voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code
in the Bankruptcy Court for the Southern District of New York. Since April 1,
2002, one additional subsidiary has filed petitions for reorganization under
Chapter 11 of the Bankruptcy Code. In addition, four subsidiaries which had
filed petitions on April 1, 2002 have been sold as part of the Company's
disposition of non-energy assets, and are no longer owned by the Company or part
of the bankruptcy proceeding. (See Note 4 to the Consolidated Financial
Statements.) It is possible that additional subsidiaries will file petitions for
reorganization under Chapter 11 and be included as part of the Company's plan of
reorganization.
The pending Chapter 11 Cases are jointly administered for procedural purposes
only. International operations and certain other subsidiaries and joint venture
partnerships were not included in the filing. (See Note 2 to the Consolidated
Financial Statements for a more detailed discussion of these Chapter 11 Cases,
including initial orders, reconciliation of claims filed with the Bankruptcy
Court with recorded pre-petition liabilities, rights and possible impact of
contract rejections or assumptions, reorganization expenses, liabilities subject
to compromise and the Debtors Condensed Combined Financial Statements.)
The Company's Consolidated Financial Statements have been prepared on a "going
concern" basis in accordance with accounting principles generally accepted in
the United States of America. The "going concern" basis of presentation assumes
that the Company will continue to operate 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 their
filing, 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
renew, the Debtor in Possession Credit Facility when it expires in October 2003
(see Liquidity/Cash Flow) 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 that this can be accomplished and if it
is not, the Company's ability to realize the carrying value of its assets and
discharge its liabilities would be subject to substantial uncertainty. If the
"going concern" basis were not used for the Company's Consolidated Financial
Statements, significant adjustments could be necessary to the carrying value of
assets and liabilities, the revenues and expenses reported, and the balance
sheet classifications used.
The Company's Consolidated Financial Statements also have been prepared in
accordance with The American Institute of Certified Public Accountants Statement
of Position 90-7, "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code", ("SOP 90-7"). Accordingly, all pre-petition liabilities
believed to be subject to compromise have been segregated in the 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 Consolidated Statements of Cash Flows.
At December 31, 2000, the Company had classified its remaining unsold non-energy
businesses as assets held for sale in its December 31, 2000 consolidated
financial statements and reported these businesses in the Other segment for the
years ended December 31, 2002, 2001 and 2000. See Notes 3 and 4 to the
Consolidated Financial Statements for additional information regarding these
assets.
2002 VS. 2001
See Note 30 to the Consolidated Financial Statements for information related to
the Company's three business segments: Domestic energy and water, International
energy and Other.
Total revenues for 2002 for the Domestic energy and water segment were $719.0
million, a decrease of $40.7 million compared to 2001. As discussed below, this
decrease was mainly due to the receipt of insurance settlements and other
matters related to two domestic energy facilities in 2001 and a decrease at
California energy facilities due to decreased energy rates as well as the
overhaul of one of the Company's geothermal plants.
Total revenues for the International energy segment were $185.4 million, an
increase of $52.8 million compared to 2001. As discussed below, this increase
was mainly due to the completion of an energy facility in India which came
online during the fourth quarter of 2001 and the completion of another energy
facility in India which came online during the second quarter of 2001.
Total revenues for the Other segment were $15.9 million, a decrease of $113.8
million compared to 2001. As discussed below, this decrease was due to the wind
down and sale of non-energy businesses.
Service revenues in 2002 decreased $66.3 million compared to 2001. Domestic
energy and water service revenues in 2002 decreased $8.7 million primarily
related to a $6.8 million decrease at California energy facilities due to
decreased rates. Other service revenues decreased $50.3 million due to
the wind-down of many non-energy businesses.
Electricity and steam sales revenue increased $47.3 million in 2002 compared to
the same period in 2001, attributable mainly to a $45.4 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 second quarter of
2001 offset by a $11.0 million decrease at California energy facilities due to
decreased energy rates as well as the overhaul of one of the Company's
geothermal plants.
Construction revenues in 2002 decreased $20.8 million from the comparable period
in 2001 due to the substantial completion and termination of various projects
offset by a $12.8 million increase attributable to the Company's construction of
the desalination project in Tampa, Florida.
Other sales - net for 2002 decreased $31.3 million compared to 2001 due mainly
to the sale of the Datacom business in November 2001. This business had been
included in the Other segment.
Other revenues- net for 2002 decreased $30.6 million compared to 2001 due mainly
to revenues in 2001 including $21.0 million of insurance settlements and other
matters related to two domestic energy facilities, $5.7 million of development
fees and other matters related to an international energy plant and insurance
proceeds of $2.8 million related to aviation businesses.
As discussed below, total costs and expenses decreased by $236.5 million in 2002
compared to the same period in 2001.
Depreciation, amortization and debt service charges for 2002 were comparable to
the same period in 2001.
Plant operating expenses increased by $50.1 million in 2002 compared to the
comparable period in 2001 primarily due to a $30.0 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, a $10.1 million increase
due to the completion of another energy facility in India which came online
during the second quarter of 2001 and a $8.0 million increase in operating
costs, mainly due to $5.1 million increase in overhaul and maintenance expenses
at several domestic energy facilities.
Construction costs decreased by $27.4 million in 2002 compared to the comparable
period of 2001. The decrease is mainly attributable to the substantial
completion and termination of various projects offset by a $13.2 million
increase attributable to the Company's construction of the desalination project
in Tampa, Florida.
Other operating costs and expenses decreased by $45.2 million in 2002 compared
to the comparable period of 2001 due to the wind-down of many non-energy
businesses.
Net loss on sale of businesses in 2002 of $1.9 million was primarily related to
a loss on the sale of an investment in an energy project in Thailand of $6.5
million (see Note 3 to the Consolidated Financial Statements) offset by a $3.6
million gain on the sale of assets held for sale (see Note 4 to the Consolidated
Financial Statements for further discussion) and a $0.6 million gain on the sale
of an investment in Bolivia (see Note 5 to the Consolidated Financial Statements
for further discussion). Net loss on sale of businesses for the year ended
December 31, 2001 of $2.8 million related to the sale of assets held for sale
(see Note 4 to the Consolidated Financial Statements for further discussion).
Costs of goods sold in 2002 decreased by $37.2 million compared to the same
period of 2001 due to the sale of the Datacom business in November 2001.
Selling, administrative and general expenses for 2002 decreased by $20.9 million
compared to 2001 due to the wind-down of many non-energy businesses.
Project development expenses in 2002 decreased by $29.5 million from 2001
primarily due to the write-off of $24.5 million in development costs related to
an energy project in California in 2001. (See Note 9 to the Consolidated
Financial Statements for further discussion.)
Other net expenses in 2002 compared to the same period in 2001 decreased by $9.4
million primarily due to a $13.4 million decrease related to the reversal of a
pre-petition severance accrual during the year ended December 31, 2002. (See
Note 25 to the Consolidated Financial Statements for further discussion.)
The Company recorded a $101.2 million pre-tax impairment charge at June 30, 2002
related to one domestic and two international energy facilities. (See Note 9 to
the Consolidated Financial Statements for further discussion.)
The Company recorded pre-tax impairment charges for assets held for sale of
$46.0 million and $260.9 million during 2002 and 2001, respectively. (See Note 4
to the Consolidated Financial Statements for further discussion.)
Equity in income of investees and joint ventures increased $7.4 million compared
to the same period in 2001. The increase is primarily attributable to an
increase in earnings from the Company's investment in international energy
projects mainly due to improved operating performance.
Income from operations for 2002 for the Domestic energy and water segment was
$88.4 million, a decrease of $32.1 million compared to 2001. As discussed above,
this decrease was mainly due to a decrease in proceeds from insurance
settlements and other matters related to two domestic energy facilities in 2001
and a decrease at California energy facilities due to decreased energy rates
combined with an increase in overhaul and maintenance expenses at several
domestic energy facilities.
Income from operations for 2002 for the International energy segment was $35.9
million, an increase of $7.8 million compared to 2001. As discussed above, this
increase was mainly due to an increase in equity earnings of investees and joint
ventures and an increase in operating revenue, offset by an increase in plant
operating costs, related to the completion of an energy facility in India which
came online during the fourth quarter of 2001 and the completion of another
energy facility in India which came online during the second quarter of 2001.
Loss from operations for 2002 for the Other segment was $55.5 million, a
decrease of $264.6 million compared to 2001. As discussed above, this decrease
was mainly due to a reduction in revenue related to the wind down and sale of
non-energy business combined with a reduction in pretax impairment charges for
assets held for sale.
Interest expense-net increased $4.9 million compared to the same period in 2001
mainly due to decreased interest income as a result of a lower interest rate
environment for investments.
See Note 2 to the Consolidated Financial Statements for a discussion of the
$49.1 million of reorganization items.
Minority interest in 2002 increased by $3.0 million compared to the same period
in 2001 due mainly to the two international energy facilities in India that
became operational during 2001.
The effective tax rate in 2002 was 8.5% compared to 7.0% for the same period of
2001. This increase in the effective rate is primarily due to deductions and
foreign losses included in the book loss in the prior year period for which
certain tax benefits were not recognized compared to pre-tax earnings in the
current period for which certain tax provisions were recorded.
Discontinued Operations: In 2002, the loss from discontinued operations totaled
$17.9 million. The loss before income taxes and minority interests from
discontinued operations was $18.1 million, due to the sale of two international
energy subsidiaries. (See Note 3 to the Consolidated Financial Statements for
further discussion.) In 2001, the income from these discontinued operations
totaled $3.7 million. The 2001 income before income taxes and minority interests
from discontinued operations was $5.1 million.
See Note 1 to the Consolidated Financial Statements for a discussion of the
change in accounting principle.
Property, plant and equipment - net decreased $239.4 million during 2002 due
mainly to the sale of $82.5 million of Thailand fixed assets on March 28, 2002,
a $93.3 million pre-tax impairment charge against fixed assets (see Note 9 to
the Consolidated Financial Statements for further discussion) and depreciation
expense of $83.6 million for the period offset by capital additions of $21.3
million.
2001 VS. 2000
Total revenues for 2001 for the Domestic energy and water segment were $759.7
million, an increase of $37.8 million compared to 2000. As discussed below, this
increase was mainly due to the receipt of insurance settlements and other
matters related to two domestic energy facilities in 2001, annual contract
escalation adjustments at many plants and a water service operating agreement
with the City of Bessemer, Alabama which began in October 2000.
Total revenues for the International energy segment were $132.6 million, an
increase of $67.1 million compared to 2000. As discussed below, this increase
was mainly due to the completion of an energy facility in India which came
online during the fourth quarter of 2001 and the completion of another energy
facility in India which came online during the second quarter of 2001.
Total revenues for the Other segment were $129.8 million, a decrease of $36.3
million compared to 2001. As discussed below, this decrease was due to the wind
down and sale of non-energy businesses.
Service revenues in 2001 increased $8.6 million compared to 2000. Domestic
energy and water service revenues increased $18.0 million due mainly to
contractual annual escalation adjustments at many plants, increases in the
supplemental waste business, and a water service operating agreement with the
City of Bessemer, Alabama which began in October 2000. Other service revenues
decreased $11.8 million mainly due to a decrease of $72.0 million related to the
environmental consulting business, which was sold in November, and a decrease of
$5.5 million due to the sale of Applied Data Technology, Inc. ("ADTI") in 2000,
offset by the inclusion in continuing operations of $65.6 million related to
unsold aviation and entertainment businesses in 2001 which were included in
discontinued operations in 2000.
Electricity and steam sales revenues increased $61.6 million compared to 2000,
attributable mainly to the Samalpatti and Madurai projects in India commencing
operations in 2001, and increased production and favorable energy pricing
experienced primarily at plants in California as well as increased pricing
experienced at certain waste-to-energy plants with merchant energy capacity.
Construction revenues in 2001 decreased $6.3 million compared to 2000. The
decrease is attributable to the completion of the retrofit construction activity
mandated by the Clean Air Act Amendments of 1990, the decision to wind down
activities in the civil construction business, and the completion of
construction of a wastewater project in the third quarter of 2000, partially
offset by the commencement of the Tampa Bay water desalination project in 2001,
and increased activity in Dual Sand(TM) contracts in 2001.
Other sales - net in 2001 decreased $14.0 million compared to 2000 due to
decreased activity in the operations of Datacom, which was sold in the fourth
quarter of 2001.
Other revenues - net increased $18.6 million in 2001 versus 2000. Other revenues
in 2001 included $19.7 million of insurance settlement proceeds and other
matters related to the Lawrence, Massachusetts facility, $5.7 million of
development fees received and other matters related to the Quezon plant in The
Philippines, insurance proceeds of $1.4 million related to a wastewood plant,
and insurance proceeds of $2.8 million related to the sale of aviation and
entertainment businesses. 2000 included a $12.2 million insurance settlement
related to the Lawrence facility.
Total costs and expenses for 2001 increased by $191.9 million in 2001, compared
to 2000, due mainly to the increased write-down of and obligations related to
assets held for sale of $183.6 million. (See Note 4 to the Consolidated
Financial Statements for further discussion.)
Debt service charges in 2001 were comparable to the same period in 2000.
Plant operating expenses decreased by $22.8 million in 2001 compared to 2000.
Plant operating expenses decreased due primarily to a decrease of $61.6 million
in the environmental consulting business, which was sold in November 2000 and
the net reversal of allowances for doubtful accounts of $2.6 million in 2001
related to receivables from California utilities compared to provisions of $6.2
million in 2000 (see Note 34 to the Consolidated Financial Statements for
further discussion.) That decrease was partially offset by increased fuel costs
attributable to higher natural gas and oil prices, higher energy generation,
primarily at waste-wood plants in California, $36.4 million of increased
expenses due to the commencement of operations at the Samalpatti and Madurai
projects, and the commencement of operations at a wastewater project.
Construction costs decreased by $4.1 million in 2001 compared to 2000. The
decrease is due to the completion of the retrofit construction activity mandated
by the Clean Air Act Amendments of 1990, completion of the construction of a
wastewater project in the third quarter of 2000, and a decrease in the civil
construction business (which ceased in 2002), partially offset by an increase
due to the commencement of construction of the water desalination project, and
increased activity in Dual Sand(TM) contracts in 2001.
Depreciation and amortization expense decreased by $8.4 million in 2001 compared
to 2000. This decrease is primarily related to a $12.7 million decrease in Other
depreciation and amortization, which in 2000 included $11.4 million of
accelerated amortization of a new data processing system. Also, energy's
depreciation and amortization expense increased by $4.4 million in 2001 compared
to 2000 primarily due to commencement of operation of the Samalpatti and Madurai
projects in 2001, partially offset by the effect of accelerated depreciation in
2000 related to certain air pollution control equipment being replaced in
connection with the Clean Air Act Amendments of 1990.
Other operating costs and expenses for 2001 increased $43.1 million due to
activity in the Other segment. This increase was due mainly to the inclusion in
continuing operations of unsold aviation and entertainment businesses in 2001,
which were included in discontinued operations in 2000. This increase was
partially offset by the effect of the sale of ADTI in 2000 and the sale of
Datacom in November 2001.
Net loss on sale of businesses for 2001 included the loss of $4.0 million on the
sale of the Non-Port Authority portion of the aviation fueling business, and a
$2.0 million loss on the sale of the Australian venue management businesses.
These losses were partially offset by a $1.9 million gain on the sale of the
aviation ground handling operations at the Rome, Italy airport, a gain of $0.8
million representing an adjustment on the sale of the aviation fixed base
operations, and a gain of $1.4 million on the sale of the Company's interest in
the airport privatization business in Colombia, South America. The net loss on
sale of businesses in 2000 included a loss of $1.0 million on the sale of ADTI.
Costs of goods sold for 2001 decreased $4.6 million compared to 2000 due mainly
to the sale of Datacom in November 2001.
Selling, administrative and general expenses for 2001 increased $9.2 million
compared to 2000. This increase is due mainly to the inclusion in continuing
operations of the unsold aviation and entertainment businesses in 2001. That
increase was partially offset by a decrease in corporate overhead expenses that
was fundamentally the result of a decrease in most overhead costs due to the
wind-down of the Company's New York office and a $6.8 million decrease due to
the sale in November 2000 of the environmental consulting business.
Project development expenses in 2001 increased by $8.8 million from 2000. The
increase is mainly due to the write-off of development costs related to an
energy project in California, offset by a decrease in overhead and other costs
related to other development, mainly in the Asian market.
In 2001, other net expenses decreased $18.1 million compared to 2000. This
decrease is due mainly to costs incurred in 2000 of $18.0 million representing
creditors' fees and expenses incurred in connection with the waiver by certain
creditors of certain covenants and the extension of credit through November
2000, and $4.8 million representing fees and expenses incurred in connection
with financing efforts to support the then-proposed recapitalization plan. 2000
also included $16.6 million related to domestic energy's cost-reduction plan and
a $2.8 million write-down of accounts receivable for one project in China. In
2001, the effect of these 2000 costs was partially offset by the amortization of
$25.5 million of the Company's costs in securing its Revolving Credit and
Participation Agreement in March 2001 and subsequent amendments. Such costs were
being amortized through March 2002.
In 2001, equity in income of investees and joint ventures decreased $6.4 million
compared to the year ended December 31, 2000. That decrease is primarily
attributable to decreases at a joint venture in California experiencing lower
contractual energy rates and a write-down of assets recorded at a joint venture
in Bolivia resulting from closing down part of a generating facility due to
lower demand in that country, partially offset by an increase in earnings at the
Quezon project in The Philippines, which commenced operations in the second
quarter of 2000.
Income from operations for 2001 for the Domestic energy and water segment was
$120.6 million, an increase of $33.9 million compared to 2000. As discussed
above, the increase was mainly due to the receipt of proceeds from insurance
settlements and other matters related to two domestic energy facilities in 2001
annual contract escalation adjustments at many plants and a water service
operating agreement with the City of Bessemer, Alabama which began in October
2000 offset by an increase fuel costs attributable to higher natural gas and oil
prices, higher energy generation, primarily at waste-wood plants in California.
Income from operations for 2001 for the International energy segment was $28.0
million, an increase of $20.1 million compared to 2000. As discussed above, the
increase was mainly due to an increase in operating revenue offset by an
increase in plant operating costs related to the completion of an energy
facility in India which came online during the fourth quarter of 2001 and the
completion of another energy facility in India which came online during the
second quarter of 2001.
Loss from operations for 2001 for the Other segment was $320.1 million, a
increase of $199.6 million compared to 2000. As discussed above, the increase
was mainly due to a reduction in revenue related to the wind down and sale of
non-energy businesses combined with an increase in pretax impairment charges for
assets held for sale in 2001.
Interest expense - net in 2001 decreased $4.9 million compared to 2000.
Interest expense-net decreased $2.4 million primarily due to lower
average debt outstanding and lower rates on variable-rate debt, partially offset
by a decrease in interest income on cash balances. The Domestic energy and water
segment's interest expense-net decreased by $3.9 million in 2001 compared to
2000 due mainly to lower interest income on cash balances and a decrease in
interest expense caused mainly by payments on debt, primarily debt associated
with the Quezon project. That debt was fully paid in March 2001. These decreases
were partially offset by the Other segment's interest expense-net which
increased $1.3 million due to the inclusion in continuing operations of the
unsold Aviation and Entertainment businesses in 2001.
Minority interest in 2001 increased by $3.0 million compared to the same period
in 2000 due mainly to the two International energy facilities in India that
became operational in the second and fourth quarters of 2001.
The effective tax rate for 2001 was 7.0% compared to 28.3% for 2000. The lower
effective rate in 2001 was primarily due to increased pre-tax losses in the
current year including certain write-downs of and obligations related to assets
held for sale and dispositions for which tax benefits were not recognized
through a valuation allowance offset by increased tax expense related to higher
foreign income in 2001. See Note 26 to the Consolidated Financial Statements for
a more detailed reconciliation of variances from the Federal statutory income
tax rate.
Discontinued Operations: In 2001, the income from discontinued operations
totaled $3.7 million. The income before income taxes and minority interest from
discontinued operations was $5.1 million. In 2000, the loss from discontinued
operations totaled $139.5 million. The loss before income taxes and minority
interest from discontinued operations was $166.7 million, primarily reflecting
operating losses of $97.0 million on the disposal of aviation and entertainment
businesses, legal, accounting, consulting and overhead expenses incurred in
connection with the discontinuance of those businesses, and accelerated
depreciation in connection with shortened estimated useful lives of management
information systems. (See Note 3 to the Consolidated Financial Statements for
further discussion.)
Property, plant and equipment - net increased $111.9 million during 2001 due
mainly to the acquisition of majority ownership interests in two energy project
companies causing the consolidation of those companies, which were previously
accounted for under the equity method.
CAPITAL INVESTMENTS AND COMMITMENTS: For the year ended December 31, 2002,
capital investments for continuing operations amounted to $21.3 million, of
which $19.4 million related to domestic energy and water investments and $1.9
million related to international energy investments.
The Company's contractual obligations, including debt and leases, as of December
31, 2002 are as follows (expressed in thousands of dollars, note references are
to the Notes to the Consolidated Financial Statements):
Payments Due by Period
----------------------
Less than 4 to 5 After
Total one year 1 to 3 years years 5 years
----- -------- ------------ ----- -------
Total Debt excluding $30,566 of Capital
lease obligations(Notes 15 and 16) $1,253,046 $120,857 $222,998 $235,172 $674,019
Less: Non-Recourse Project Debt (Note 16) (1,212,917) (104,429) (222,998) (233,359) (652,131)
Total Operating Leases (Note 27) 504,001 41,270 65,386 60,573 336,772
Less: Non-Recourse Operating Leases (Note 27) (382,096) (34,592) (51,936) (39,862) (255,706)
Total Capital Leases (Note 15 and 16) 30,566 10,758 11,438 8,370
Less: Non-Recourse Capital Lease (Note 16) (30,465) (10,736) (11,390) (8,339)
Other Long-Term Obligations (Note 18) 80,369 26,763 26,763 26,843
Purchase Commitments (Note 29) 13,800 3,200 5,300 5,300
----------- ----------- ----------- ----------- -----------
Total Recourse Contractual Obligations $256,304 $26,328 $40,261 $54,618 $135,097
=========== =========== =========== =========== ===========
The table above excludes $892.0 million of Liabilities subject to compromise at
December 31, 2002 that are stayed by the Company's bankruptcy filing on April 1,
2002. The ultimate amount and timing of payments of Liabilities subject to
compromise will not be established until the Company's plan of reorganization is
approved by the Bankruptcy Court (see Note 2 to the Consolidated Financial
Statements for further discussion.)
The Company's other commitments as of December 31, 2002 are as follows
(expressed in thousands of dollars, note references are to the Notes to the
Consolidated Financial Statements):
Commitments Expiring by Period
Less than More than
Total one year one year
----- -------- --------
Standby Letters of Credit (Note 17) $384,957 $384,957
Less: Obligations included in the
Consolidated Balance Sheet (151,754) (151,754)
Surety Bonds 96,585 96,585
Less: Obligations included in the
Consolidated Balance Sheet (19,500) (19,500)
Additional guarantees 52,194 34,524 17,670
------ ------ ------
Total Recourse Other Commitments $362,482 $267,727 $94,755
======== ======== =======
The surety bonds guarantee the Company's performance under its Tampa Bay
desalination construction contract ($29.6 million), performance under its waste
water treatment operating contracts ($12.7 million), possible closure costs for
various energy projects ($11.1 million) and performance of contracts related to
non-energy businesses ($43.2 million).
Additional guarantees include approximately $24.1 million of guarantees related
to international energy projects, a $7.5 million related to the guarantee of a
lease at a domestic energy project the net unrecognized guarantees of $19.7
million related the Company's interests in Ottawa (see Note 4 to the
Consolidated Financial Statements) and $0.9 million for other entertainment
facilities.
In addition to the above commitments:
A public authority in Onondaga County, New York (the "Agency") and the
Company have several commercial disputes between them. Among these is a
January 16, 2002 demand by the Agency to provide 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 Agency 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 million under the terms of the
agreement. The Company commenced a lawsuit in state court with respect
to such disputes, as well as the Agency's right to terminate. Following
the commencement of the Chapter 11 Cases, the Company removed the case
to the federal court in the Northern District of New York and further
requested that the matter be transferred to the Bankruptcy Court. On
the motion of the Agency, the case was remanded back to state court. In
addition, the Agency 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 applied to the litigation, or other related relief. The
Company appealed the issuance of the district court's injunction to the
Court of Appeals for the Second Circuit and in January 2003 the
injunction was vacated. The Bankruptcy Court thereafter issued an order
declaring that the Agency's post-petition prosecution of the state
court lawsuit violated the automatic stay imposed pursuant to the
Bankruptcy Code and preliminarily enjoined and restrained further
prosecution of the lawsuit against the Company. The Agency has appealed
the Bankruptcy Court's order. 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. In addition, the Company could incur
substantial obligations to the limited partners in the project.
The Company's agreement with a client in Montgomery County, Maryland
("the County") provides that as a result of the rating downgrades of
the Company's unsecured corporate debt, the Company was obligated to
provide a $50 million letter of credit by January 31, 2003, and failing
that, the County could elect to terminate the agreement or receive a $1
million reduction in its annual service fee. At the current time the
Chapter 11 proceedings stays the County's ability to terminate.
Regardless of the stay, the Company asserts that this is a one time
option. The client maintains that it has a continuous right to rescind
the fee reduction and elect termination. It is likely this matter will
be resolved as part of the Chapter 11 proceedings and at the time of
emergence from bankruptcy the Company will either prevail on its
position, provide the letter of credit, negotiate other terms with the
County or the agreement will be terminated. (See Note 2 of the
Consolidated Financial Statements.)
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, water, 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.
LIQUIDITY/CASH FLOW: At December 31, 2002, the Company had approximately $115.8
million in cash and cash equivalents, of which $32.4 million related to cash
held in foreign bank accounts that could be difficult to transfer to the U.S.
Net cash provided by operating activities for 2002 was $102.6 million compared
to net cash provided by operating activities in 2001 of $77.4 million. The
increase of $25.2 million mainly due to changes in working capital.
Net cash provided by investing activities was $26.8 million compared to net cash
used in investing activities of $10.4 million in 2001. This increase of $37.2
million in cash provided by investing activities was primarily due to decreases
in capital expenditures and investments in facilities of $40.1 million and
investments in and advances to joint ventures of $18.3 million offset by
decreases in proceeds from the sales of businesses and other of $16.0 million
and distributions from investees and joint ventures of $3.3 million.
Net cash used in financing activities was $128.5 million in 2002 compared to
$69.8 million in 2001. This increase of $58.7 million in cash used in financing
activities is due primarily to increased net debt repayments.
In connection with the bankruptcy petition, the Company and most of its
subsidiaries have entered into a Debtor-In-Possession Credit Agreement (as
amended, the "DIP Credit Facility"). On April 5, 2002, the Bankruptcy Court
issued an interim order approving the DIP Credit Facility and on May 15, 2002, a
final order approving the DIP Credit Facility. On August 2, 2002, the Bankruptcy
Court issued an order that overruled objections by holders of minority interests
in two limited partnerships who disputed the inclusion of the limited
partnerships in the DIP Credit Facility. Although the holders of such interests
at one of the limited partnerships have appealed the order, they have reached an
agreement with the Company that in effect defers the appeal. The DIP Credit
Facility's current terms are described below.
The DIP Credit Facility is now an approximately $240.0 million facility largely
for the continuation of existing letters of credit and 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 DIP facility places limits on the Company's expenditures for
categories of expenses. The Company does not expect that these limits will
impact its ability to continue to operate its business as now being conducted.
The DIP Credit Facility initially was scheduled to mature on April 1, 2003. On
March 28, 2003, the DIP Credit Facility was extended through October 1, 2003 and
may, with the consent of DIP Lenders holding more than 66-2/3% of the Tranche A
Facility, be extended for an additional period of six months. There are no
assurances that the DIP lenders will agree to an extension. At ultimate
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 proceedings. Moreover, the legal provisions relating to the Chapter
11 proceedings are expected to provide a legal basis for maintaining the
Company's business intact while it is being reorganized. However, the outcome of
the Chapter 11 proceedings are not within the Company's control and no
assurances can be made with respect to the outcome of these efforts.
See Note 17 to the Consolidated Financial Statements for additional information
relating to the Company's credit facilities.
OTHER:
Receivables from California Utilities
Events in late 2000 and early 2001 in the California energy markets affected the
state's two largest utilities and resulted in delayed payments for energy
delivered by the Company's independent power facilities. 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.
As stated earlier, SCE paid 100% of its past due receivables by March 1, 2002
and PG&E has paid ten twelfths of its past due receivables through December 31,
2002, in accordance with a bankruptcy court approved twelve-month payment
schedule. On December 31, 2002, the Company had outstanding gross receivables
from PG&E of approximately $1.2 million (including the Company's 50% interest in
several partnerships) as of March 1, 2003 PG&E paid the past due receivable in
full. The Company has received payment of all these outstanding receivables less
discounts charged by the financial institutions. See Note 34 to the Consolidated
Financial Statements for further discussion.
In addition, during 2001 and 2002, the Company agreed to fixed price energy
contracts through June 2006 for the PG&E California energy assets and April 2007
for the majority of the SCE California energy assets.
Quezon Power
As discussed above in Part I - Business Description, Manila Electric Company
("Meralco"), the power purchaser for the Company's Quezon Project, is
financially stressed. Meralco is engaged in discussions with the Philippine
government and legal proceedings in this regard. The Company is unable at this
time to predict the outcome of these discussions and proceedings, which will
affect Meralco's ability to perform its contract to purchase power from this
project. Should it not be resolved satisfactorily, the Company is also unable to
predict the impact on its revenues, net income and assets, which will depend on
the extent to which Meralco will be able to perform and the Company's ability to
obtain alternative power purchasers and the prices such alternative purchasers
would pay.
Insurance
Recent changes in the domestic and international insurance markets have
increased costs and reduced the amount and types of coverage available. 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, policy limits and premium costs which the Company
believes to be appropriate. However, the insurance obtained does not cover the
Company for all possible losses.
Off Balance Sheet Arrangements
The Company currently is party to several lease arrangements with unrelated
parties under which it rents energy generating facilities, including
sale-leasebacks. The Company generally uses operating lease treatment for these
arrangements. (See Notes 14 and 27 to the Consolidated Financial Statements for
additional information regarding these leases.)
The Company has investments in several investees and joint ventures accounted
for under the equity method and therefore does not consolidate the financial
information of those companies. See Note 5 to the Consolidated Financial
Statements for summarized financial information for those investees and joint
ventures.
Critical Accounting Policies
The Company prepares its Consolidated Financial Statements in accordance with
accounting principles generally accepted in the United States of America. The
preparation of financial statements requires management to make estimates and
assumptions that affect the reported amounts and classification 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, liabilities for
workers compensation, severance, restructuring, litigation and other claims
against the Company and the estimated fair value of the Company's assets and
liabilities, including guarantees. ( See Note 33 to the Consolidated Financial
Statements.)
The Company's Consolidated 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
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 Consolidated Statements of Cash Flows.
The Company is in the process of reconciling recorded pre-petition liabilities
with claims filed by creditors with the Bankruptcy Court. The Company recently
began this process and has not yet determined the necessary reorganization
adjustments, if any. 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.
The Company establishes carrying value of assets held for sale based on its
estimate of their fair value less costs to sell. That fair value is based on
estimated sales prices derived from signed sales contracts, the status of
current negotiations for the sale of such assets and recent appraisals. The
actual ultimate amount of sale proceeds realized might be less than the
currently estimated sales prices and could have a material adverse effect on the
carrying value of those assets and on the Company's operating results and
financial condition.
The Companies revenues are generally earned under contractual arrangements.
Service revenues primarily include the fees earned under contracts to operate
and maintain energy facilities and to service the Project debt, with additional
fees earned based on excess tonnage processed. Revenues under fixed-price
contracts, including construction, are recognized on the basis of the estimated
percentage of completion of services rendered. Anticipated losses are recognized
as soon as they become known. Service revenues also represent fees for the
operation and maintenance of water and wastewater facilities. Revenue from the
sale of electricity and steam are earned at energy facilities and are recorded
based upon output delivered and capacity provided at rates specified under
contract terms or prevailing market rates. Long-term unbilled service
receivables related to energy operations are discounted in recognizing the
present value for services performed currently in order to service the Project
debt. The full recovery of these receivables assumes no refinancing of the
Project debt or other significant restructuring of the project. A significant
change in these revenue recognition policies, or a change in accounting
principles generally accepted in the United States could have a material impact
on the Company's recorded operating results and financial condition.
The Company evaluates long-lived assets based on its projection of undiscounted
cash flows whenever events or changes in circumstances indicate that their
carrying amounts may not be recoverable. The projection of future undiscounted
cash flows used to test recoverability of long-lived assets is based on expected
cash flows from the use and eventual disposition of those long-lived assets. If
the carrying value of such assets is greater than the future undiscounted cash
flows of those assets, the Company would measure the impairment amount as the
difference between the carrying value of the assets and the discounted present
value of the cash flows to be generated by those assets. Long-lived assets to be
disposed of are evaluated in relation to the estimated fair value of such assets
less costs to sell. A significant reduction in actual cash flows and estimated
cash flows could have a material adverse effect on the carrying value of those
assets and on the Company's operating results and financial condition.
Property, plant and equipment is recorded at cost and is depreciated over its
estimated useful life. The estimated useful life of the Company's energy
generation facilities is up to 50 years. A significant decrease in the estimated
useful life of any individual facility or group of facilities could have a
material adverse impact on the Company's operating results in the period in
which the estimated useful life is revised and subsequent periods.
Pension and Postretirement Plans: The Company has pension and post-retirement
obligations and costs that are developed from actuarial valuations. Inherent in
these valuations are key assumptions including discount rates, expected return
on plan assets and medical trend rates. Changes in these assumptions are
primarily influenced by factors outside the Company's control and can have a
significant effect on the amounts reported in the financial statements.
See Note 1 to the Consolidated Financial Statements for a summary of additional
accounting policies and new accounting pronouncements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the Company is party to financial instruments
that are subject to market risks arising from changes in interest rates, foreign
currency exchange rates, and commodity prices. The Company's use of derivative
instruments is very limited and it does not enter into derivative instruments
for trading purposes. The following analysis provides quantitative information
regarding the Company's exposure to financial instruments with market risks. The
Company uses a sensitivity model to evaluate the fair value or cash flows of
financial instruments with exposure to market risk that assumes instantaneous,
parallel shifts in exchange rates and interest rate yield curves. There are
certain limitations inherent in the sensitivity analysis presented, primarily
due to the assumption that exchange rates change in a parallel manner and that
interest rates change instantaneously. In addition, the fair value estimates
presented herein are based on pertinent information available to management as
of December 31, 2002. Further information is included in Note 33 to the
Consolidated Financial Statements.
Interest Rate Risk
The Company has long-term debt and Project debt outstanding bearing interest at
floating rates that could subject it to the risk of increased interest expense
due to rising market interest rates, or an adverse change in fair value due to
declining interest rates on fixed rate debt. Of the Company's total long-term
debt, approximately $18.2 million was floating rate at December 31, 2002. Of the
Project Debt, approximately $289.4 million was floating rate at December 31,
2002. However, of that floating rate project debt, $133.5 million related to
waste-to-energy projects where, because of their contractual structure, interest
rate risk is borne by Client Communities because debt service is passed through
to those clients. The Company had only one interest rate swap outstanding at
December 31, 2002 in the notional amount of $80.2 million related to floating
rate project debt. Gains and losses on this swap are for the account of the
Client Community.
For floating rate debt, a 20 percent hypothetical increase in the underlying
December 31, 2002 market interest rates would result in a potential loss to
twelve month future earnings of $2.2 million. For fixed rate debt, the potential
reduction in fair value from a 20 percent hypothetical decrease in the
underlying December 31, 2002 market interest rates would be approximately $51.8
million. The fair value of the Company's fixed rate debt (including $914.8
million in fixed rate debt related to revenue bonds in which debt service is an
explicit component of the service fees billed to the Client Communities) was
$939.5 million at December 31, 2002, and was determined using average market
quotations of price and yields provided by investment banks.
Foreign Currency Exchange Rate Risk
The Company has investments in energy projects in various foreign countries,
including The Philippines, China, India and Bangladesh, and to a much lesser
degree, Italy, Spain, and Costa Rica. The Company does not enter into currency
transactions to hedge its exposure to fluctuations in currency exchange rates.
Instead, the Company attempts to mitigate its currency risks by structuring its
project contracts so that its revenues and fuel costs are denominated in U.S.
dollars. As a result, the U.S. dollar is the functional currency at most of the
Company's international projects. Therefore, only local operating expenses and
project debt denominated in other than a project entity's functional currency
are exposed to currency risks.
At December 31, 2002, the Company had $113.7 million of project debt related to
two diesel engine projects in India. Exchange rate fluctuations on $22.2 million
of the debt (related to a project entity whose functional currency is in the
U.S. dollar) are recorded as adjustments to the recorded amount of the debt and
as foreign currency transaction gains and losses and are included in Other-net
in the Statement of Consolidated Operations. For $59.0 million of the debt
(related to project entities whose functional currency is the Indian Rupee),
exchange rate fluctuations are recorded as translation adjustments to the
cumulative translation adjustment account within stockholders' deficit in the
Company's Consolidated Balance Sheet. The remaining $32.5 million debt is
denominated in U.S. dollars.
The potential loss in fair value for such financial instruments from a 10%
adverse change in December 31, 2002 quoted foreign currency exchange rates would
be approximately $9.0 million.
At December 31, 2002, the Company also had net investments in foreign
subsidiaries and projects. See Note 9 to the Consolidated Financial Statements
for further discussion.
Commodity Price Risk
The Company has not entered into futures, forward contracts, swaps or options to
hedge purchase and sale commitments, fuel requirements, inventories or other
commodities. Alternatively, the Company attempts to mitigate the risk of energy
and fuel market fluctuations by structuring contracts related to its energy
projects as fixed price contracts so that energy sales and fuel costs are
"locked in" for the same term. Most of its waste-to-energy facilities have such
contracts and the Company has recently structured fixed price contracts for the
majority of its California projects through June 2006 for projects selling to
PG&E and April 2007 for projects with SCE contracts. Certain power sales
agreements related to domestic projects provide for energy sales prices linked
to the "avoided costs" of producing such energy and, therefore, fluctuate with
various economic factors. The Company is exposed to commodity price risk at
those projects. At other plants, fuel costs are contractually included in the
Company's electricity revenues, or fuel is provided by the Company's customers.
Also, at most of the Company's waste-to-energy facilities, commodity price risk
is mitigated in that either most commodity costs used in the operation of those
facilities are borne by Client Communities, or service revenues are adjusted to
reflect fluctuations in various price indices which are intended to be
indicative of, the Company's cost including the cost of certain commodities used
in the operation of those facilities.
Generally, the Company is protected against fluctuations in the cost of waste
disposal (i.e., tip fees) through long-term disposal contracts at its
waste-to-energy facilities. At three owned waste-to-energy facilities, differing
amounts of waste disposal capacity are not subject to long-term contracts and,
therefore, the Company is exposed to the risk of fluctuations in tip fees.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX
Statements of Consolidated Operations and Comprehensive Loss
for the Years ended December 31, 2002, 2001, and 2000
Consolidated Balance Sheets - December 31, 2002 and 2001
Statements of Shareholders' Equity (Deficit) for the Years
ended December 31, 2002, 2001, and 2000
Statements of Consolidated Cash Flows
for the Years ended December 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
Independent Auditors' Report
Report of Management
Quarterly Results of Operations
Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
for the Years ended December 31, 2002, 2001 and 2000
All other schedules are omitted because they are not applicable or not
required, or because the required information is included in the
consolidated financial statements or notes thereto.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
Covanta Energy Corporation (Debtor in Possession) and Subsidiaries
STATEMENTS OF CONSOLIDATED OPERATIONS
AND COMPREHENSIVE LOSS
- -------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
(In Thousands of Dollars, Except Per Share Amounts)
Service revenues.......................................... $ 514,450 $ 580,767 $ 572,188
Electricity and steam sales............................... 363,290 315,984 254,358
Construction revenues..................................... 42,277 63,052 69,341
Other sales-net........................................... 31,343 45,329
Other revenues-net........................................ 263 30,877 12,233
------------- ------------- -------------
Total revenues............................................ 920,280 1,022,023 953,449
------------- ------------- -------------
Plant operating expenses.................................. 539,089 489,028 511,803
Construction costs........................................ 42,699 70,124 74,271
Depreciation and amortization............................. 95,400 98,315 106,674
Debt service charges-net.................................. 82,256 81,835 78,426
Other operating costs and expenses........................ 27,409 72,575 29,446
Net loss on sale of businesses............................ 1,943 2,768 1,067
Costs of goods sold....................................... 37,173 41,809
Selling, administrative and general expenses.............. 62,700 83,624 74,416
Project development expenses.............................. 3,844 33,326 24,483
Other-net................................................. 15,908 25,357 43,460
Write-down of assets held for use......................... 101,211
Write-down of and obligations related to assets
held for sale............................................ 46,000 260,866 77,240
------------- ------------- -------------
Total costs and expenses.................................. 1,018,459 1,254,991 1,063,095
------------- ------------- -------------
Equity in income from unconsolidated investments.......... 25,076 17,665 24,088
------------- ------------- -------------
Operating loss............................................ (73,103) (215,303) (85,558)
------------- ------------- -------------
Interest expense (net of interest income of $2,487, $8,164,
and $9,496, respectively and excluding post-petition
contractual interest of $3,607 for 2002)................ (35,320) (30,462) (35,390)
Reorganization items...................................... (49,106)
------------- ------------- -------------
Loss from continuing operations before income taxes,
minority interests, discontinued operations and the
cumulative effect of change in accounting principle..... (157,529) (245,765) (120,948)
Income taxes.............................................. 13,446 17,110 34,247
Minority interests........................................ (9,104) (6,074) (3,081)
------------- ------------- -------------
Loss from continuing operations before discontinued
operations and change in accounting principle........... (153,187) (234,729) (89,782)
Income (loss) from discontinued operations (net of
income tax (expense) benefit of $(15), $(80), and
$29,165 in 2002, 2001 and 2000, respectively)........... (17,866) 3,702 (139,503)
Cumulative effect of change in accounting principle....... (7,842) - -
------------- ------------- -------------
Net loss.................................................. (178,895) (231,027) (229,285)
------------- ------------- -------------
Other comprehensive income (loss), net of income tax:
Foreign currency translation adjustments (net of
income taxes of: ($415), ($1,443), and $1,858,
respectively)........................................... (1,485) (3,976) (8,015)
Less: reclassification adjustment for translation
adjustments included in: loss from continuing operations 1,233 7,048
loss from discontinued operations 297 25,323
Unrealized gains (losses) on securities:
Unrealized holding losses arising during period (net of
income taxes benefit of $112)......................... (167)
Less: reclassification adjustment for losses (gains)
included in net loss.................................... (150)
Minimum pension liability adjustment...................... 88 409 (102)
------------- ------------- -------------
Other comprehensive income (loss)......................... (34) 3,481 17,056
------------- ------------- -------------
Comprehensive loss........................................ $(178,929) $ (227,546) $ (212,229)
============== ============== ==============
Basic loss per share:
Loss from continuing operations........................... $ (3.08) $ (4.73) $ (1.81)
Income (loss) from discontinued operations................ (0.36) 0.08 (2.82)
Cumulative effect of change in accounting principle....... (0.16)
------------- ------------- -------------
Net loss.................................................. $ (3.60) $ (4.65) $ (4.63)
============== ============== ==============
Diluted loss per share:...................................
Loss from continuing operations........................... $ (3.08) $ (4.73) $ (1.81)
Income (loss) from discontinued operations................ (0.36) 0.08 (2.82)
Cumulative effect of change in accounting principle....... (0.16)
------------- ------------- -------------
Net loss.................................................. $ (3.60) $ (4.65) $ (4.63)
============== ============== ==============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Covanta Energy Corporation (Debtor in Possession) and Subsidiaries
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------------------------------------------
ASSETS December 31, 2002 2001
- -----------------------------------------------------------------------------------------------------------------
(In Thousands of Dollars, Except Share and Per Share Amounts)
Current Assets:
Cash and cash equivalents................................................ $ 115,815 $ 86,773
Restricted funds held in trust........................................... 92,039 93,219
Receivables (less allowances: 2002, $20,476 and 2001, $16,444)........... 259,082 306,712
Deferred income taxes.................................................... 11,200 27,500
Prepaid expenses and other current assets................................ 85,997 89,775
Assets held for sale..................................................... 67,948
------------- -------------
Total current assets..................................................... 564,133 671,927
Property, plant and equipment-net........................................ 1,661,863 1,901,311
Restricted funds held in trust........................................... 169,995 167,009
Unbilled service and other receivables (less allowance of
$2,957 in 2002 and zero in 2001)....................................... 147,640 150,825
Unamortized contract acquisition costs-net............................... 60,453 89,030
Goodwill-net............................................................. 10,106
Other intangible assets-net.............................................. 7,631 8,211
Investments in and advances to investees and joint ventures.............. 166,465 183,231
Other assets............................................................. 61,927 65,502
------------- -------------
Total Assets............................................................. $ 2,840,107 $ 3,247,152
============= =============
Liabilities and Shareholders' Equity (Deficit)
Liabilities:
Current Liabilities:
Current portion of long-term debt........................................ $ 16,450 $ 13,089
Current portion of project debt.......................................... 115,165 113,112
Convertible subordinated debentures...................................... 148,650
Accounts payable......................................................... 23,593 37,142
Federal and foreign income taxes payable................................. 5,955
Accrued expenses......................................................... 254,964 362,388
Obligations related to assets held for sale.............................. 217,206
Deferred income.......................................................... 41,402 42,694
------------- -------------
Total current liabilities................................................ 451,574 940,236
Long-term debt........................................................... 23,779 298,602
Project debt............................................................. 1,128,217 1,302,381
Deferred income taxes.................................................... 249,600 323,669
Deferred income.......................................................... 151,000 161,525
Other liabilities........................................................ 80,369 174,345
Liabilities subject to compromise........................................ 892,012
Minority interests....................................................... 35,869 40,150
------------- -------------
Total Liabilities........................................................ 3,012,420 3,240,908
------------- -------------
Shareholders' Equity (Deficit):
Serial cumulative convertible preferred stock, par value $1.00
per share, authorized, 4,000,000 shares; shares outstanding:
33,049 in 2002 and 33,480 in 2001, net of treasury shares of
29,820 in 2002 and 2001.................................................. 33 34
Common stock, par value $.50 per share; authorized, 80,000,000
shares; outstanding: 49,824,251 in 2002 and 49,835,076 in 2001,
net of treasury shares of 4,125,350 and 4,111,950, respectively.......... 24,912 24,918
Capital surplus.......................................................... 188,156 188,371
Notes receivable from key employees for common stock issuance............ (870) (870)
Unearned restricted stock compensation................................... (54) (664)
Deficit.................................................................. (384,173) (205,262)
Accumulated other comprehensive loss..................................... (317) (283)
------------- -------------
Total Shareholders' Equity (Deficit)..................................... (172,313) 6,244
------------- -------------
Total Liabilities and Shareholders' Equity (Deficit)..................... $ 2,840,107 $ 3,247,152
============= =============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Covanta Energy Corporation (Debtor in Possession) and Subsidiaries
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
- ----------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------------
(In Thousands of Dollars, Except Share and
Per Share Amounts) SHARES AMOUNTS SHARES AMOUNTS SHARES AMOUNTS
SERIAL CUMULATIVE CONVERTIBLE
PREFERRED STOCK, PAR VALUE $1.00
PER SHARE; AUTHORIZED, 4,000,000 SHARES
Balance at beginning of year............... 63,300 $ 64 65,402 $ 66 69,066 $ 69
Shares converted into common stock......... (431) (1) (2,102) (2) (3,664) (3)
---------- ----------- ---------- -------- ---------- ----------
Total...................................... 62,869 63 63,300 64 65,402 66
Treasury shares............................ (29,820) (30) (29,820) (30) (29,820) (30)
---------- ----------- ---------- -------- ---------- ----------
Balance at end of year (aggregate
involuntary liquidation value--2002, $666).. 33,049 33 33,480 34 35,582 36
---------- ----------- ---------- -------- ---------- ----------
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 53,873,298 26,937
Exercise of stock options.................. 23,898 12
Shares issued for acquisition.............. 15,390 8
Conversion of preferred shares............. 2,575 1 12,554 6 21,886 11
---------- ----------- ---------- -------- ---------- ----------
Total...................................... 53,949,601 26,975 53,947,026 26,974 53,910,574 26,956
---------- ----------- ---------- -------- ---------- ----------
Treasury shares at beginning of year ...... 4,111,950 2,056 4,265,115 2,133 4,405,103 2,203
(Issuance) cancellation of restricted stock 13,400 7 (114,199) (57) (139,988) (70)
Exercise of stock options.................. (38,966) (20)
---------- ----------- ---------- -------- ---------- ----------
Treasury shares at end of year............. 4,125,350 2,063 4,111,950 2,056 4,265,115 2,133
---------- ----------- ---------- -------- ---------- ----------
Balance at end of year..................... 49,824,251 24,912 49,835,076 24,918 49,645,459 24,823
---------- ----------- ---------- -------- ---------- ----------
CAPITAL SURPLUS:
Balance at beginning of year............... 188,371 185,681 183,915
Exercise of stock options.................. 776
Issuance (cancellation )of restricted stock (215) 1,918 1,602
Shares issued for acquisition.............. 172
Conversion of preferred shares............. (4) (8)
----------- -------- ----------
Balance at end of year..................... 188,156 188,371 185,681
----------- -------- ----------
NOTES RECEIVABLE FROM KEY EMPLOYEES FOR
COMMON STOCK ISSUANCE...................... (870) (870) (1,049)
----------- -------- ----------
UNEARNED RESTRICTED STOCK COMPENSATION:
Balance at beginning of year............... (664)
(Issuance) cancellation of restricted common stock 222 (1,567)
Amortization of unearned restricted stock compensation 388 903
----------- -------- ----------
Balance at end of year..................... (54) (664)
----------- -------- ----------
EARNED SURPLUS (DEFICIT):
Balance at beginning of year............... (205,262) 25,829 255,182
Net loss................................... (178,895) (231,027) (229,285)
----------- -------- ----------
Total...................................... (384,157) (205,198) 25,897
----------- -------- ----------
Preferred dividends-per share 2002 $.46875;
2001 and 2000, $1.875;..................... 16 64 68
----------- -------- ----------
Balance at end of year..................... (384,173) (205,262) 25,829
----------- -------- ----------
CUMULATIVE TRANSLATION
ADJUSTMENT-NET............................. (238) (283) (3,355)
----------- -------- ----------
MINIMUM PENSION LIABILITY ADJUSTMENT....... 88 (409)
----------- -------- ----------
NET UNREALIZED LOSSES ON
SECURITIES AVAILABLE FOR SALE.............. (167)
----------- -------- ----------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)....... $ (172,313) $ 6,244 $ 231,556
=========== ======== ==========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Covanta Energy Corporation (Debtor in Possession) and Subsidiaries
STATEMENTS OF CONSOLIDATED CASH FLOWS
- -------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
(In Thousands of Dollars)
Cash Flows From Operating Activities:
Net loss.................................................... $ (178,895) $ (231,027) $ (229,285)
Adjustments to Reconcile Net Loss to Net Cash
Provided by (Used in) Operating Activities of Continuing Operations:
Loss (income) from discontinued operations.................. 17,866 (3,702) 139,503
Reorganization items........................................ 49,106
Payment of reorganization items............................. (26,928)
Depreciation and amortization............................... 95,400 98,315 106,674
Deferred income taxes....................................... (8,839) (29,544) (37,868)
Write-down of assets held for use........................... 101,211
Write-down of and obligations related to assets held
for sale.................................................. 46,000 260,866 77,240
Provision for doubtful accounts............................. 20,013 14,212 15,598
Amortization of financing costs............................. 23,685 14,684
Equity in income from unconsolidated investments............ (25,076) (17,665) (24,088)
Cumulative effect of change in accounting principle......... 7,842
Severance and other employment charges...................... 10,271
Other....................................................... (20,563) 28,941 8,976
Management of Operating Assets and Liabilities:
Decrease (Increase) in Assets:
Receivables................................................. 24,215 (56,207) (3,947)
Inventories................................................. (722)
Other assets................................................ (504) (20,087) (6,000)
Increase (Decrease) in Liabilities:
Accounts payable............................................ 33,571 (15,749) (27,082)
Accrued expenses............................................ 853 32,235 (47,925)
Deferred income............................................. (2,815) (15,349) (8,901)
Other liabilities........................................... (53,543) 17,495 (41,386)
------------- ----------- -----------
Net cash provided by (used in) operating activities
of continuing operations............................... 102,599 77,418 (68,942)
------------- ----------- -----------
Cash Flows From Investing Activities:
Proceeds from sale of marketable securities available
for sale.................................................. 646 584 7,251
Net proceeds from sale of businesses and other.............. 18,871 34,904 19,354
Proceeds from sale of property, plant, and equipment........ 988 915 9,814
Investments in facilities .................................. (18,164) (51,951) (30,051)
Other capital expenditures.................................. (3,103) (9,442) (24,897)
Decrease in other receivables............................... 2,011 3,963
Distributions from investees and joint ventures............. 27,863 31,182 9,459
Increase in investments in and advances to investees
and joint ventures..................................... (296) (18,576) (34,032)
------------- ----------- -----------
Net cash provided by (used in) investing activities
of continuing operations.............................. 26,805 (10,373) (39,139)
------------- ----------- -----------
Cash Flows From Financing Activities:
Borrowings for energy facilities............................ 92,643
Other new debt.............................................. 6,102 18,174 2,378
Payment of debt............................................. (120,924) (271,867) (182,228)
Dividends paid.............................................. (16) (64) (68)
(Increase) Decrease in funds held in trust.................. (9,549) (6,925) 16,991
Decrease (Increase) in restricted cash...................... 194,118 (194,118)
Proceeds from exercise of stock options..................... 808
Other....................................................... (4,087) (4,075) (3,800)
------------- ----------- -----------
Net cash used in financing activities of continuing operations (128,474) (69,831) (268,202)
------------- ----------- -----------
Net cash provided by discontinued operations................ 28,112 8,916 355,906
------------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................................. 29,042 6,130 (20,377)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 86,773 80,643 101,020
------------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 115,815 $ 86,773 $ 80,643
============ =========== ==========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Covanta Energy Corporation (Debtor in Possession) and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Principles of Consolidation: The Consolidated Financial Statements include the
accounts of Covanta Energy Corporation (Debtor in Possession) and its
subsidiaries (collectively, "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/operate capabilities for water and wastewater treatment
infrastructures. Companies in which Covanta has equity investments of 20% to 50%
are accounted for using the equity method since Covanta has the ability to
exercise significant influence over their operating and financial policies.
Those companies in which Covanta owns less than 20% are accounted for using the
cost method, except for two companies in which Covanta owns less than 20% but
has significant influence over the operations of these companies through
significant representation on the Boards of Directors, significant shareholder
rights and significant ownership in the operators of the energy facilities owned
by these companies. All intercompany transactions and balances have been
eliminated.
Basis of Accounting: On April 1, 2002 ("Petition Date"), Covanta Energy
Corporation and 123 of its domestic subsidiaries filed voluntary petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the Southern
District of New York (the "Bankruptcy Court"). Since April 1, 2002, one
additional subsidiary has filed a petition for reorganization under Chapter 11
of the Bankruptcy Code. In addition, four subsidiaries which had filed petitions
on April 1, 2002 have been sold as part of the Company's disposition of non-core
assets, and are no longer owned by the Company or part of the bankruptcy
proceeding (see Note 4.) It is possible that additional subsidiaries will file
petitions for reorganization under Chapter 11 and be included as part of the
Company's plan of reorganization. The pending Chapter 11 cases (the "Chapter 11
Cases") are being jointly administered for procedural purposes only.
International operations and certain other subsidiaries and joint venture
partnerships were not included in the filing.
The Company's Consolidated Financial Statements have been prepared on a "going
concern" basis in accordance with accounting principles generally accepted in
the United States of America. The "going concern" basis of presentation assumes
that the Company will continue in operation for the foreseeable future and will
be able to realize its assets and discharge its liabilities in the normal course
of business. Because of the Chapter 11 Cases and the circumstances leading to
the filing thereof, the Company's ability to continue as a "going concern" is
subject to substantial doubt and is dependent upon, among other things,
confirmation of a plan of reorganization, the Company's ability to comply with
the terms of, and if necessary renew, the Debtor in Possession Credit Facility,
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 that this can be accomplished and if it were not, the Company's
ability to realize the carrying value of its assets and discharge its
liabilities would be subject to substantial uncertainty. Therefore, if the
"going concern" basis were not used for the Company's Consolidated Financial
Statements, then significant adjustments could be necessary to the carrying
value of assets and liabilities, the revenues and expenses reported, and the
balance sheet classifications used.
The Company's Consolidated Financial Statements 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
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 Consolidated Statements of Cash Flows.
During 1999, the Company announced that it intended to sell its aviation and
entertainment businesses and the Board of Directors of the Company formally
adopted a plan to sell these operations. As a result of the adoption of this
plan, these operations were presented as discontinued operations (see Notes 3
and 4). The Company classified the remaining unsold businesses on December 31,
2000 as assets held for sale in the Consolidated Financial Statements (see Note
4).
Use of Estimates: 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 consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Significant estimates include management's estimate of the carrying
values of the Company's assets held for sale and related liabilities, estimated
useful lives of long-lived assets, allowances for doubtful accounts receivable,
liabilities for workers' compensation, severance, restructuring, litigation and
other claims against the Company and the fair value of the Company's guarantees.
Cash and Cash Equivalents: Cash and cash equivalents include all cash balances
and highly liquid investments having original maturities of three months or
less.
Marketable Securities: Marketable securities are classified as available for
sale and recorded at current market value. Net unrealized gains and losses on
marketable securities available for sale are credited or charged to Other
Comprehensive Loss (see Note 6).
Contracts and Revenue Recognition: Service revenues primarily include the fees
earned under contracts to operate and maintain energy facilities and to service
the project debt, with additional fees earned based on excess tonnage processed.
Revenues under fixed-price contracts, including construction, are recognized on
the basis of the estimated percentage of completion of services rendered.
Anticipated losses are recognized as soon as they become known. Service revenues
also represent fees for the operation and maintenance of water and wastewater
facilities. Revenue from the sale of electricity and steam are earned at energy
facilities and are recorded based upon output delivered and capacity provided at
rates specified under contract terms or prevailing market rates. Each of a
majority of the Company's power plants rely primarily on one power sales
agreement with a single customer for the majority of its electricity sales
revenues.
Long-term unbilled service receivables related to energy operations are
discounted in recognizing the present value for services performed currently in
order to service the project debt. Such unbilled receivables amounted to 134.9
million and $149.6 million at December 31, 2002 and 2001, respectively. The full
recoverability of these receivables assumes no refinancing of the project debt
or other significant project restructuring.
Other Sales-Net: Other sales-net includes the sale of product by subsidiaries,
mainly Datacom, in the Other segment. Sales are recognized when goods are
shipped to customers and title and risk of loss for such goods passes to those
customers. No goods are shipped on consignment.
Other Revenues-Net: Other revenues-net includes amounts received related to
insurance proceeds as a result of the settlement of certain legal matters.
Property, Plant and Equipment: Property, plant, and equipment is stated at cost.
For financial reporting purposes, depreciation is calculated by the
straight-line method over the estimated useful lives of the assets, which range
generally from three years for computer equipment to 50 years for
waste-to-energy facilities. Accelerated depreciation is generally used for
Federal income tax purposes. Leasehold improvements are amortized by the
straight-line method over the terms of the leases or the estimated useful lives
of the improvements as appropriate. Landfills are amortized based on the
quantities deposited into each landfill compared to the total estimated capacity
of such landfill.
Contract Acquisition Costs: Costs associated with the acquisition of specific
contracts are amortized using the effective interest rate method over their
respective contract terms. Contract acquisition costs are presented net of
accumulated amortization of $55.1 million and $51.6 million at December 31, 2002
and 2001, respectively.
Bond Issuance Costs: Costs incurred in connection with the issuance of bonds are
amortized straight-line over the terms of the respective debt issues.
Restricted Funds: Restricted funds represent proceeds from the financing and
operations of energy facilities. Funds are held in trust and released as
expenditures are made or upon satisfaction of conditions provided under the
respective trust agreements.
Deferred Financing Costs: Costs incurred in connection with obtaining financing
are capitalized and amortized using the effective interest rate method over the
terms of the related financings.
Project Development Costs: The Company capitalizes project development costs
once it is determined that it is probable that such costs will be realized
through the ultimate construction of a plant. These costs include outside
professional services, permitting expense and other third party costs directly
related to the development of a specific new project. Upon the start-up of plant
operations or the completion of an acquisition, these costs are generally
transferred to property, plant and equipment and are amortized over the
estimated useful life of the related project or charged to construction costs in
the case of a construction contract for a publicly owned facility. Capitalized
project development costs are charged to expense when it is determined that the
related project is impaired.
Pension and Postretirement Plans: The Company has pension and post-retirement
obligations and costs that are developed from actuarial valuations. Inherent in
these valuations are key assumptions including discount rates, expected return
on plan assets and medical trend rates. Changes in these assumptions are
primarily influenced by factors outside the Company's control and can have a
significant effect on the amounts reported in the financial statements.
Other Intangible Assets: These assets are amortized by the straight-line method
over periods ranging from 15 to 25 years. Intangibles of $7.6 million and $8.2
million at December 31, 2002 and 2001, respectively, are net of accumulated
amortization of $1.4 million and $0.8 million, respectively (see Note 11). Also
see Changes in Accounting Principle below regarding the change in accounting for
goodwill and other intangible assets.
Interest Rate Swap Agreements: The fair value of swap agreements are recorded as
assets and liabilities, with change in fair value during the year credited or
charged to interest expense or debt service charges, as appropriate.
Income Taxes: Covanta files a consolidated Federal income tax return, which
includes all eligible United States subsidiary companies. Foreign subsidiaries
are taxed according to regulations existing in the countries in which they do
business. Provision has not been made for United States income taxes on income
earned by foreign subsidiaries as the income is considered to be permanently
invested overseas.
Long-Lived Assets: Covanta accounts for the impairment of long-lived assets to
be held and used by evaluating the carrying value of its long-lived assets in
relation to the operating performance and future undiscounted cash flows of the
underlying businesses when indications of impairment are present. If the
carrying value of such assets is greater than the anticipated future
undiscounted cash flows of those assets, the Company would measure the
impairment amount, if any, as the difference between the carrying value of the
assets and the fair value of those assets.
Long-lived assets held for sale are evaluated in relation to the estimated fair
values of such assets less costs to sell those assets. Fair value is based on
estimated sales prices derived from signed sales contracts, the status of
current negotiation for the sale of such assets or recent appraisals. Assets
held for sale are also not depreciated, which had the effect of decreasing the
loss before income taxes for the years ended December 31, 2002 and 2001 by $0.7
and $0.7 million, respectively.
Foreign Currency Translation: For foreign operations, assets and liabilities are
translated at year-end exchange rates and revenues and expenses are translated
at the average exchange rates during the year. Gains and losses resulting from
foreign currency translation are included on the Statement of Consolidated
Operations and Comprehensive Loss as a component of other comprehensive loss.
For subsidiaries whose functional currency is deemed to be other than the U.S.
dollar, translation adjustments are included as a separate component of other
comprehensive loss and shareholders' equity (deficit). Currency transaction
gains and losses are recorded in Other-net in the Statement of operations.
Earnings per Share: Basic Earnings (Loss) per Share is represented by net income
(loss) available to common shareholders divided by the weighted-average number
of common shares outstanding during the period. Diluted earnings (loss) per
share reflects the potential dilution that could occur if securities or stock
options were exercised or converted into common stock during the period, if
dilutive (see Note 28).
Changes in Accounting Principles: In December 1999, the staff of the Securities
and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements." SAB No. 101 provides guidance on
the recognition, presentation, and disclosure of revenue, and was implemented by
the Company in the quarter ending December 31, 2000. There was no impact from
the adoption of SAB No. 101 on the Company's financial position or results of
operations.
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 Consolidated Balance Sheet as
either an asset or liability measured at fair value, with changes in fair value
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows derivative gains and losses
to offset related results on the hedged items in the Statements of Consolidated
Operations and Comprehensive Loss, and requires that a company must formally
document, designate, and assess the effectiveness of derivatives that receive
hedge accounting.
The Company's policy is to enter into derivatives only 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 $19.1 million at
December 31, 2002.
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. Upon adoption SFAS
No. 142 requires the discontinuance for goodwill and other intangible assets
with indefinite lives, amortization, which the Company estimates would have been
$0.8 million in 2002 (see Note 11). 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.
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,
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. SFAS No. 144 did not have a material effect upon adoption. However,
SFAS 144 required certain balance sheet reclassifications of assets and
liabilities at December 31, 2001 in order to conform with the 2002 presentation,
and the presentation of discontinued operations for the sale of the Company's
Thailand subsidiaries (see Note 3).
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 cumulative effect of adoption of SFAS No. 143 as of January 1, 2003 is
currently estimated to be between $15.0 and $20.0 million.
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 provisions of SFAS No. 145 noted above without
impact on its financial position or results of operations.
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. 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 adoption on January 1, 2003 of
SFAS No. 146 did not have an effect on the Company's financial position or
results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others - an interpretation of FASB Statements No. 5, 57, and 107
and rescission of FASB interpretation No. 34" (FIN No. 45). FIN No. 45
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. This Interpretation does not prescribe a
specific approach for subsequently measuring the guarantor's recognized
liability over the term of the related guarantee. This Interpretation also
incorporates, without change, the guidance in FASB Interpretation No. 34,
"Disclosure of Indirect Guarantees of Indebtedness of Others," which is being
superseded. The initial recognition and initial measurement provisions of this
Interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002, irrespective of the guarantor's fiscal
year-end. The disclosure requirements in this Interpretation are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company has adopted the disclosure requirements of FIN No. 45.
In December 2002, the FASB issued SFAS No.148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of SFAS No 123". SFAS No.
148 provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation . In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123
"Accounting for Stock-Based Compensation" (SFAS No.123), to require prominent
disclosures in annual financial statements about the method of accounting for
stock-based employee compensation and the effect in measuring compensation
expense. The disclosure requirements of SFAS No. 148 are effective for periods
beginning after December 15, 2002. At December 31, 2002, the Company has three
stock-based employee compensation plans, which are described more fully in Note
20. The Company accounts for those plans under the recognition and measurement
provision of APB Opinion No. 25, "Accounting for Stock Issued to Employees", and
related Interpretations. No stock-based employee compensation cost is reflected
in 2002, 2001 and 2000 net loss, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. No options were granted in 2002. Awards under the Company's plans
vest over periods ranging from three to five years. Therefore, the cost related
to stock-based employee compensation included in the determination of net loss
for 2002 is less than that which would have been recognized if the fair value
based method had been applied to all awards since the original effective date of
SFAS No. 123. The following table illustrates the effect on net loss and loss
per share if the fair value based method had been applied to all outstanding and
unvested awards in each period (in thousands, except per share amounts):
Year Ended December 31
2002 2001 2000
- -----------------------------------------------------------------------------------------------
Net loss, as reported.............................. $ (178,895) $ (231,027) $ (229,285)
Deduct: Total stock based employee compensation
expense determined under fair value method for
all awards, net of related tax effects......... $ (4,933) $ (3,772) $ (3,896)
----------- ----------- -----------
Pro forma net loss................................. $ (183,828) $ (234,799) $ (233,181)
=========== =========== ===========
Basic loss per common share:
Basic - as reported................................ $ (3.60) $ (4.65) $ (4.63)
=========== =========== ===========
Basic - pro forma.................................. $ (3.70) $ (4.73) $ (4.71)
=========== ============ ===========
Diluted loss per common share:
Diluted - as reported.............................. $ (3.60) $ (4.65) $ (4.63)
=========== ============ ===========
Diluted - pro forma................................ $ (3.69) $ (4.73) $ (4.71)
=========== ============ ===========
Compensation expense, under the fair value method shown in the table above has
been determined consistent with the provisions of SFAS No. 123 using the
binomial option-pricing model with the following assumption-dividend yield of 0%
in 2001 and 2000; volatility of 42.47% in 2001 and 39.61% in 2000; risk-free
interest rate of 5.8% in 2001 and 6.53% in 2000; and weighted average expected
life of 6.5 years in 20001 and 7.5 years in 2000.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN No. 46). FIN No. 46 clarifies the application
of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," and
applies immediately to any variable interest entities created after January 31,
2003 and to variable interest entities in which an interest is obtained after
that date. This Interpretation is applicable for the Company on July 1, 2003 for
interests acquired in variable interest entities prior to February 1, 2003.
Based on current operations, the Company does not expect the adoption of
Interpretation No. 46 to have a material effect on its financial position or
results of operations.
Reclassification: Certain prior year amounts, including various revenues and
expenses, have been reclassified in the Consolidated Financial Statements to
conform with the current year presentation. Such reclassifications include
equity in income from unconsolidated investments which previously were included
in revenues.
2. Reorganization
As stated above, the Company and certain of its domestic subsidiaries filed
voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code
on April 1, 2002. In the Chapter 11 cases, the filed companies (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 operations 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 May 15, 2002, the
Bankruptcy Court entered 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 issued a memorandum decision
overruling 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 confirmed the memorandum decision in an
order dated August 2, 2002, although one of the objectors has appealed the
order. The Debtors and the appealing objector have reached agreement under which
the appeal has been stayed.
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, debt service has continued to be paid 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.
As a condition to contract assumption, the Company will have to be in current
compliance with all of its obligations under the assumed contract. With respect
to certain of the Company's energy projects, claims have been asserted by
counter-parties to contracts the Company wishes to assume. In some instances the
Company believes these claims are overstated. Prior to emergence, such claims
will be resolved either by negotiation or court proceedings. In addition, the
Company is analyzing the contracts pursuant to which it operates energy projects
to determine if changes to the Company's financial and organizational structure
that will permit it to be in compliance with such contracts at the time of
emergence. There can be no assurance that the matters referred to in this
paragraph can be resolved. If they cannot, the Company may then reject such
contracts.
A public authority in Onondaga County, New York (the "Agency") and the Company
have several commercial disputes between them. Among these is a January 16, 2002
demand by the Agency to provide 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 Agency 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 million under the terms of the
agreement. The Company commenced a lawsuit in state court with respect to such
disputes, as well as the Agency's right to terminate. Following the commencement
of the Chapter 11 Cases, the Company removed the case to the federal court in
the Northern District of New York and further requested that the matter be
transferred to the Bankruptcy Court. On the motion of the Agency, the case was
remanded back to state court. In addition, the Agency 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 applied to the litigation, or other related relief. The Company
appealed the issuance of the district court's injunction to the Court of Appeals
for the Second Circuit and in January 2003 the injunction was vacated. The
Bankruptcy Court thereafter issued an order declaring that the Agency's
post-petition prosecution of the state court lawsuit violated the automatic stay
imposed pursuant to the Bankruptcy Code and preliminarily enjoined and
restrained further prosecution of the lawsuit against the Company. The Agency
has appealed the Bankruptcy Court order. 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. In
addition, the Company could incur substantial obligations to the limited
partners in the project.
The Company is reviewing possible restructuring alternatives for the Onondaga
County project discussed in the preceding paragraph and three other energy
projects in Warren County, New Jersey, the city of Tulsa, Oklahoma and Lake
County, Florida. 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 potentially 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, general 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
December 31, 2002, these four projects had a net book value of approximately
$33.7 million. Lastly, the Company could lose its ownership interest in these
project assets.
The Company's agreement with a client in Montgomery County, Maryland (the
"County") provides that as a result of the rating downgrades of the Company's
unsecured corporate debt, the Company was obligated to provide a $50 million
letter of credit by January 31, 2003, and failing that, the County could elect
to terminate the agreement or receive a $1 million reduction in its annual
service fee. At the current time the Chapter 11 proceedings stays the County's
ability to terminate. Regardless of the stay, the Company asserts that this is a
one-time option. The County maintains that it has a continuous right to rescind
the fee reduction and elect termination. It is likely this matter will be
resolved as part of the Chapter 11 proceedings and at the time of emergence from
bankruptcy the Company will either prevail on its position, provide the letter
of credit, negotiate other terms with Montgomery County or the contract will be
terminated. The impact on the Company's revenues, net income and assets will
depend on how this matter is resolved.
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. The exclusive period to file a plan currently expires on
July 31, 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 may
file a plan of reorganization.
After a plan of reorganization has been filed and the form of disclosure
statement has been approved by 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. Generally speaking, creditors or equity holders that will receive no
distribution under a plan are presumed to vote against such plan and are not
sent a copy of the plan and disclosure statement. 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 Code 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 distribution 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.
The Debtors have begun to develop a plan of reorganization premised upon a core
Energy operation. In addition, in order to enhance the value of the Company's
core business, on September 23, 2002, management announced a 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 improve management efficiency.
Numerous non-energy assets have been disposed of or otherwise eliminated,
including the sale of the remaining aviation fueling business as of December 31,
2002. 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").
The Company has not yet filed a plan of reorganization setting forth its
proposal for emergence from the Chapter 11 process. It is reviewing with its
secured and unsecured creditors possible capital and debt structures for the
reorganized company. As previously disclosed, the restructured entity will
likely focus on the U.S. energy and water markets, predominately the
waste-to-energy market.
Potential stand-alone reorganization structures many enhance Company cash flows
and thereby the value of the reorganized Company by which would increase the
recovery of the Company's creditors. Accordingly, the Company is working with
its creditors to determine the feasibility and benefits of such structures.
As previously announced, contemporaneously with the commencement of the Chapter
11 Cases, the Company executed a non-binding letter of intent with KKR pursuant
to which KKR would acquire the Company. After conducting further due diligence,
KKR made a further proposal in the third quarter of 2002, substantially along
the lines of the letter of intent. The Company sought to negotiate this proposal
with KKR to improve its terms for all creditors. However, since KKR's proposal
is contingent upon the Company's secured bank creditors providing new debt
financing to the Company upon emergence, KKR's discussions to date with respect
to its proposal have been conducted with the Company's bank secured creditors.
Based on the statements by the Company's secured bank creditors, the Company
believes that KKR has recently reduced the value of its offer and, as such, the
Company believes that KKR's recent proposal would result in recoveries that are
inferior to what creditors would obtain in a stand-alone structure.
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. The Company recently
began this process and has not yet determined the necessary reorganization
adjustments, if any. 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 period ended December 31, 2002, (in Thousands):
Legal and professional fees $31,561
Severance, retention and office closure costs 7,380
Lease rejection expenses 600
Write off of deferred financing costs 2,078
Bank fees related to DIP Credit Facility 7,487
-------
Total $49,106
=======
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 $3.6 million for the
post-petition period ended December 31, 2002, 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
because 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 December 31, 2002, (in Thousands):
Debt (See Note 15) $ 138,908
Debt under credit arrangement (See Notes 4 and 17) 144,691
Accounts payable 44,030
Other liabilities 184,135
Obligations related to the Centre and the Team 128,500
Obligations related to Arrowhead Pond 103,098
Convertible Subordinated Debentures (See Note 12) 148,650
---------
Total $ 892,012
=========
As also required by SOP 90-7, below are the condensed combined financial
statements of the Debtors since the date of the bankruptcy filing ("the Debtors'
Statements"). The Debtors' Statements have been prepared on the same basis as
the Company's Financial Statements.
DEBTORS' CONDENSED COMBINED STATEMENT OF OPERATIONS
For the period April 1, 2002 through December 31, 2002
(In Thousands of Dollars)
Total revenues $ 427,548
Operating costs and expenses 332,234
Cost allocation from non-Debtor subsidiaries 7,382
Write down of assets held for use 22,195
Write down of and obligations related to
assets held for sale 46,000
Equity in earnings of non-Debtor subsidiaries
(net of tax benefit of $3,578) (63,416)
---------
Operating loss (43,679)
Reorganization items (49,106)
Interest expense, net (26,838)
---------
Loss before income taxes (excluding taxes applicable
to non-Debtor subsidiaries) and minority interests (119,623)
Income tax benefit 2,290
Minority interests (2,768)
---------
Net Loss $(120,101)
=========
DEBTORS' CONDENSED COMBINED BALANCE SHEETS
As of December 31, 2002 and April 1, 2002
(In Thousands of Dollars)
December 31, 2002 April 1, 2002
Assets:
Current assets $ 414,907 $ 397,646
Property, plant and equipment-net 1,173,222 1,225,181
Investments in and advances to investees
and joint ventures 3,815 3,815
Other assets 358,753 357,564
Investments in and advances to non-Debtor
subsidiaries, net 84,678 (18,800)
----------- ----------
Total Assets $ 2,035,375 $ 1,965,406
=========== ===========
Liabilities:
Current liabilities $ 161,908 $ 70,098
Long-term debt 34,969 17,777
Project debt 931,568 989,654
Deferred income taxes 136,498 103,272
Other liabilities 49,474
Liabilities subject to compromise 892,012 837,057
Minority interests 1,259
----------- -----------
Total liabilities 2,207,688 2,017,858
Shareholders' Deficit (172,313) (52,452)
----------- -----------
Total Liabilities and Shareholders' Deficit $ 2,035,375 $ 1,965,406
=========== ===========
DEBTORS' CONDENSED COMBINED STATEMENT OF CASH FLOWS
For the period April 1, 2002 through December 31, 2002
(In Thousands of Dollars)
Net cash used in operating activities $ 84,326
Net cash used in investing activities (14,728)
Net cash provided by financing activities (54,576)
---------
Net Increase in Cash and Cash Equivalents 15,022
---------
Cash and Cash Equivalents at Beginning of Period 65,791
---------
Cash and Cash Equivalents at End of Period $ 80,813
=========
The Debtors' Statements present the non-Debtor subsidiaries on the equity
method. 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 $7.4 million of costs incurred by the non-Debtor subsidiaries that
provide significant support to the Debtors. All the assets and liabilities of
the Debtors and non-Debtors are subject to revaluation upon emergence from
bankruptcy.
3. Discontinued Operations
As a result of the adoption of the plan in 1999 to discontinue the operations of
the entertainment and aviation businesses, operating results of those businesses
were reported as discontinued operations until December 31, 2000.
At December 31, 2000, the Company reclassified the remaining aviation and
entertainment businesses in the December 31, 2000 Consolidated Balance Sheet to
show these businesses as assets held for sale (see Note 4).
On March 28, 2002, following approval from the Master Credit Facility lenders
(see Note 17,) two of the Company's subsidiaries sold their interests in a power
plant and an operating and maintenance contractor based in Thailand. The total
sale price for both interests was approximately $27.8 million, and the Company
realized a net loss of approximately $17.1 million on this sale after deducting
costs relating to the sale. The results of operations of the two subsidiaries
for 2001 and 2000 have been reclassified in the Statements of Consolidated
Operations and Comprehensive Loss and Statements of Consolidated Cash Flows to
conform with the 2002 presentation.
Revenues and income (loss) from discontinued operations (expressed in thousands
of dollars) for the year ended December 31, 2002, 2001 and 2000 were as follows:
2002 2001 2000
---- ---- ----
Revenues $ 10,963 $ 45,847 $ 361,784
-------- -------- ---------
Loss on disposal of businesses (17,110) (96,969)
Operating income (loss) (987) 5,090 (66,270)
Interest expense - net 33 216 (3,422)
-------- -------- ---------
Income (loss) before income taxes
and minority interests (18,064) 5,306 (166,661)
Income tax (expense) benefit (15) (80) 29,165
Minority interests 213 (1,524) (2,007)
-------- -------- ---------
Income (loss) from discontinued operations $(17,866) $ 3,702 $(139,503)
======== ======== =========
The following is a list of discontinued businesses sold during the year ended
December 31, 2000, the gross proceeds from those sales and the realized gain or
(loss) on those sales (expressed in thousands of dollars):
Description of Business Gross Proceeds Realized Gain (Loss)
Food and Beverage/Venue Management $222,577 $116,437
Aviation Ground Handling 95,728 (31,090)
Parks and Themed Attractions 38,300 (110,610)
Argentina Airport Privatization 27,500 (3,177)
Aviation Fixed Base Operations 15,552 (7,331)
Fairmont Race Track 15,356 (481)
Dominican Republic Airport Privatization 3,175 2,313
Other businesses 4,162 (3,715)
-------- --------
$422,350 $(37,654)
======== ========
In addition, in 2000 the Company closed all but one of its themed restaurants,
disposed of the related assets and negotiated the buyout of the related leases.
The Company recorded charges of $39.4 million related to the disposal of those
fixed assets, and accrued an additional $11.0 million for rent adjustments,
lease buyouts and other costs of disposal. In 2000, the Company also wrote-off
its investments in the Isla Magica theme park as a result of the equity and debt
restructuring of that park resulting in a charge of $9.0 million. All of these
charges are included in Income (Loss) from Discontinued Operations on the
Statement of Consolidated Operations and Comprehensive Loss.
4. Assets Held for Sale and Related Obligations
All remaining non-energy businesses, including remaining aviation and
entertainment businesses, were classified as assets held for sale, and related
assets and obligations in the Consolidated Balance Sheet, at December 31, 2001
(expressed in thousands of dollars) and were as follows:
Current assets $57,556
Property, plant and equipment - net 4,044
Other assets 6,348
---------
Total assets held for sale $67,948
=========
Other current liabilities $(216,859)
Other liabilities (347)
---------
Obligations related to assets held for sale $(217,206)
=========
The following is a list of assets held for sale that were sold during the years
ended December 31, 2002 and 2001, the gross proceeds from those sales, the
realized gain or (loss) on those sales and the write-down of or recognition of
liabilities related to assets held for sale.
Writedown or
Recognition of
Description of Business Proceeds Gain (Loss) Obligations
- ----------------------- -------- ----------- -----------
2002
Port Authority of New York and
New Jersey Fueling $ 5,700 $ 3,510 $
Non Port Authority Fueling 1,000 1,000
Metropolitan 2,308 248
Casino Iguazu 3,439 -
La Rural 500 500
Compania General De Sondeos (1,708)
Arrowhead Pond (40,000)
The Centre and The Team (6,000)
---------- --------- ---------
Total $12,947 $ 3,550 $ (46,000)
========== ========= =========
2001
Non-Port Authority Fueling $ 15,200 $ (4,026) $ -
Colombia Airport Privatization 9,660 1,404 -
Rome, Italy Aviation Ground Operations 9,947 1,855 -
Spain Aviation Ground Operations 1,753 (261) -
Aviation Fixed Base Operations 2,098 777 -
Metropolitan (5,369)
Casino Iguazu (4,491)
La Rural (16,616)
Compania General De Sondeos (358)
IFC Australia (1,978)
Arrowhead Pond (74,353)
The Centre and The Team (140,000)
Datacom (16,810)
Other 197 (2,517) (891)
---------- --------- ---------
Total $ 38,855 $ (2,768) $(260,866)
========== ========= =========
At December 31, 2000, the Company applied the provisions of SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" to the Assets held for sale and recorded a pre-tax loss of $77.2
million, related entirely to businesses previously classified in the
entertainment segment. This amount is shown in write-down and obligations
related to assets held for sale in the 2000 Statement of Consolidated Operations
and Comprehensive Loss.
The Company's interests in the Arrowhead Pond, the Centre and the Team have been
materially adversely affected by events occurring at the end of 2001 and
beginning of 2002. On December 21, 2001 the Company announced that its inability
to access the capital markets, the continuing delays in payment of remaining
California energy receivables and delays in the sale of aviation and
entertainment assets had adversely impacted Covanta's ability to meet cash flows
covenants under its Master Credit Facility. The Company also stated that the
banks had provided a waiver for the covenants only through January of 2002, had
not agreed to provide the additional short-term liquidity the Company had sought
and that the Company was conducting a comprehensive review of its strategic
alternatives.
On December 27, 2001 and January 11, 2002 the Company's credit rating was
reduced by Moody's and Standard & Poor's, respectively. These downgrades
triggered requirements to post in excess of $100 million in performance and
other letters of credit for energy projects and for which the Company no longer
had available commitments under its Master Credit Facility.
The Company required further waivers from its cash flows covenants under its
Master Credit Facility for the period after January 2002. On January 31, 2002
the Company announced that it had obtained waivers through the end of March
2002, subject, however, to its meeting stringent cash balance requirements set
by its banks.
Among other things, these cash balance requirements prevented the Company from
paying interest due on March 1, 2002 on its 9.25% Debentures (the "9.25%
Debentures"). In addition, the restrictions prevented contributions to the
working capital needs of the Team, the prime tenant of the Centre.
These events resulted in draws during March 2002 on the letters of credit for
the $19.0 million and $86.2 million guarantees discussed below with respect to
the Team and the Centre, respectively. As a result of drawing on the letters of
credit, the Company obtained an interest in the loans that had been secured by
the letters of credit that had been drawn.
On April 1, 2002, the Company filed for relief under Chapter 11 of the
Bankruptcy Code. (See Note 2).
The events leading up to the bankruptcy filing and the filing itself have
materially adversely affected the Company's ability to manage the timing and
terms on which to dispose of its interests and related obligations with respect
to the Centre, the Team and the Arrowhead Pond, as described below.
With respect to the Centre and the Team, these events led to the termination, in
early 2002, of a pending sale of limited partnership interests and related
recapitalization of the Team that, if completed as contemplated, would have been
expected to stabilize the finances of the Team and the Centre for a considerable
period. Given the Company's inability to fund short-term working capital needs
of the Team, and given the events described above, the Company is not in a
position to manage the timing and terms of disposition of the Team and the
Centre in a manner most advantageous to the Company.
Based upon all available information, including an initial offer to purchase
dated June 20, 2002 and certain assumptions as to the future use, and
considering the factors listed above, the Company recorded a pre-tax impairment
charge as of December 31, 2001 of $140.0 million related to the Centre and the
Team. As a result of the Team filing for protection under the Canadian Company's
Creditor Arrangement Act on January 9, 2003 and the status of the Company's
current negotiations to dispose of these interests, an additional $6.0 million
pre-tax impairment charge was recorded as of December 31, 2002.
The impairment charges, which have been included in write-down of and
obligations related to assets held for sale in the Statements of Consolidated
Operations and Comprehensive Loss, represent the Company's current estimate of
the net cost to sell its interests in the Centre and Team and to be discharged
of all related obligations and guarantees and are included in Liabilities
subject to compromise in the December 31, 2002 Consolidated Balance Sheet. The
resulting tax benefit of $22.8 million has been included in the deferred income
taxes liability at December 31, 2002. However, in view of the proposed sales of
these interests, and the need for approval by the Bankruptcy Courts in the
United States, the Ontario Superior Court of Justice in Canada, DIP lenders (see
Note 2) and the National Hockey League ("NHL") of such transactions, uncertainty
remains as to the actual amount of the impairment and deferred tax benefit.
The Company's guarantees at December 31, 2001 were comprised of a: (1) $19.0
million guarantee of the Team's subordinated loan payable; (2) $86.2 million
guarantee of the senior term debt of the Centre; (3) $45.8 million guarantee of
the senior subordinated debt of the Centre for which $6.3 million in cash
collateral has been posted by the borrower; (4) $3.1 million guarantee of senior
secured term debt of the team; (5) guarantee of the interest payments on $37.7
million of senior secured term debt of the Team; (6) guarantee to make working
capital advances to the Centre from time to time in amounts necessary to cover
any shortfall between certain operating cash flows, operating expenses and debt
service of the Centre; and (7) $17.5 million cost for terminated foreign
exchange currency swap agreements. The swap agreements had a notional amount of
$130.6 million and were entered into by the Centre related to the $86.2 million
senior term and $45.8 million senior subordinated debt. These swap agreements
had extended originally through December 23, 2002 but were terminated by the
counter-parties in May 2002.
The Company's guarantees arose during 1994, when a subsidiary of Covanta entered
into a 30-year facility management contract at the Centre pursuant to which it
agreed to advance funds to the Team, and if necessary, to assist the Centre's
refinancing of senior secured debt incurred in connection with the construction
of the Centre. In compliance with these guarantees, the Company entered into
agreements pursuant to which it was required to purchase the $19.0 million and
$86.2 million series of debt referred to above if such debt was not timely
refinanced or upon the occurrences of certain defaults. In March 2002, the
holders of the subordinated debt of the Team required the Company to purchase
such debt in the total amount (together with accrued and unpaid dividends) of
$19.0 million and were paid that amount under a letter of credit for which the
Company was the reimbursement party. In addition, in March, as the result of
defaults occurring in 2002, the holders of the senior debt relating to the
Centre required the Company to purchase such debt in the total amount (together
with accrued and unpaid dividends) of $86.2 million and were paid that amount
under a letter of credit for which the Company was the reimbursement party. The
subordinated secured debt of the Centre in the amount of $45.8 million is also
subject to a put right pursuant to the terms of the underlying agreements. Such
subordinated secured debt has not been put to the Company, although the holder
has the right to do so. The obligation to purchase such debt is not secured by a
letter of credit.
In addition to the above impairment charges, and following the termination of
the pending sale of limited partnership interests discussed above, the Company
also recorded a charge of $5.5 million at December 31, 2001 to fully reserve
against receivables due from the Team. The $5.5 million charge was included in
Other Operating Costs and Expenses in the 2001 Statement of Consolidated
Operations and Comprehensive Loss.
The events set forth above have also materially adversely affected the Company's
ability to manage the timing and terms on which to dispose of its interest and
related obligations in the Arrowhead Pond. The Company's limited ability to fund
short-term working capital needs at the Arrowhead Pond under the DIP credit
facility and the need to resolve the bankruptcy case may create the need to
dispose of the management contract for the Arrowhead Pond at a time when
building revenues are not at levels consistent with past experience. Based upon
all the then currently available information, including a recently received
valuation and certain assumptions as to the future use, and considering the
effects of the events set forth above, the Company recorded an impairment charge
as of December 31, 2001 of $74.4 million related to the Company's interest in
the Arrowhead Pond.
The $74.4 million charge, which was included in write-down of and obligations
related to assets held for sale in the 2001 Consolidated Statement of
Consolidated Operations and Comprehensive Loss, represents the write-off of the
$16.4 million previous carrying amount at that date and the Company's $58.0
million estimate of the net cost to sell its interests in the long-term
management agreement discussed in the following paragraph. The estimated net
after tax cost to sell has been included in Liabilities subject to compromise in
the December 31, 2002 Consolidated Balance Sheet. The resulting tax benefit of
$20.9 million has been included in the deferred income taxes liability at
December 31, 2001. However, in view of the proposed sales of this interest, and
the need for approval by the Bankruptcy Court and DIP Lenders (see Note 2) of
such transactions, uncertainty remains as to the actual amount of the impairment
and deferred tax benefit.
A subsidiary of the Company is the manager of the Arrowhead Pond under a
long-term management agreement. The Company and the City of Anaheim are parties
to a reimbursement agreement to the financial institution which issued a letter
of credit in the amount of approximately $117.2 million ($2.1 million of which
was drawn on December 4, 2002) which provides credit support for Certificates of
Participation issued to finance the Arrowhead Pond project. As part of its
management agreement, the manager is responsible for providing working capital
to pay operating expenses and debt service (including interest rate swap
exposure of $10.4 million at December 31, 2002 and reimbursement of the lender
for draws under the letter of credit including draws related to an acceleration
by the lender of all amounts payable under the reimbursement agreement) if the
revenues of Arrowhead Pond are insufficient to cover these costs. The Company
has guaranteed the obligations of the manager. The City of Anaheim has given the
manager notice of default under the management agreement. In such notice, the
City indicated that it did not propose to exercise its remedies at such time and
is stayed from doing so as a result of the Company's Chapter 11 filing.
The Company is also the reimbursement party on a $26.0 million letter of credit
and a $1.5 million letter of credit relating to a lease transaction for
Arrowhead Pond. The $26.0 million letter of credit, which is security for the
lease investor, can be drawn upon the occurrence of an event of default. The
$1.5 million letter of credit is security for certain indemnification payments
under the lease transaction documents, the 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 for 2002 is
estimated to be approximately $6.7 million, which the Company has not provided.
Notices of default were delivered in 2002 under the lease transaction documents.
As a result of the default, parties may exercise remedies, including drawing on
letters of credit related to lease transactions and recovering fees to which the
manager may be entitled for managing the Arrowhead Pond.
These 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 lessor or to the bank honoring a drawn letter of
credit.
To reflect the Company's estimate of its total exposure with respect to the
Arrowhead Pond, including 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 in the second quarter of 2002 a pre-tax $40.0 million impairment
charge which is included in Liabilities subject to compromise in the December
31, 2002 Consolidated Balance Sheet. The resulting tax benefit of $14.0 million
has been included in the deferred income taxes liability at December 31, 2002.
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 benefit.
In March 2003, the underlying swap agreement related to the Company's interest
rate swap exposure was terminated resulting in a fixed obligation of $10.6
million.
5. Investments In and Advances to Investees and Joint Ventures
The Company is party to joint venture agreements through which the Company has
equity investments in several operating projects and a project that is expected
to become operational in the second half of 2003. The joint venture agreements
generally provide for the sharing of operational control as well as voting
percentages. The Company records its share of earnings from its equity investees
on a pre-tax basis and records the Company's share of the investee's income
taxes in income tax expense (benefit).
At December 31, 2001, the Company's share of earnings from its equity investees
was reduced by a $7.9 million impairment charge, calculated based upon
discounted future cash flows and resulting mainly from closing down part of an
energy generating facility due to lower demand, related to its Bolivia
investment. In December 2002, the Company sold this investment for gross
proceeds of approximately $0.9 million resulting in a gain on sale of $0.6
million after selling expenses.
In 2000, the Company acquired an ownership interest in a 106 MW low sulfur
furnace heavy fuel oil based diesel engine power plant located in India. Through
a share purchase agreement the Company's ownership interest reached 74.8% in
2001. Also in 2000, the Company acquired a 49% interest in a heavy fuel oil
based diesel engine power plant also located in India. Upon the plant's
achieving commercial operation in February 2001, the Company obtained an
additional 11% stake in the plant. As of December 31, 2000, the Company
accounted for these investments on the equity method. Because the increased
ownership interests gave the Company control, the Company began to consolidate
these project companies in the first quarter of 2001.
The Company is a party to a joint venture formed to design, construct, own and
operate a coal-fired electricity generation facility in the Quezon Province, The
Philippines ("Quezon Joint Venture"). The Company owns 26.125% of, and has
invested 27.5% of the total equity in, the Quezon Joint Venture. This project
commenced commercial operations in 2000.
In March of 2002, the Company sold its equity interest in the Rojana Power Plant
in Thailand contemporaneously with the sale of the Saha Cogeneration Plant. The
gross proceeds from this sale were $7.1 million, which resulted in a loss on
sale of $6.5 million after selling expenses.
In addition, the Company owns interests of up to 50% in 12 other affiliates
which principally own and operate, or are developing, energy facilities.
The December 31, 2002 aggregate carrying value of the investments in and
advances to investees and joint ventures of $166.4 million is less than the
Company's equity in the underlying net assets of these investees by
approximately $1.7 million. The carrying value of $183.2 million at December 31,
2001 was $4.2 million less than the Company's equity in the underlying net
assets. These differences of cost over acquired net assets are mainly related to
property, plant, and equipment and power purchase agreements of several
investees.
At December 31, 2002 and 2001, investments in and advances to investees and
joint ventures accounted for under the equity method were comprised as follows
(expressed in thousands of dollars):
Ownership Interest at December 31,
December 31, 2002 2002 2001
----------------- ---- ----
Mammoth Pacific Plant (U.S.) 50% $ 41,796 $ 53,085
Ultrapower Chinese Station Plant (U.S.) 50% 8,756 12,133
South Fork Plant (U.S.) 50% 1,041 958
Koma Kulshan Plant (U.S.) 50% 4,161 3,471
Linasa Plant (Spain) 50% 2,511 2,137
Haripur Barge Plant (Bangladesh) 45% 18,870 17,363
Quezon Power (Philippines) 26% 82,935 73,861
Rojana Power Plant (Thailand) (A) 12,377
Empressa Valle Hermoso Project (Bolivia) (B) 1,000
Trezzo Power Plant (Italy) 13% 3,815 3,815
Other various 2,580 3,031
--------- --------
Total Investments in Power Plants $ 166,465 $183,231
========= ========
(A) Rojana plant was sold on March 28, 2002
(B) Empressa Project was sold on December 5, 2002
The unaudited combined results of operations and financial position of the
Company's equity method affiliates are summarized below (expressed in thousands
of dollars).
2002 2001 2000
---- ---- ----
Condensed Statements of Operations
for the years ended December 31:
Revenues $305,835 $333,277 $267,359
Gross profit 169,954 158,487 62,976
Net income 82,892 56,172 67,832
Company's share of net income 25,076 17,665 24,088
Condensed Balance Sheets at December 31:
Current assets $171,069 $212,074 $235,975
Non-current assets 1,082,948 1,261,953 1,351,668
Total assets 1,254,017 1,474,027 1,587,643
Current liabilities 86,345 96,595 139,384
Non-current liabilities 695,789 826,962 826,319
Total liabilities 782,134 923,557 965,703
6. Investments in Marketable Securities Available for Sale
At December 31, 2002 and 2001, marketable equity and debt securities held for
current and noncurrent uses, such as nonqualified pension liabilities and a
deferred compensation plan, are classified as long-term assets (see Note 10).
Marketable securities at December 31, 2002 and 2001 (expressed in thousands of
dollars), include the following:
2002 2001
Market Value Carrying Value Market Value Carrying Value
------------ -------------- ------------ --------------
Classified as Noncurrent Assets:
Mutual and bond funds $ 2,353 $ 2,353 $ 2,940 $ 2,940
======= ======= ======= =======
Proceeds, realized gains and realized losses from the sales of securities
classified as available for sale for the years ended December 31, 2002, 2001 and
2000, were $0.6 million, zero, and $0.3 million; $0.6 million, zero and $0.1
million; and $7.2 million, $0.9 million and $0.1 million, respectively. For the
purpose of determining realized gains and losses, the cost of securities sold
was based on specific identification.
7. Unbilled Service and Other Receivables
Unbilled service and other receivables (expressed in thousands of dollars)
consisted of the following:
2002 2001
---- ----
Unbilled service receivables net $139,378 $149,624
Notes receivable 4,335 -
Other 3,927 1,201
-------- --------
Total $147,640 $150,825
======== ========
Long-term unbilled service receivables are for services that have been performed
for municipalities that are due by contract at a later date and are discounted
in recognizing the present value of such services. Current unbilled service
receivables, which are included in Receivables on the Consolidated Balance
Sheet, amounted to $65.9 million and $62.8 million at December 31, 2002 and
2001, respectively.
8. Restricted Funds Held in Trust
Restricted funds held in trust are primarily amounts received by third parties
relating to projects owned by the Company, and which may be used only for
specified purposes. They include debt service reserves for payment of principal
and interest on project debt, deposits of revenues received with respect to
projects prior to their disbursement as provided in the relevant indenture or
other agreements, lease reserves for lease payments under operating leases, and
proceeds received from financing the construction of energy facilities. Such
funds are invested principally in United States Treasury bills and notes and
United States government agencies securities.
Fund balances (expressed in thousands of dollars) were as follows:
2002 2001
---- ----
Current Non-current Current Non-current
------- ----------- ------- -----------
Debt service funds $53,948 $133,300 $48,357 $131,300
Revenue funds 12,382 - 11,608
Lease reserve funds 3,548 15,731 3,116 15,794
Construction funds 187 - 186
Other funds 21,974 20,964 29,952 19,915
------- -------- ------ --------
Total $92,039 $169,995 $93,219 $167,009
======= ======== ======= ========
9. Property, Plant and Equipment
Property, plant and equipment (expressed in thousands of dollars) consisted of
the following:
2002 2001
---- ----
Land $ 5,323 $ 8,427
Energy facilities 2,075,949 2,239,082
Buildings and improvements 194,395 207,622
Machinery and equipment 79,541 84,930
Landfills 13,842 13,661
Construction in progress 9,622 15,042
---------- ----------
Total 2,378,672 2,568,764
Less accumulated depreciation and amortization 716,809 667,453
---------- ----------
Property, plant, and equipment - net $1,661,863 $1,901,311
========== ==========
Depreciation and amortization related to property, plant and equipment amounted
to $83.6 million, $87.5 million and $82.8 million for the years ended December
31, 2002, 2001 and 2000, respectively.
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 Consolidated Statement of Operations
and Comprehensive Loss, a pre-tax impairment charge totaling $101.2 million. The
charge 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
$22.3 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
$41.7 million related to the net book value of the assets of this project at
June 30, 2002. Although this project had $32.1 million of non-recourse debt at
June 30 2002, 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 remaining
non-recourse debt of $30.3 million at December 31, 2002.
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 regional grid tariff. Based on the current operating
environment, including the tariff reduction described above, the Company no
longer expects the contract for the Bataan project to be extended beyond its
current term or to be able to recover the project's current carrying 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.
On March 28, 2002, following approval from the Master Credit Facility lenders,
three of the Company's subsidiaries sold their interests in two power plants and
an operating and maintenance contractor based in Thailand. The total sale price
for the power plant and maintenance contractor was approximately $27.8 million,
and the Company realized a net loss of approximately $17.1 million on this sale
after deducting costs relating to the sale (see Note 3). The total fixed assets
included in the sale was $82.5 million.
Although the Company had not decided to sell any of its remaining Asian energy
assets as of December 31, 2002, 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 $186.4 million net book value at
December 31, 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.
During 2001, the Company received all of the principal permits necessary to
commence construction on a 500 MW gas-fired project in California. However, due
to the significant changes in the California energy markets as well as in its
own financial situation, in late December 2001 the Company decided to delay
project implementation until California market conditions improve and wrote-off,
as project development expenses in the Statement of Consolidated Operations and
Comprehensive Loss, all of its approximately $24.5 million of previously
capitalized costs associated with this project. These costs primarily related to
turbine purchase deposits and related termination fees, permit, viability and
other development costs, and other assets under construction.
10. Other Assets
Other assets (expressed in thousands of dollars) consisted of the following:
2002 2001
---- ----
Unamortized bond issuance costs $31,389 $39,449
Deferred financing costs 7,980 8,590
Non-current securities available for sale (see Note 6) 2,353 2,940
Interest rate swap 19,137 13,199
Other 1,068 1,324
------- -------
Total $61,927 $65,502
======= =======
11. Goodwill and Intangibles Assets
The following tables present the Company's intangible assets (excluding
goodwill) as of December 31, 2002 and 2001 (in thousands of dollars):
Accumulated
December 31, 2002 Gross Amortization Net
- --------------------------------------------------------------------------------------------
Land rights and other intangibles $ 3,062 $ (698) $ 2,364
Deferred development costs 5,921 (654) 5,267
-------- -------- --------
Sub-total 8,983 (1,352) 7,631
Contract acquisition costs 115,516 (55,063) 60,453
-------- -------- --------
Total $124,499 $(56,415) $ 68,084
======== ======== ========
Accumulated
December 31, 2001 Gross Amortization Net
- --------------------------------------------------------------------------------------------
Land rights and other intangibles $ 3,065 $ (536) $ 2,529
Deferred development costs 5,942 (260) 5,682
-------- -------- --------
Sub-total 9,007 (796) 8,211
Contract acquisition costs 140,620 (51,590) 89,030
-------- -------- --------
Total $149,627 $(52,386) $ 97,241
======== ======== ========
Amortization expense related to intangibles amounted to $6.7 million, $7.2
million and $7.1 million for the years ended December 31, 2002, 2001 and 2000,
respectively.
The estimated future amortization expense of intangible assets as of December
31, 2002 is as follows (in thousands of dollars):
For the year ended Amount
------------------ ------
2003 $ 5,967
2004 5,967
2005 5,967
2006 5,967
2007 5,967
Thereafter 38,249
--------
Total $ 68,084
========
The following table presents the changes in goodwill allocated to the company's
reportable segments during fiscal 2002 (in thousands of dollars):
Balance at Impairment Balance at
December 31,2001 Sold Adjustments December 31,2002
- ----------------------------------------------------------------------------------------------
Domestic energy and $ 4,517 $ $(4,517) $0.0
water
International energy 5,361 (2,264) (3,097) (0.0)
Other 228 (228) 0.0
------- -------- -------- ----
Total $10,106 $(2,264) $(7,842) $0.0
======= ======== ======== ====
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 of a change in accounting principle as of
January 1, 2002, which had no tax impact.
For the Year Ended December 31,
---------------------------------
(In thousands of dollars, except per share amounts) 2002 2001 2000
---- ---- ----
Net loss $(178,895) $(231,027) $(229,285)
Add back: goodwill amortization, net of tax 542 578
--------- --------- ---------
Adjusted net loss $(178,895) $(230,485) $(228,707)
--------- --------- ---------
Basic earnings (loss) per common share:
Reported Net loss $ (3.60) $ (4.65) $ (4.63)
Goodwill amortization 0.01 0.01
--------- --------- ---------
Adjusted Net loss $ (3.60) $ (4.64) $ (4.62)
========= ========= =========
Diluted earnings (loss) per common share:
Reported Net loss $ (3.60) $ (4.65) $ (4.63)
Goodwill amortization 0.01 0.01
--------- --------- ---------
Adjusted Net loss $ (3.60) $ (4.64) $ (4.62)
========= ========= =========
12. Convertible Subordinated Debentures
Convertible subordinated debentures (expressed in thousands of dollars)
consisted of the following:
2002 2001
---- ----
6% debentures due June 1, 2002 $ 85,000 $ 85,000
5.75% debentures due October 20, 2002 63,650 63,650
--------- --------
Total 148,650 148,650
Less: Liabilities subject to compromise (148,650) -
--------- --------
Total $ - $148,650
========= ========
The 6% convertible subordinated debentures are convertible into Covanta common
stock at the rate of one share for each $39.077 principal amount of debentures.
These debentures are redeemable at Covanta's option at 100% face value. The
5.75% convertible subordinated debentures are convertible into Covanta common
stock at the rate of one share for each $41.772 principal amount of debentures.
These debentures are redeemable at Covanta's option at 100% of face value. By
their terms, both series of bonds are subordinated in right of payment to the
prior payment in full of the indebtedness of the issuer. Indebtedness is defined
to include all obligations, contingent or otherwise, which in accordance with
generally accepted accounting principles should be classified as liabilities and
in any event all obligations secured by liens on the issuer's property and
guarantees and other contingent obligations of the issuer in respect of the
indebtedness of others. In accordance with SOP 90-7, since April 1, 2002
interest expense has not been accrued on the subordinated debentures as it is
not likely to be paid. As of December 31, 2002 both of these debentures have
been included in Liabilities subject to compromise.
13. Accrued Expenses
Accrued expenses (expressed in thousands of dollars) consisted of the following:
2002 2001
---- ----
Operating expenses $ 89,544 $ 139,771
Severance 8,450 21,300
Insurance 8,749 24,960
Debt service charges and interest 29,330 31,234
Municipalities' share of energy revenues 35,166 39,158
Payroll 24,201 22,134
Payroll and other taxes 7,602 9,435
Lease payments 13,903 15,644
Pension and profit sharing 16,267 16,448
Other 21,752 42,304
--------- --------
Total $ 254,964 $362,388
========= ========
14. Deferred Income
Deferred income (expressed in thousands of dollars) consisted of the following:
2002 2001
Current Non-current Current Non-current
------- ----------- ------- -----------
Power sales agreement prepayment $ 9,001 $138,305 $ 9,001 $147,306
Sale and leaseback arrangements 1,524 12,695 1,523 14,219
Advance billings to municipalities 13,262 - 11,088 -
Other 17,615 - 21,082 -
------- -------- ------- --------
Total $41,402 $151,000 $42,694 $161,525
======= ======== ======= ========
In 1998, the Company received a payment for future energy deliveries required
under a power sales agreement. This prepayment is being amortized straight-line
over the life of the agreement. The gains from sale and leaseback transactions
consummated in 1986 and 1987 were deferred and are being amortized as a
reduction of rental expense over the respective lease terms. Advance billings to
various customers are billed one or two months prior to performance of service
and are recognized as income in the period the service is provided.
15. Long-Term Debt
Long-term debt (expressed in thousands of dollars) consisted of the following:
2002 2001
Adjustable-rate revenue bonds due 2014-2024 $ - $124,755
9.25% debentures due 2022 100,000 100,000
Other long-term debt 79,137 86,936
--------- --------
Total 179,137 311,691
Less amounts subject to compromise (138,908) -
Less current portion of long term debt (16,450) (13,089)
---------- --------
Total $ 23,779 $298,602
========= ========
The adjustable-rate revenue bonds are adjusted periodically to reflect current
market rates for similar issues, generally with an upside cap of 15%. The
average rate for this debt was 1.39% and 2.52% in 2002 and 2001, respectively.
Beginning in April 2002 and in connection with the Company's Chapter 11 filing,
trustees for these bonds declared the principal and accrued interest on such
bonds due and payable immediately. Accordingly, letters of credit supporting
these bonds have been drawn in the amount of $125.1 million and the Company is
presently not able to reissue these bonds (see Note 17 for further discussion).
The Company's 9.25% Debentures are, to the extent required by their terms,
equally and ratably secured by the security interests granted under the
Company's Revolving Credit and Participation Agreement (see Note 17). 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 on March 1, 2002 at that time. Following the commencement of the
Chapter 11 Cases in April 2002, the Company has not made interest payments on
the 9.25% Debentures. As of December 31, 2002 the 9.25% Debentures have been
included in Liabilities subject to compromise.
Other long-term debt includes the following obligations:
$28.4 million, related to a sale and leaseback arrangement relating to
an energy facility. This arrangement is accounted for as a financing,
has an effective interest rate of approximately 5%, and extends through
2017. As of December 31, 2002, this obligation is included in
Liabilities subject to compromise.
$22.5 million resulting from the sale of limited partnership interests
in and related tax benefits of an energy facility, which has been
accounted for as a financing for accounting purposes. This obligation
has an effective interest rate of 10% and extends through 2015.
$12.5 million relating to the buyout of operating leases at a geothermal
plant and a fluid field. On February 11, 2002 the Company restructured
these notes extending their maturity from April 2002 to July 2003, and,
therefore, these notes are classified as current maturities of long-term
debt in the December 31, 2002 Consolidated Balance Sheet. These notes
bear interest at the three-month Eurodollar rate plus 4.75% (6.15% at
December 31, 2002). These notes are to be paid from substantially all
available cash generated by the related plant and the fluid field. This
debt is secured by all the Company's assets relating to the geothermal
plant and fluid field.
$1.5 million note associated with the acquisition of energy assets. The
note bears interest at 6.0% and matures in 2009. As of December 31,
2002, this note is included in Liabilities subject to compromise.
The maturities on long-term debt including capital lease obligations, net of
liabilities subject to compromise, (expressed in thousands of dollars) at
December 31, 2002 were as follows:
2003 $ 16,450
2004 24
2005 24
2006 1,838
2007 5
Later years 21,888
--------
Total 40,229
Less current portion (16,450)
--------
Total long-term debt $ 23,779
========
See Note 17 for a description of the credit arrangements of the Company.
16. Project Debt
Project debt (expressed in thousands of dollars) consisted of the following:
2002 2001
---- ----
Revenue Bonds Issued by and Prime Responsibility of Municipalities:
3.625-6.75% serial revenue bonds due 2003 through 2011 $ 334,965 $ 373,045
5.0-7.0% term revenue bonds due 2003 through 2015 302,230 319,734
Adjustable-rate revenue bonds due 2006 through 2013 130,330 133,540
---------- ----------
Total 767,525 826,319
---------- ----------
Revenue Bonds Issued by Municipal Agencies with Sufficient Service Revenues
Guaranteed by Third Parties:
5.25-8.9% serial revenue bonds due 2003 through 2008 58,620 69,193
---------- ----------
Other Revenue Bonds:
4.7-5.5% serial revenue bonds due 2003 through 2015 79,390 86,365
5.5-6.7% term revenue bonds due 2014 through 2019 68,020 68,020
---------- ----------
Total 147,410 154,385
---------- ----------
Other project debt 154,662 252,484
---------- ----------
Total long-term project debt $1,128,217 $1,302,381
========== ==========
Project debt associated with the financing of waste-to-energy facilities is
generally arranged by municipalities through the issuance of tax-exempt and
taxable revenue bonds. The category, "Revenue Bonds Issued by and Prime
Responsibility of Municipalities," includes bonds issued with respect to
projects owned by the Company for which debt service is an explicit component of
the Client Community's obligation under the related service agreement. In the
event that a municipality is unable to satisfy its payment obligations, the
bondholders' recourse with respect to the Company is limited to the
waste-to-energy facilities and restricted funds pledged to secure such
obligations.
The category "Revenue Bonds Issued by Municipal Agencies with Sufficient Service
Revenues Guaranteed by Third Parties" includes bonds issued to finance two
facilities for which contractual obligations of third parties to deliver waste
ensure sufficient revenues to pay debt service, although such debt service is
not an explicit component of the third parties' service fee obligations.
The category "Other Revenue Bonds" includes bonds issued to finance one facility
for which current contractual obligations of third parties to deliver waste
provide sufficient revenues to pay debt service related to that facility through
2011, although such debt service is not an explicit component of the third
parties' service fee obligations. The Company anticipates renewing such
contracts prior to 2011.
Payment obligations for the project debt associated with waste-to-energy
facilities owned by the Company are limited recourse to the operating subsidiary
and non-recourse to the Company, subject to construction and operating
performance guarantees and commitments. These obligations are secured by the
revenues pledged under various indentures and are collateralized principally by
a mortgage lien and a security interest in each of the respective
waste-to-energy facilities and related assets. At December 31, 2002, such
revenue bonds were collateralized by property, plant and equipment with a net
carrying value of $1,297.3 million and restricted funds held in trust of
approximately $219.5 million.
The interest rates on adjustable-rate revenue bonds are adjusted periodically
based on current municipal-based interest rates. The average adjustable rate for
such revenue bonds was 1.54% and 0.83% at December 31, 2002 and 2001,
respectively, and the average adjustable rate for such revenue bonds was 1.35%
and 2.47% during 2002 and 2001, respectively.
Other project debt includes the following obligations:
$4.0 million due to a financial institution as part of the refinancing
of project debt in the category "Revenue Bonds Issued by and Prime
Responsibility of Municipalities." The debt service associated with
this loan is included as an explicit component of the Client
Community's obligation under the related service agreement. A portion
of the funds was retained in the Company's restricted funds and is
loaned to the Client Community each month to cover the Client
Community's monthly service fees. The Company's repayment for the other
part of the loan is limited to the extent repayment is received from
the Client Community. This obligation has an effective interest rate of
7.06% and extends through 2005.
$8.4 million due to financial institutions which bears interest at an
adjustable rate that was the three-month LIBOR rate plus 1.4% (2.83% at
December 31, 2002). The debt extends through 2005 and is secured by
substantially all the assets of a subsidiary that owns various power
plants in the United States, which had a carrying value of
approximately $86.0 million at December 31, 2002, and $5.0 million
funded into an escrow account.
$25.8 million due to financial institutions for the purchase of the
Magellan Cogeneration Inc. power plant in The Philippines. This debt
bears interest at rates equal to the three-month LIBOR (1.42% at
December 31, 2002) plus spreads that increase from plus 4.5% until June
2005, to plus 4.875% from June 2005 to June 2007. The rate was 5.92% at
December 31, 2002. This debt is non-recourse to Covanta and is secured
by all assets of the project, which had no net carrying value at
December 31, 2002, and all revenues and contracts of the project and by
a pledge of the Company's ownership in the project.
$48.7 million due to a financial institution. This debt relates to the
construction of a second heavy fuel oil fired diesel engine power plant
in India. It is denominated in Indian rupees and bears interest at
rates ranging from 13.6% to 16.46%. The debt extends through 2010, is
non-recourse to Covanta and is secured by the project assets, which had
a net book value at December 31, 2002 of approximately $75.8 million.
$48.0 million due to financial institutions, of which $28.7 million is
denominated in U.S. dollars and $19.3 million is denominated in Indian
rupees. This debt relates to the construction of a heavy fuel oil fired
diesel engine power plant in India. The U.S. dollar debt bears interest
at the three-month LIBOR, plus 4.5% (6.31% at December 31, 2002). The
Indian rupee debt bears interest at rates ranging from 16% to 16.5% at
December 31, 2002. The debt extends through 2011, is non-recourse to
Covanta, and is secured by the project assets, which had a net carrying
value of approximately $86.4 million at December 31, 2002.
$19.7 million obligation of a limited partnership acquired by
subsidiaries of Covanta and represents the lease of a geothermal power
plant, which has been accounted for as a financing, has an effective
interest rate of 5.3% and extends into 2008 with options to renew for
additional periods and has a fair market value purchase option at the
conclusion of the initial lease term. Payment obligations under this
lease arrangement are limited to assets of the limited partnership and
revenues derived from a power sales agreement with a third party, which
are expected to provide sufficient revenues to make rental payments.
Such payment obligations are secured by all the assets, revenues, and
other benefits derived from the geothermal power plant, which had a net
carrying value of approximately $59.7 million at December 31, 2002.
Revenues of the limited partnership are contractually required by the
lessor to be deposited into a series of escrow accounts administered by
an independent escrow agent. A letter agreement with the lessor, as
amended on December 20, 2000, also required that if Covanta's senior
debt rating fell below investment grade, the limited partnership would
commence depositing funds into a lease reserve account pursuant to the
existing project document until $7,500,000 was in the account. On
January 16, 2002, Covanta's senior debt rating fell below investment
grade, as defined. On May 13, 2002, the Bankruptcy Court issued a final
order (the "Final Order") approving certain changes to the existing
lease documents negotiated as a result of the limited partnership's
bankruptcy filing on April 1, 2002. Under the Final Order, the limited
partnership agreed to make all lease payments due after the Petition
Date. The Final Order did not authorize the limited partnership to pay
any lease amounts due prior to April 1, 2002, but instead ordered the
limited partnership to place that amount in escrow and accrue interest.
The pre-petition lease payments being held in escrow would be paid to
the lessor with interest if the limited partnership assumes the lease.
If the limited partnership rejects the lease the escrowed funds and
interest would be returned to the limited partnership. Pursuant to the
Final Order, the limited partnership is not required to fund the lease
reserve account until the earliest of (1) the effective date of a plan
of reorganization, (2) expiration of the debtor in possession facility,
but no later than October 1, 2003, and (3) a default arising after the
Petition Date. On June 27, 2002 and in compliance with the Final Order,
the Bankruptcy Court approved an Order Authorizing Assumption of
Certain Inter-company Agreements authorizing the limited partnership to
assume executory contracts and agreements with related parties.
At December 31, 2002, the Company had one interest rate swap agreement that
economically fixes the interest rate on certain adjustable-rate revenue bonds.
The swap agreement was entered into in September 1995 and expires in January
2019. This swap agreement relates to adjustable rate revenue bonds in the
category "Revenue Bonds Issued by and Prime Responsibility of Municipalities."
Any payments made or received under the swap agreement, including fair value
amounts upon termination, are included as an explicit component of the Client
Community's obligation under the related service agreement. Therefore, all
payments made, or received under the swap agreement are a passthrough to the
Client Community. Under the swap agreement, the Company will pay an average
fixed rate of 9.8% for 2002 through January 2005, and 5.18% thereafter through
January 2019, and will receive a floating rate equal to the rate on the
adjustable rate revenue bonds, unless certain triggering events occur (primarily
credit events), which results in the floating rate converting to either a set
percentage of LIBOR or a set percentage of the BMA Municipal Swap Index, at the
option of the swap counterparty, (see Note 1). In the event the Company
terminates the swap prior to its maturity, the floating rate used for
determination of settling the fair value of the swap would also be based on a
set percentage of one of these two rates at the option of the counterparty. For
the years ended December 31, 2002, 2001 and 2000, the floating rate on the swap
averaged 1.41%, 2.46% and 4.09%, respectively. The notional amount of the swap
at December 31, 2002 was $80.2 million and is reduced in accordance with the
scheduled repayments of the applicable revenue bonds. The counterparty to the
swap is a major financial institution. The Company believes the credit risk
associated with nonperformance by the counterparty is not significant. The swap
agreement resulted in increased debt service expense of $3.4 million, $2.2
million and $1.1 million for 2002, 2001 and 2000, respectively. The effect on
Covanta's weighted-average borrowing rate of the project debt was an increase of
0.25%, 0.17% and 0.07%, for 2002, 2001 and 2000, respectively.
The maturities on long-term project debt (expressed in thousands of dollars) at
December 31, 2002 were as follows:
2003 $ 115,165
2004 116,757
2005 117,631
2006 116,332
2007 125,366
Later years 652,131
----------
Total $1,243,382
Less current portion 115,165
----------
Total long-term project debt $1,128,217
==========
See Note 17 for a description of the credit arrangements of the Company.
17. Credit Arrangements
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 with certain required
financial ratios also discussed below and possible other items, has caused the
Company to be in default of its Master Credit Facility. However, on April 1,
2002, the Company and 123 of its subsidiaries each filed a voluntary petition
for relief under Chapter 11 of the Bankruptcy Code that, among other things,
acts as a stay of enforcement of any remedies under the Master Credit Facility
against any debtor company.
In connection with the bankruptcy petition, the Company 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 August 2,
2002, the Bankruptcy Court issued an order that overruled objections by holders
of minority interests in two limited partnerships who disputed the inclusion of
the limited partnerships in the DIP Credit Facility. Although the holders of
such interests at one of the limited partnerships have appealed the order, they
have reached an agreement with the Company that in effect defers the appeal. The
DIP Credit Facility's current terms are described below.
The DIP Credit Facility, is now an approximately $240.0 million facility largely
for the continuation of existing letters of credit and 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. However the enforcement of any remedies triggered
by a default under the Master Credit Facility is stayed against the Debtors by
the Chapter 11 proceeding.
As of March 31, 2002, letters of credit had been issued in the ordinary course
of business under the Master Credit Facility for the Company's benefit using up
most of the available line under that facility. The Master Credit Facility also
provided for the coordinated administration of certain letters of credit issued
in the normal course of business to secure performance under certain energy
contracts (totaling $203 million), letters of credit issued to secure
obligations relating to the entertainment businesses (totaling $153 million;
which includes an additional $2.1 million that was drawn in December, 2002)
largely with respect to the Anaheim and Ottawa projects described in Note 4 to
the Consolidated Financial Statements, letters of credit issued in connection
with the Company's insurance program (totaling $39 million), and letters of
credit used for credit support of the Company's adjustable rate revenue bonds
(totaling $127 million).
Beginning in April 2002 and pursuant to the Company's Chapter 11 filing,
trustees for the Company's adjustable rate revenue bonds declared the principal
and accrued interest on such bonds due and payable immediately. Accordingly,
letters of credit supporting these bonds have been drawn in the amount of $125.1
million and the Company is presently not able to reissue these bonds.
Of these remaining outstanding letters of credit at December 31, 2002,
approximately $151.8 million secured indebtedness is included in the Company's
Balance Sheet and $60.9 million relates to other commitments. Additional letters
of credit of approximately $172.3 million principally secured the Company's
obligation under energy contracts to pay damages in the unlikely event of
non-performance. 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.
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-energy
businesses and access to the capital markets. However, a number of factors in
2001 and 2002 affected these plans, including:
(1) The power crisis in California substantially reduced the
Company's liquidity in 2001 as a result of California
utilities' failure to pay timely for power purchased from the
Company;
(2) The sale of non-energy assets took longer and yielded
substantially less proceeds than anticipated; and
(3) A general economic downturn during 2001 and a tightening of
credit and capital markets, particularly for energy companies
which were substantially exacerbated by the bankruptcy of
Enron Corporation.
As a result of a combination of these factors 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, public 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 exceeded the Company's
cash resources. In this connection, in the last six months of 2001 and the first
quarter of 2002, the Company sought potential minority equity investors,
conducted a broad-based solicitation for indications of interest in acquiring
the Company among potential strategic and financial buyers and investigated a
combined private and public placement of equity securities. On December 21,
2001, in connection with a further amendment to the Master Credit Facility, the
Company issued a press release stating its need for further covenant waivers and
for access to short-term liquidity. Following this release, the Company's debt
rating by Moody's and Standard & Poor's was reduced below investment grade on
December 27, 2001 and January 16, 2002, respectively. These downgrades further
adversely impacted the Company's access to capital markets and triggered the
Company's commitments to provide $100 million in additional letters of credit in
connection with two waste-to-energy projects and the draws during March of 2002
of approximately $105.2 million in letters of credit related to the Centre and
the Team. On March 1, 2002, the Company availed itself of the 30-day grace
period provided under the terms of its 9.25% Debentures due March 2022, and did
not make the interest payment due March 1, 2002 at that time.
On April 1, 2002 the Company publicly announced that as a result of the review
the Company:
(1) Determined that reorganization under the Bankruptcy Code
represented the only viable venue to reorganize the Company's
capital structure, complete the disposition of its remaining
non-energy 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 KKR 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-energy assets and, as a result, reduce overhead costs.
On April 1, 2002, Covanta Energy Corporation and 123 of its subsidiaries, each a
debtor in possession (the "Debtors"), filed for protection under the Bankruptcy
Code and accordingly did not make the interest payment on the 9.25% Debentures
due at that time.
The rights of Covanta's creditors will be determined as part of the Chapter 11
process. Existing common equity and preferred shareholders are not expected to
participate in the new capital structure or realize any value.
In connection with its bankruptcy filing, the Company entered into 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
$12.8 million in commitments for the issuance of certain letters of credit and
for cash borrowings under a revolving credit line. The Tranche B Facility
consists of approximately $232.8 million in commitments solely for the extension
of, or issuance 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 facility fee
of approximately $1.0 million equal to 2% of the amount of the Tranche A
commitments, $2.5 million of agent fees and $0.5 million of lender advisor fees.
During 2002 the Company paid additional amendment fees and agent fees of $1.1
million and $0.8 million, respectively.
In addition, the Company pays a commitment fee based on utilization of the
facility of between .50% and 1% of the unused Tranche A commitments. The Company
also pays 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. These fees totaled $5.5 million
at December 31, 2002.
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 for total and specific
expenditures, 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) achieve quarterly minimum
cumulative consolidated operating income targets for April 1,
2003 through October 31, 2003.
(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 $4.7 million in new letters of credit have been
issued under the Tranche A of the Credit facility.
The DIP Credit Facility initially was schedule to mature on April 1, 2003. On
March 28, 2003 the DIP Credit Facility was extended through October 1, 2003 and
may, with the consent of DIP Lenders holding more than 66-2/3% of the Tranche A
Facility, be extended for an additional period of six months. There are no
assurances that the DIP lenders will agree to an extension. At ultimate
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. On March 25, 2003 an extension
fee of $0.1 million was paid by the Company to the DIP Lenders.
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 are not within the Company's control and no assurances
can be made with respect to the outcome of these efforts.
18. Other Liabilities
Other liabilities (expressed in thousands of dollars) consisted of the
following:
2002 2001
---- ----
Interest rate swap $ 19,137 $ 13,199
Workmen's compensation reserve 28,737
Accrued interest 7,270 28,295
California receivables loan 30,194
Project lease reserves 30,071 28,875
Post-retirement reserves 12,190 11,338
Other 11,701 33,707
-------- --------
Total $ 80,369 $174,345
======== ========
19. Preferred Stock
The outstanding Series A $1.875 Cumulative Convertible Preferred Stock is
convertible at any time at the rate of 5.97626 common shares for each preferred
share. Covanta may redeem the outstanding shares of preferred stock at $50 per
share, plus all accrued dividends. These preferred shares are entitled to
receive cumulative annual dividends at the rate of $1.875 per share, plus an
amount equal to 150% of the amount, if any, by which the dividend paid or any
cash distribution made on the common stock in the preceding calendar quarter
exceeded $.0667 per share. With the filing of voluntary petitions for
reorganization under Chapter 11 on April 1, 2002 (see Note 1) dividend payments
were suspended. The holders of the preferred shares are not expected to
participate in the new capital structure or receive any value following the
Chapter 11 process.
20. Common Stock and Stock Options
In 1986, Covanta adopted a nonqualified stock option plan (the "1986 Plan").
Under this plan, options and/or stock appreciation rights were granted to key
management employees to purchase Covanta common stock at prices not less than
the fair market value at the time of grant, which became exercisable during a
five-year period from the date of grant. Options were exercisable for a period
of ten years after the date of grant. As adopted and as adjusted for stock
splits, the 1986 Plan called for up to an aggregate of 2,700,000 shares of
Covanta common stock to be available for issuance upon the exercise of options
and stock appreciation rights, which were granted over a ten-year period ending
March 10, 1996.
In October 1990, Covanta adopted a nonqualified stock option plan (the "1990
Plan"). Under this plan, nonqualified options, incentive stock options, and/or
stock appreciation rights and stock bonuses may be granted to key management
employees and outside directors to purchase Covanta common stock at an exercise
price to be determined by the Covanta Compensation Committee, which become
exercisable during the five-year period from the date of grant. These options
are exercisable for a period of ten years after the date of grant. Pursuant to
the 1990 Plan, which was amended in 1994 to increase the number of shares
available by 3,200,000 shares, an aggregate of 6,200,000 shares of Covanta
common stock were available for grant over a ten-year period which ended October
11, 2000.
In 1999, Covanta adopted a nonqualified stock option plan (the "1999 Plan").
Under this plan, nonqualified options, incentive stock options, limited stock
appreciation rights ("LSAR's") and performance-based cash awards may be granted
to employees and outside directors to purchase Covanta common stock at an
exercise price not less than 100% of the fair market value of the common stock
on the date of grant which become exercisable over a three-year period from the
date of grant. These options are exercisable for a period of ten years after the
date of grant. In addition, performance-based cash awards may also be granted to
employees and outside directors. As adopted, the 1999 Plan calls for up to an
aggregate of 4,000,000 shares of Covanta common stock to be available for
issuance upon the exercise of such options and LSAR's, which may be granted over
a ten-year period ending May 19, 2009. At December 31, 2002, 2,042,032 shares
were available for grant.
Effective January 1, 2000, the 1999 Plan was amended and restated to change the
name of the plan to the "1999 Stock Incentive Plan" and to include the award of
restricted stock to key employees based on the attainment of pre-established
performance goals. The maximum number of shares of common stock that is
available for awards of restricted stock is 1,000,000. As of December 31, 2002,
no awards of restricted stock have been made under the plan.
Under the foregoing plans, Covanta issued 3,952,900 LSAR's between 1990 and 2001
in conjunction with the stock options granted. These LSAR's are exercisable only
during the period commencing on the first day following the occurrence of any of
the following events and terminate 90 days after such date: the acquisition by
any person of 20% or more of the voting power of Covanta's outstanding
securities; the approval by Covanta shareholders of an agreement to merge or to
sell substantially all of its assets; or the occurrence of certain changes in
the Company's Board of Directors. The exercise of these limited rights entitles
participants to receive an amount in cash with respect to each share subject
thereto, equal to the excess of the market value of a share of Covanta common
stock on the exercise date or the date these limited rights became exercisable,
over the related option price.
In February 2000, Covanta adopted (through an amendment to the 1999 Stock
Incentive Plan) the Restricted Stock Plan for Key Employees (the "Key Employees
Plan") and the Restricted Stock Plan for Non-Employee Directors (the "Directors
Plan"). The Plans, as amended, call for up to 500,000 shares and 160,000 shares,
respectively, of restricted Covanta common stock to be available for issuance as
awards. Awards of restricted stock will be made from treasury shares of Covanta
common stock, par value $.50 per share. The Company accounts for restricted
shares at their market value on their respective dates of grant. Restricted
shares awarded under the Directors Plan vest 100% at the end of three months
from the date of award. Shares of restricted stock awarded under the Key
Employees Plan are subject to a two-year vesting schedule, 50% one year
following the date of award and 50% two years following the date of award. As of
December 31, 2002, an aggregate of 169,198 shares of restricted stock had been
awarded under the Key Employees Plan and an aggregate of 95,487 shares of
restricted stock had been awarded under the Directors Plan. The total
compensation cost recorded by the Company in 2002, 2001 and 2000 relating to the
restricted stock plans was zero, $2.2 million and $0.7 million, respectively.
In connection with the acquisition of the minority interest of Covanta Energy
Group, Inc. ("CEGI"), Covanta assumed the pre-existing CEGI stock option plan
then outstanding and converted these options into options to acquire shares of
Covanta common stock. All of these options were exercised or cancelled at August
31, 1999.
Information regarding the Company's stock option plans is summarized as follows:
Weighted-Average
Option Price Exercise
Per Share Outstanding Exercisable Price
--------- ----------- ----------- -----
1986 Plan:
December 31, 1999, balance $18.31-$22.50 570,500 570,500 $19.01
Cancelled $18.31 (475,000) (475,000) $18.31
------ -------- -------- ------
December 31, 2000, balance $22.50 95,500 95,500 $22.50
Cancelled $22.50 (85,500) (85,500) $22.50
------ -------- -------- ------
December 31, 2001, balance $22.50 10,000 10,000 $22.50
------ ------ ------ ------
December 31, 2002, balance $22.50 10,000 10,000 $22.50
------ ------ ------ ------
1990 Plan:
December 31, 1999, balance $18.31-$29.38 4,274,500 2,640,800 $21.14
Granted $9.97 50,000 $9.97
Became exercisable $20.06-$29.38 450,900
Cancelled $18.31-$26.78 (1,956,000) (1,580,500) $21.29
------------- ---------- ---------- ------
December 31, 2000, balance $9.97-$29.38 2,368,500 1,511,200 $23.56
Became exercisable $9.97-$29.38 268,600
Cancelled $20.06-$26.78 (559,500) (436,800) $23.51
------------- ---------- -------- ------
December 31, 2001, balance $9.97-$29.38 1,809,000 1,343,000 $23.51
Became exercisable $9.97-$29.38 200,000
Cancelled $20.06-$26.78 (272,000) (235,000) $23.03
------------- ---------- --------- ------
December 31, 2002, balance $9.97-$29.38 1,537,000 1,308,000 $23.43
------------- ---------- --------- ------
1999 Plan:
December 31, 1999, balance $8.66-$26.59 1,437,400 $13.13
Granted $9.97-$14.77 78,000 $12.61
Became exercisable $8.66-$26.59 474,033
Cancelled $11.78-$14.73 (26,500) (2,500) $12.34
------------- --------- ------- ------
December 31, 2000, balance $8.66-$26.59 1,488,900 471,533 $13.12
Granted $16.18-$20.23 685,100 $17.29
Exercised $11.28-$14.73 (62,863) (62,863) $12.85
Became exercisable $8.66-$26.59 443,509
Cancelled $11.28-$17.59 (153,169) (20,500) $13.52
------------- --------- -------- ------
December 31, 2001, balance $8.66-$26.59 1,957,968 831,679 $14.68
Became exercisable $8.66-$26.59 613,280
Cancelled $11.28-$20.23 (181,633) (52,399) $14.23
------------- --------- -------- ------
December 31, 2002, balance $8.66-$26.59 1,776,335 1,392,560 $13.76
------------ --------- --------- ------
Total December 31, 2002 $8.66-$29.38 3,323,335 2,710,560 $18.46
------------ --------- --------- ------
The following table summarizes information about stock options outstanding at
December 31, 2002:
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------------------------------------
Range of Number of Weighted-Average Weighted-Average Number of Weighted-Average
Exercise Shares Remaining Exercise Shares Exercise
Prices Outstanding Contractual Life Price Outstanding Price
$8.66-$12.98 811,300 6.9 Years $11.52 764,970 $11.57
$14.10-$21.15 1,284,035 6.5 Years $17.29 916,590 $17.20
$21.50-$29.38 1,228,000 3.9 Years $25.01 1,029,000 $24.70
------------- --------- --------- ------ --------- ------
$8.66-$29.38 3,323,335 5.7 Years $18.73 2,710,560 $18.46
------------ --------- --------- ------ --------- ------
The weighted-average exercise prices for all exercisable options at December 31,
2002, 2001 and 2000 were $18.46, $19.34, and $20.67, respectively.
At December 31, 2002, there were 9,789,301 shares of common stock reserved for
the exercise of stock options, the issuance of restricted stock and the
conversion of preferred shares and debentures.
In 1998, Covanta's Board of Directors authorized the purchase of shares of the
Company's common stock in an amount up to $200 million. From 1998 through
February 22, 1999, 2002, 2,223,000 shares of common stock were purchased at a
total cost of $58.9 million. No shares were purchased during 2002 and 2001.
Existing common stock and stock option holders are not expected to participate
in the new capital structure or receive any value following the Chapter 11
process (see Note 2).
21. Shareholders' Rights Agreement
In 1990, the Board of Directors declared a dividend of one preferred stock
purchase right ("Right") on each outstanding share of common stock pursuant to a
Rights Agreement. In 2000, the Board of Directors amended and extended the
Rights Agreement. Among other provisions, each Right may be exercised to
purchase a one one-hundredth share of a new series of cumulative participating
preferred stock at an exercise price of $80, subject to adjustment. The Rights
may only be exercised after a party has acquired 15% or more of the Company's
common stock or commenced a tender offer to acquire 15% or more of the Company's
common stock. The Rights do not have voting rights, expire October 2, 2010, and
may be redeemed by the Company at a price of $0.01 per Right at any time prior
to the acquisition of 15% of the Company's common stock.
In the event a party acquires 15% or more of the Company's outstanding common
stock in accordance with certain defined terms, each Right will then entitle its
holders (other than such party) to purchase, at the Right's then-current
exercise price, a number of the Company's common shares having a market value of
twice the Right's exercise price. At December 31, 2002, 49,824,251 Rights were
outstanding, but are not expected to have any function or value following the
Chapter 11 process.
22. Foreign Exchange
Foreign exchange translation adjustments net of tax for 2002, 2001 and 2000,
amounting to $1.5 million, $4.0 million, and $8.0 million, respectively, have
been charged directly to Other Comprehensive Loss. In 2002, $1.2 million was
reclassified to loss on sale of businesses and $0.3 million was reclassified to
loss from discontinued operations. In 2001, $7.0 million relating to the sale or
write-down of assets held for sale was reclassified to gain (loss) on sale of
businesses ($6.7 million) and write-down of assets held for sale ($0.3 million).
In 2000, $25.3 million relating to aviation and entertainment businesses sold
were reclassified to loss from discontinued operations. Foreign exchange
transaction adjustments, amounting to $0.3 million, $0.7 million, and $0.4
million, have been charged directly to Net Loss for 2002, 2001 and 2000,
respectively.
23. Debt Service Charges
Debt service charges for Covanta's Project Debt (expressed in thousands of
dollars) consisted of the following:
2002 2001 2000
- -------------------------------------------------------------------------------------------------------------
Interest incurred on taxable and
tax-exempt borrowings $82,845 $89,371 $82,125
Interest earned on temporary investment
of certain restricted funds (589) (1,551) (1,363)
------- ------- -------
Net interest incurred 82,256 87,820 80,762
Interest capitalized during construction in property, plant
and equipment - (5,985) (2,336)
------- ------- -------
Debt service charges--net $82,256 $81,835 $78,426
======= ======= =======
24. Pensions and Other Postretirement Benefits
Covanta has defined benefit and defined contribution retirement plans that cover
substantially all of its employees. The defined benefit plans provide benefits
based on years of service and either employee compensation or a fixed benefit
amount. Covanta's funding policy for those plans is to contribute annually an
amount no less than the minimum funding required by ERISA. Contributions are
intended to provide not only benefits attributed to service to date but also for
those expected to be earned in the future.
As of January 1, 2002, a defined contribution plan for approximately 1,200
employees was frozen and the employees were transferred to the Company's
qualified defined benefit plan. The following table sets forth the details of
Covanta's defined benefit plans' and other postretirement benefit plans' funded
status and related amounts recognized in Covanta's Consolidated Balance Sheets
(expressed in thousands of dollars):
Pension Benefits Other Benefits
2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
Change in Benefit Obligation:
Benefit obligation at beginning of year $ 36,600 $29,664 $10,869 $9,325
Service cost 4,187 2,275 53 64
Interest cost 2,111 2,270 1,409 713
Amendments (2,143) 2,143
Actuarial loss 5,325 3,031 8,061 1,012
Benefits paid (285) (640) (634) (245)
Aviation fueling sale (see Note 4) (6,888) (776)
-------- ------- -------- --------
Benefit obligation at end of year 38,907 36,600 21,125 10,869
-------- ------- -------- --------
Change in Plan Assets:
Plan assets at fair value
at beginning of year 26,211 24,994
Actual return on plan assets (2,741) 679
Company contributions 1,178 634 245
Benefits paid (285) (640) (634) (245)
Aviation fueling sale (8,306)
-------- ------- -------- --------
Plan assets at fair value at end of year 14,879 26,211
-------- ------- -------- --------
Reconciliation of Accrued Benefit Liability and
Net Amount Recognized:
Funded status of the plan (24,028) (10,389) (21,125) (10,869)
Unrecognized:
Prior service cost (1,897) 600
Net loss (gain) 12,020 1,954 8,935 (808)
-------- ------- -------- --------
Net Amount Recognized $(13,905) $(7,835) $(12,190) $(11,677)
======== ======= ======== ========
Amounts Recognized in the Consolidated Balance
Sheets Consist of:
Accrued benefit liability $(13,905) $(7,835) $(12,190) $(11,677)
-------- ------- -------- --------
Net Amount Recognized $(13,905) $(7,835) $(12,190) $(11,677)
-------- ------- -------- --------
Weighted Average Assumptions as of December 31:
Discount Rate 6.75% 7.25% 6.75% 7.25%
Expected return on plan assets 8.00% 8.00%
Rate of compensation increase 4.50% 4.50% 5.50% 4.50%
For management purposes, an annual rate of increase of 12.0% in the per capita
cost of health care benefits was assumed for 2002 for covered employees. The
rate was assumed to decrease gradually to 5.5% in 2010 and remain at that level.
For the pension plans with accumulated benefit obligations in excess of plan
assets the projected benefit obligation, accumulated benefit obligation, and
fair value of plan assets were $4.1 million, $0.9 million, and zero,
respectively as of December 31, 2002 and $4.5 million, $2.4 million and zero,
respectively as of December 31, 2001.
Contributions and costs for defined contribution plans are determined by benefit
formulas based on percentage of compensation as well as discretionary
contributions and totaled $3.3 million, $1.5 million, and $5.6 million, in 2002,
2001, and 2000, respectively. Plan assets at December 31, 2002, 2001 and 2000,
primarily consisted of common stocks, United States government securities, and
guaranteed insurance contracts.
With respect to union employees, the Company is required under contracts with
various unions to pay, generally based on hours worked, retirement, health and
welfare benefits. These multi-employer defined contribution plans are not
controlled or administered by the Company. The amount charged to expense for
such plans during 2002, 2001 and 2000 was $1.7 million, $3.0 million and $3.6
million, respectively.
Pension costs for Covanta's defined benefit plans and other post-retirement
benefit plans included the following components (expressed in thousands of
dollars):
Pension Benefits Other Benefits
- ----------------------------------------------------------------------------------------------------------------------
2002 2001 2000 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------
Components of Net Periodic Benefit Cost:
Service Cost $ 4,187 $ 2,275 $ 2,105 $ 53 $ 64 $ 57
Interest Cost 2,111 2,270 2,012 1,409 713 675
Expected return on plan assets (1,421) (2,027) (1,859)
Amortization of unrecognized:
Net transition (asset) obligation (53) (54)
Prior service cost (185) 37 207
Net (gain) loss 195 (102) (100) 527 (117) (197)
------- ------- ------- ------- ----- -----
Net periodic benefit cost $ 4,887 $ 2,400 $ 2,311 $ 1,989 $ 660 $ 535
======= ======= ======= ======= ===== =====
Curtailment Gain
Settlement Gain $(117)
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plan. A one-percentage point change in the assumed
health care trend rate would have the following effects (expressed in thousands
of dollars):
One-Percentage One-Percentage
Point Increase Point Decrease
-------------- --------------
Effect on total service and interest cost components $ 121 $ (104)
Effect on postretirement benefit obligation $ 1,621 $(1,414)
25. Special Charges
In September 1999, the Company's Board of Directors approved a plan to dispose
of its aviation and entertainment businesses and close its New York
headquarters, and in December 1999, it approved a plan to exit other non-energy
businesses so that the Company could focus its resources on its core energy
business.
Of the New York employees, 24, 139, 29 and 14 employees were terminated in 1999,
2000, 2001 and 2002, respectively. As of December 31, 2002, 10 such employees
remained and the Company intends to terminate them at various dates throughout
2003.
In December 2000, the Company approved a plan to reorganize its development
office in Hong Kong and its New Jersey headquarters. As a result, the Company
implemented a reduction in its workforce of approximately 80 employees, both
domestically and internationally, in connection with the refocusing of the
Company's energy development activities and streamlining its organizational
structure. This plan included closure of the Company's Hong Kong office and
consolidation of its waste-to-energy regional organizational structure. The plan
was completed as of December 31, 2001, however certain remaining termination
claims will be resolved through the Company's bankruptcy proceeding.
As a result of these decisions, the Company has incurred various expenses, which
have been recognized in its continuing and discontinued operations.
For 2002, bank fees of $24.0 million relate to the Company's Master Credit
Facility (see Note 17). These fees were recognized as Other expenses-net and
were payable in March 2002 but remain unpaid and therefore 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 and the closure of various satellite
offices (see Note 2). In accordance with the severance and retention plan
approved by the Bankruptcy Court on September 20, 2002, these employees and the
remaining New York City employees may be entitled to aggregate severance
payments of approximately $5.0 million. In the third quarter of 2002 and in
accordance with EITF 94-3, this amount was recognized as reorganization costs in
the 2002 Statement of Consolidated Operations and Comprehensive Loss and the
prior severance accrual was reduced by $13.4 million as a credit to operating
expense. In addition, the Company accrued office closure and outplacement costs
of $0.7 million and were recognized as Reorganization items.
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 began to be recognized during the
third quarter of 2002 and were recognized as Reorganization items. 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 unpaid amounts under the retention program are
being accrued on a straight-line basis from September 30, 2002 through September
30, 2003.
These special charges in 2001 included bank fees and expenses incurred in
connection with the Company entering into the Master Credit Facility in March
2001 and related subsequent amendments of $25.5 million. Also in 2001, the
Company re-characterized $2.1 million of lease buy-out costs as severance cost.
This reflects the fact that in 2001 the Company negotiated certain lease
buy-outs at terms that were more favorable than anticipated; however, the terms
with some severed employees were worse than anticipated. The net effect of these
negotiations was favorable and resulted in a reduction of total special charges
of $0.4 million.
In 2000, these special charges included $22.8 million of creditors' fees and
expenses incurred in connection with extensions of credit agreements and
covenant waivers ($18.0 million), and fees and expenses paid to financial
advisors and consultants for their performance of due diligence procedures in
connection with financing efforts to support the Company's balance sheet
recapitalization plan ($4.8 million); legal, accounting and consulting expenses
related to the capitalization plan and to the sales of businesses of $14.7
million; workers' compensation insurance charges of $17.5 million related to
discontinued operations and other sold businesses; and severance charges of $0.2
million. The Company also assigned its lease of the Company aircraft resulting
in the write-off of certain lease prepayments of $1.1 million. The expenses also
included the accelerated amortization of a new data processing system of $11.4
million, based upon a revised useful life of 15 months starting October 1, 1999.
The following is a summary of the principal special charges (both cash and
non-cash charges) recognized in the years ended December 31, 2002, 2001 and 2000
(expressed in thousands of dollars):
Balance at Charges for Total Amounts Balance at
January Continuing Special Paid In December
1, 2002 Operations Charges 2002 31, 2002
------------------------------------------------------------------------------
2002
Severance for approximately $17,500 $(15,100) $(15,100) $ 800 $1,600
216 New York city employees
Severance for approximately
80 energy employees 3,800 1,300 2,500
Severance for approximately
71 Employees terminated post 5,000 5,000 650 4,350
petition
Key employee retention plan 1,800 1,800 1,100 700
Contract termination settlement 400 400
Bank fees 11,000 24,000 24,000 1,000 34,000
Office closure costs 600 730 730 130 1,200
------- ------- ------- ------ -------
Total $33,300 $16,430 $16,430 $4,980 $44,750
======= ======= ======= ====== =======
Balance at Charges for Total Amounts Balance at
January Continuing Special Paid In December
1, 2001 Operations Charges 2001 31, 2001
----------- ------------- -------------- ------------ ----------- ------------
2001
Severance for approximately
216 New York city employees $27,500 $10,000 $17,500
Severance for approximately
80 energy employees 10,300 $1,700 $1,700 8,200 3,800
Contract termination settlement 400 400
Bank fees 2,100 25,500 25,500 16,600 11,000
Office closure costs 4,000 (2,100) (2,100) 1,300 600
Professional services relating to
energy reorganization 1,500 1,500
------- ------- ------- ------ -------
Total $45,800 $25,100 $25,100 $37,600 $33,300
======= ======= ======= ======= =======
Balance at Charges for Charges for Total Amounts Balance at
January Continuing Discontinued Special Paid In December
1, 2000 Operations Operations Charges 2000 31, 2000
----------- ------------- ------------- ------------- ----------- ------------
2000
Severance for approximately
216 New York city employees $40,400 $ 900 $ (700) $ 200 $13,100 $27,500
Severance for approximately
80 energy employees 10,300 10,300 10,300
Contract termination settlement 15,700 15,300 400
Bank fees 18,000 18,000 15,900 2,100
Recapitalization plan expenses 4,800 4,800 4,800
Professional services relating to
recapitalization and sales of 5,100 9,600 14,700 14,700
businesses
Office closure costs 4,000 4,000 4,000
Professional services relating to
energy reorganization 2,000 2,000 500 1,500
------- ------- ------- ------- ------- -------
Subtotal 56,100 45,100 8,900 54,000 $64,300 $45,800
======= =======
Workers' compensation charges 8,700 8,800 17,500
Write-down of Datacom receivables 6,500 6,500
Write-off of aircraft lease 1,100 1,100
prepayments
Accelerated amortization of new data
processing system 5,600 5,800 11,400
Write-down of impaired energy assets 3,100 3,100
------- ------- ------- -------
Total $56,100 $70,100 $23,500 $ 93,600
======= ======= ======= ========
In 2001, bank fees of $25.5 million were included in Other expense-net and the
net reversal of severance of the $0.4 million discussed above is included in
plant operating expenses in the 2001 Statement of Consolidated Operations and
Comprehensive Loss.
In 2000, for continuing operations, bank fees of $18.0 million, recapitalization
plan expenses of $4.8 million, professional services fees relating to the
recapitalization plan and sales of businesses of $5.1 million, and energy's
severance costs of $10.3 million, office closure costs of $4.0 million,
professional services expenses of $2.0 million and write-down of impaired assets
of $3.1 million were included in Other expense-net; workers' compensation
expenses of $8.7 million and provisions relating to non-energy receivables of
$6.5 million are included in Other operating costs and expenses; the write-off
of the aircraft lease prepayments of $1.1 million and severance charges of $0.9
million were included in selling, administrative and general expenses; and
accelerated amortization of the new data processing system of $5.6 million was
included in depreciation and amortization in the 2000 Statement of Consolidated
Operations and Comprehensive Loss.
The amount accrued for severance is based upon the Company's written severance
policy and the positions eliminated. The accrued severance does not include any
portion of the employees' salaries through their severance dates.
The amount accrued for the contract termination costs of the Company's former
Chairman and Chief Executive Officer is based upon a settlement agreement
reached in December 1999. Pursuant to the settlement agreement, in 1999 the
Company forgave demand notes dated August 1999 in the face amount of
approximately $1.8 million, and with the exception of certain insurance
benefits, paid the remaining amounts in 2000.
26. Income Taxes
The components of the benefit for income taxes on continuing operations
(expressed in thousands of dollars) were as follows:
2002 2001 2000
- ---------------------------------------------------------------------------
Current:
Federal $ (10,488) $ (470)
State 504 $ 6,002 2,558
Foreign 5,377 6,432 1,533
--------- --------- ------
Total current (4,607) 12,434 3,621
--------- --------- --------
Deferred:
Deferred:
Federal (8,441) (23,917) (36,844)
State 626 (4,629) (1,024)
Foreign (1,024) (998)
--------- --------- --------
Total deferred (8,839) (29,544) (37,868)
--------- --------- --------
Total benefit for
income taxes $ (13,446) $ (17,110) $(34,247)
========== ========== =========
The benefit for income taxes (expressed in thousands of dollars) varied from the
Federal statutory income tax rate due to the following:
2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------
Percent of Percent of Percent of
Amount Loss Before Amount Loss Amount Loss
of Tax Taxes of Tax Before Taxes of Tax Before Taxes
Taxes at statutory rate $ (55,135) 35.0% $(86,018) 35.0% $(42,332) 35.0%
State income taxes, net of
Federal tax benefit 734 (0.5) 892 (0.4) 997 (0.8)
Taxes on foreign earnings 24,323 (15.4) 2,656 (1.1) (113) 0.1
Subpart F income and foreign
dividends 350 (0.2) 3,755 (1.5)
Amortization of goodwill 47 56
Write-down of goodwill 767 (0.3) (1,729) 1.4
Reorganization items 5,600 (3.5)
Valuation allowance 11,648 (7.4) 59,210 (24.1) 7,000 (5.8)
Other--net (1,013) 0.5 1,572 (0.6) 1,930 (1.6)
--------- ---- -------- ----- -------- ----
Benefit for
income taxes $ (13,446) 8.5% $(17,110) 7.0% $(34,247) 28.3%
========= ==== ======== ===== ========= =====
The components of the net deferred income tax liability (expressed in thousands
of dollars) as of December 31, 2002 and 2001, were as follows:
2002 2001
- --------------------------------------------------------------------------------
Deferred Tax Assets:
Accrued expenses $ 61,828 $ 89,398
Other liabilities 17,807 18,515
Non energy assets and related obligations 138,965 58,370
Net operating losses 64,068 42,121
Valuation allowance (101,571) (89,923)
Investment tax credits 26,073 26,073
Alternative minimum tax credits 18,257 28,514
-------- --------
Total deferred tax assets 225,427 173,068
-------- --------
Deferred Tax Liabilities:
Unbilled accounts receivable 79,924 80,087
Property, plant, and equipment 343,561 352,492
Other 40,342 36,658
-------- --------
Total deferred tax liabilities 463,827 469,237
-------- --------
Net deferred tax liability $238,400 $296,169
======== ========
Deferred tax assets and liabilities (expressed in thousands of dollars) are
presented as follows in the balance sheets:
2002 2001
- --------------------------------------------------------------------------------
Net deferred tax liability--noncurrent $249,600 $323,669
Less net deferred tax asset--current (11,200) (27,500)
-------- --------
Net deferred tax liability $238,400 $296,169
======== ========
A valuation allowance of $75.5 million has been recorded because the Company
does not believe it is more likely than not that certain of the losses resulting
from the sales and writedown of and obligations related to discontinued
operations and assets that were held for sale will be realized for tax purposes.
At December 31, 2002, for Federal income tax purposes, the Company had net
operating loss carry-forwards of approximately $171.6 million, which will expire
in 2021, investment and tax energy credit carry-forwards of approximately $26.1
million, which will expire in 2004 through 2009, and alternative minimum tax
credit carry-forwards of approximately $18.3 million, which have no expiration
date. A valuation allowance of $26.1 million was recorded against the investment
and energy tax credit carry-forwards because the Company does not believe it is
more likely than not that those credits will be realized for tax purposes.
27. Leases
Total rental expense amounted to $40.5 million, $40.2 million, and $63.1 million
(net of sublease income of $3.5 million, $1.9 million, and $4.2 million) for
2002, 2001 and 2000, respectively. Principal leases are for leaseholds, sale and
leaseback arrangements on waste-to-energy facilities and independent power
projects, trucks and automobiles, and machinery and equipment. Some of these
operating leases have renewal options.
The following is a schedule (expressed in thousands of dollars), by year, of
future minimum rental payments required under operating leases that have initial
or remaining non-cancelable lease terms in excess of one year as of December 31,
2002:
2003 $ 41,270
2004 32,170
2005 33,216
2006 28,855
2007 31,718
Later years 336,772
--------
Total $504,001
========
These future minimum rental payment obligations include $373.3 million of future
non-recourse rental payments that relate to energy facilities. Of this amount
$231.2 million is supported by third-party commitments to provide sufficient
service revenues to meet such obligations. The remaining $142.1 million related
to a waste-to-energy facility at which the Company serves as operator and
directly markets one half of the facility's disposal capacity. This facility
currently generates sufficient revenues from short-, medium-, and long-term
contracts to meet rental payments. The Company anticipates renewing the
contracts or entering into new contracts to generate sufficient revenues to meet
remaining future rental payments. Also included are $8.8 million of non-recourse
rental payments relating to an energy facility operated by a subsidiary, which
are supported by contractual power purchase obligations of a third party and
which are expected to provide sufficient revenues to make the rent payments.
These non-recourse rental payments (in thousands of dollars) are due as follows:
2003 $ 34,592
2004 25,908
2005 26,028
2006 20,952
2007 18,910
Later years 255,706
---------
Total $ 382,096
=========
28. Loss Per Share
Basic loss per share was computed by dividing net loss reduced by preferred
stock dividend requirements, by the weighted average of the number of shares of
common stock outstanding during each year.
Diluted loss per share was computed on the assumption that all convertible
debentures, convertible preferred stock, restricted stock, and stock options
converted or exercised during each year or outstanding at the end of each year
were converted at the beginning of each year or at the date of issuance or
grant, if dilutive. This computation provided for the elimination of related
convertible debenture interest and preferred dividends.
The reconciliation of the loss from continuing operations and common shares
included in the computation of basic loss per common share and diluted earnings
per common share for the years ended December 31, 2002, 2001 and 2000, is as
follows (in thousands, except per share amounts):
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Loss Shares Per-Share Loss Shares Per-Share Loss Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------ -------- ---------- ------------- ------ ----------- ------------ ------
Basic Earnings (Loss)
Per Share:
Loss from continuing
operations $(153,187) $(234,729) $ (89,782)
Less: Preferred stock
Dividend 16 64 68
---------- --------- ----------
Loss to common stockholders $(153,203) 49,794 $(3.08) $ (234,793) 49,674 $(4.73) $ (89,850) 49,534 $(1.81)
========== ====== ======= ========== ====== ======= ========== ====== =======
Income (loss) from
discontinued operations $ (17,866) 49,794 $(0.36) $ 3,702 49,674 $ 0.08 $(139,503) 49,534 $(2.82)
========== ====== ======= ========== ====== ======= ========== ====== =======
Loss from cumulative effect
of change in accounting
principle $ (7,842) 49,794 $(0.16)
========== ====== =======
Diluted Loss
Per Share:
Loss to common stockholders $(153,203) 49,794 $(3.08) $ (234,793) 49,674 $ (4.73) $ ( 89,850) 49,534 $ (1.81)
========== ====== ======= ========== ====== ======= ========== ====== =======
Income (loss) from
discontinued operations $ (17,866) 49,794 $(0.36) $ 3,702 49,674 $ 0.08 $ (139,503) 49,534 $(2.82)
========== ====== ======= ========== ====== ======= ========== ====== =======
Loss from cumulative effect
of change in accounting
principle $ (7,842) 49,794 $(0.16)
========== ====== =======
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 0 in
2002, 2,466,000 in 2001, and 3,249,000 in 2000. Shares of common stock to be
issued, assuming conversion of convertible preferred shares, the 6% convertible
debentures, the 5.75% convertible debentures, and unvested restricted stock
issued to employees were not included in computations of diluted earnings per
share as to do so would have been antidilutive. The common shares excluded from
the calculation were 2,175,000 in 2002, 2001 and 2000 for the 6% convertible
debentures; 1,524,000 in 2002, 2001 and 2000 for the 5.75% convertible
debentures; 0, 172,000, and 49,000 in 2002, 2001 and 2000, respectively for
stock options; 198,000, 209,000 and 220,000 in 2002, 2001 and 2000, respectively
for convertible preferred stock and 25,000, 110,000 and 76,000 in 2002, 2001 and
2000 for unvested restricted stock issued to employees, respectively.
29. Commitments and Contingent Liabilities
At December 31, 2002, capital commitments for continuing operations amounted to
$3.2 million for normal replacement and growth in energy. Other capital
commitments for Domestic energy and water and International energy as of
December 31, 2002 amounted to approximately $14.2 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 $2.0 million for an oil-fired project in
India, which commenced operations in September 2002 and $1.6 million for an
energy facility project in Italy.
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 businesses. 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 relating to matters arising prior to April 1, 2002 against
the Debtors shall be resolved pursuant to the Company's confirmed plan of
reorganization.
Covanta and certain of its subsidiaries have issued or are party to performance
bonds and guarantees and related contractual obligations undertaken mainly
pursuant to agreements to construct and operate certain energy, entertainment
and other facilities. In the normal course of business, they are involved in
legal proceedings in which damages and other remedies are sought.
Surety bonds guarantee the Company's performance under its Tampa Bay
desalination construction contract ($29.6 million), performance under its waste
water treatment operating contracts ($12.7 million), possible closure costs for
various energy projects ($11.1 million) and performance of contracts related to
non-energy businesses ($43.2 million).
On December 31, 2002, the Company divested its remaining Aviation assets,
consisting of fueling operations at three airports. The Company retained certain
environmental liabilities relating to the John F. Kennedy International Airport.
In addition, the Company agreed to indemnify the buyer for various other
liabilities, including certain environmental matters; however, the buyer's sole
recourse is an offset right against payments it owes the Company under a $2.6
million promissory note delivered as part of the consideration for this sale.
Prior to filing for Chapter 11 reorganization on April 1, 2002, the Company
agreed to indemnify various other 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. To date such
indemnification has been sought with respect to alleged environmental damages at
the Miami Dade International Airport. Because the Company did not provide
fueling services at that airport, it does not believe it will have significant
obligations with respect to this matter. The Company believes that these
indemnities are, at best, 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. The ultimate outcome and expense of any litigation, including
environmental remediation, is uncertain.
Motions for relief from the Chapter 11 automatic stay have been filed with the
Bankruptcy Court by a group of plaintiffs, led by Martin County Coal
Corporation, to join Ogden Environmental and Energy Services (OEES), a
subsidiary of the company, as a third party defendant to several pending
Kentucky state court litigations arising from an October 2000 failure of a mine
waste impoundment that resulted in the release of approximately 250 million
gallons of coal slurry. Plaintiffs allege that OEES is liable to Martin County
Coal in an unspecified amount for contribution and/or indemnification arising
from an independent contractor agreement to perform engineering and
technological services with respect to the impoundment from 1994 to 1996. OEES
has not been a party to the underlying litigations to date, some of which have
been pending for two years, and, and is in the process of analyzing the claims
against it and an appropriate response.
See Notes 2, 17 and 33 for additional information regarding commitments and
contingent liabilities.
30. Business Segments
As a result of the management restructuring and overhead reduction (see Note 2)
effective October 1, 2002 the Company's reportable segments are: Domestic energy
and water, International energy and Other. The segment information for prior
years has been restated to conform with the current segments.
Covanta's two energy segments develop, operate and in some cases own, domestic
and international energy generating facilities that utilize a variety of fuels,
as well as water and wastewater facilities that will serve communities on a
long-term basis.
The Other segment is primarily comprised of non-energy businesses of the Company
and at December 31, 2001 includes assets held for sale (see Note 4).
For the years ended December 31, 2002, 2001 and 2000 segment and corporate
results were as follows (expressed in thousands of dollars):
2002 2001 2000
- ---------------------------------------------------------------------------------------------------------
Revenues:
Domestic energy and water $ 718,968 $ 759,685 $ 721,924
International energy 185,364 132,575 65,456
Other 15,948 129,763 166,069
---------- ----------- ---------
Total revenue $920,280 $ 1,022,023 $ 953,449
---------- ----------- ---------
Income (Loss) from Operations:
Domestic energy and water $ 88,431 $ 120,580 $ 86,720
International energy 35,886 28,049 7,992
Other, including writedown of assets held for sale (55,529) (320,103) (120,502)
Writedown of assets held for use or sale
Domestic energy and water (22,348)
International energy (78,863)
Corporate unallocated income
and expenses-net (40,680) (43,829) (59,768)
---------- ------------ ----------
Operating loss (73,103) (215,303) (85,558)
Interest expense net (35,320) (30,462) (35,390)
Reorganization items (49,106)
----------- ------------ ----------
Loss from continuing operations before income taxes,
minority interests, discontinued operations and the
cumulative effect of change in accounting principle $ (157,529) $ (245,765) $ (120,948)
=========== ============ ===========
Covanta's revenues include $1.2 million, $0.9 million, and $46.9 million from
United States government contracts for the years ended December 31, 2002, 2001
and 2000, respectively.
Total revenues by segment reflect sales to unaffiliated customers. In computing
loss from operations, none of the following have been added or deducted:
unallocated corporate expenses, non-operating interest expense, interest income
and income taxes.
For the years ended December 31, 2002 and 2001 segment and corporate assets and
results are as follows (expressed in thousands of dollars):
Identifiable Depreciation and Capital
Assets Amortization Additions
- -------------------------------------------------------------------------------------------------------
2002
Domestic energy and water $2,307,159 $ 76,897 $ 19,326
International energy 412,713 18,410 1,941
Other 120,235 93 -
------- -- --------
Consolidated $2,840,107 $ 95,400 $ 21,267
========== ======== ========
2001
Domestic energy and water $2,434,993 $ 78,909 $ 47,114
International energy 618,376 15,713 14,098
Other 193,783 3,693 181
---------- -------- --------
Consolidated $3,247,152 $ 98,315 $ 61,393
========== ======== ========
Covanta's areas of operations are principally in the United States. Operations
outside of the United States are primarily in Asia, with some projects in Latin
America and Europe. No single foreign country or geographic area is significant
to the consolidated operations. A summary of revenues by geographic area for the
years ended December 31, 2002, 2001 and 2000 (expressed in thousands of dollars)
is as follows:
2002 2001 2000
- --------------------------------------------------------------------------------------------------
Revenues:
United States $ 734,544 $ 872,296 $ 878,038
Asia 184,130 107,595 57,255
Latin America 553 29,215 12,616
Europe 146 9,155 5,540
Other 907 3,762
--------- ---------- ---------
Total $ 920,280 $1,022,023 $ 953,449
========= ========== =========
A summary of identifiable assets by geographic area for the years ended December
31, 2002 and 2001 (expressed in thousands of dollars) is as follows:
- --------------------------------------------------------------------------------
2002 2001
- -------------------------------------------------------------------------------
Identifiable Assets:
United States $2,458,758 $2,919,271
Asia 272,556 329,031
Latin America 394 (2,871)
Europe 24,309 1,571
Other 84,090 150
---------- ----------
Total $2,840,107 $3,247,152
========== ==========
31. Supplemental Disclosure of Cash Flow Information
(Expressed in thousands of dollars) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------
Cash Paid for Interest and Income Taxes:
Interest (net of amounts capitalized) $93,139 $123,052 $131,647
Income taxes paid (refunded) 11,485 (4,929) (13,842)
Noncash Investing and Financing Activities:
Conversion of preferred shares for common shares 1 2 3
Reduction of notes receivable from key employees 179
32. Related Party Transactions
In 1999, four officers of the Company were extended loans for the purpose of
paying the exercise price and withholding taxes in connection with their
exercise of certain stock options. In 1999, following the termination of his
employment the loans of the former Chairman of the Company were forgiven as part
of the settlement of litigation brought by him to enforce payment of his
severance (see Note 25).
On November 26, 2001 the remaining notes receivable and accrued interest from
other officers were restructured as a settlement of a dispute surrounding the
circumstances under which the loans were originally granted. That settlement
changed the notes from a fixed principal amount which accrued interest to a
variable amount equal to the market value, from time to time, of the Covanta
common shares purchased by the officers when exercising the above-mentioned
stock options. At that time, the notes receivable and accrued interest recorded
by the Company were adjusted to the $0.9 million market value of the Company's
common shares underlying those notes. The effect of amending the loan agreements
on November 26, 2001 was to adjust the balance in the separate component of
equity by $0.2 million. Also, the subsequent indexing to the Company's stock
price of the balance due under the notes is marked to fair value each reporting
period, with the change in fair value recorded in earnings and as an asset or
liability. As of December 31, 2002, $0.9 million is recorded as a liability as a
result of the change in fair value of the Company's stock since the amendment
date. The notes are due upon the sale of the stock. Through December 31, 2002,
none of the stock has been sold.
In addition, one member of the Company's Board of Directors is a partner in a
major law firm, and another member is an employee of another major law firm.
From time to time, the Company seeks legal services and advice from those two
law firms. During 2002, 2001 and 2000, the Company paid those two law firms
approximately $1.4 million, $1.0 million and $1.3 million, and $1.0 million,
$2.7 million and $1.2 million, respectively, for services rendered.
33. Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of SFAS No. 107, "Disclosures About
Fair Value of Financial Instruments." The estimated fair-value amounts have been
determined using available market information and appropriate valuation
methodologies. However, considerable judgment is necessarily required in
interpreting market data to develop estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts that
Covanta would realize in a current market exchange.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value.
For cash and cash equivalents, restricted cash, and marketable securities, the
carrying value of these amounts is a reasonable estimate of their fair value.
The fair value of long-term unbilled receivables is estimated by using a
discount rate that approximates the current rate for comparable notes. The fair
value of non-current receivables is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to such
borrowers based on the remaining maturities, consideration of credit risks, and
other business issues pertaining to such receivables. The fair value of
restricted funds held in trust is based on quoted market prices of the
investments held by the trustee. Other assets, consisting primarily of insurance
and escrow deposits, and other miscellaneous financial instruments used in the
ordinary course of business are valued based on quoted market prices or other
appropriate valuation techniques.
Fair values for debt were determined based on interest rates that are currently
available to the Company for issuance of debt with similar terms and remaining
maturities for debt issues that are not traded on quoted market prices. With
respect to convertible subordinated debentures, fair values are based on quoted
market prices. The fair value of project debt is estimated based on quoted
market prices for the same or similar issues. Other liabilities are valued by
discounting the future stream of payments using the incremental borrowing rate
of the Company. The fair value of the Company's interest rate swap agreements is
the estimated amount the Company would receive or pay to terminate the agreement
based on the net present value of the future cash flows as defined in the
agreement. The fair value of Covanta financial guarantees provided on behalf of
certain customers are valued by computing the letter of credit fee under its
Master Credit Facility (see Note 17) for each year of the guarantee and
discounting the future stream of payments using the investment rate on AA rated
bonds.
The fair-value estimates presented herein are based on pertinent information
available to management as of December 31, 2002 and 2001. However, such amounts
have not been comprehensively revalued for purposes of these financial
statements since December 31, 2001 and current estimates of fair value may
differ significantly from the amounts presented herein.
The estimated fair value (expressed in thousands of dollars) of financial
instruments at December 31, 2002 and 2001, is summarized as follows:
2002 2001
- ---------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- ---------------------------------------------------------------------------------------------------------------
Assets:
Cash and cash equivalents $115,815 $115,815 $ 86,773 $ 86,773
Marketable securities 2,353 2,353 2,940 2,940
Receivables 406,722 419,862 457,537 472,090
Restricted funds 262,034 262,400 260,228 261,018
Other assets 332 332
Interest rate swap receivable 19,137 19,137 13,199 13,199
Liabilities:
Debt 40,229 40,789 311,691 346,713
Convertible subordinated debentures -(a) - 148,650 101,460
Project debt 1,243,382 1,260,948 1,415,493 1,442,552
Interest rate swap payable 19,137 19,137 13,199 13,199
Other liabilities -(a) 2,000 1,955
Liabilities subject to compromise 892,012 (b)
Off Balance-Sheet Financial Instruments:
Guarantees (c)
(a) included in Liabilities subject to compromise
(b) see Note 2
(c) additionally guarantees include approximately $24.1 million of guarantees
related to international energy projects, $7.5 million related to the guarantee
of a lease at a domestic energy project, guarantees of $19.7 million related to
the Company's interest in Ottawa and $58.0 million related to the Company's
interests in Anaheim and $0.9 million for other entertainment facilities, (see
Note 4).
Effective with the adoption of SFAS No. 133 on January 1, 2001, the interest
rate swap is recorded in other noncurrent assets and other noncurrent
liabilities in the Consolidated Balance Sheets.
34. Receivables from California Utilities
Events in late 2000 and early 2001 in the California energy markets affected the
state's two largest utilities and resulted in delayed payments for energy
delivered by the Company's independent power facilities. 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 December 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 received a portion of escrowed funds each month through
January 31, 2003, at which time the escrowed funds had been fully paid to the
Company.
As stated earlier, SCE paid 100% of their past due receivables on March 1,2002
and PG&E has paid ten-twelfths of their past due receivables through December
31, 2002, in accordance with a bankruptcy court approved twelve-month payment
schedule. As of December 31, 2002, the Company had outstanding gross receivables
from PG&E of approximately $1.2 million (including the Company's 50% interest in
several partnerships). As of March 1, 2003, PG&E paid the past due receivable in
full. The Company has received payment of all these outstanding receivables less
discounts charged by the financial institutions.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Covanta Energy Corporation
(Debtor In Possession)
We have audited the accompanying Consolidated Balance Sheets of Covanta Energy
Corporation (Debtor in Possession) and its subsidiaries (the "Company") as of
December 31, 2002 and 2001, and the related Statements of Consolidated
Operations and Comprehensive Loss, Shareholders' Equity (Deficit) and
Consolidated Cash Flows for each of the three years in the period ended December
31, 2002. Our audits also included the financial statement schedules listed in
the Index at Item 15. These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such Consolidated Financial Statements present fairly, in all
material respects, the financial position of the Company at December 31, 2002
and 2001, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such financial statement schedules, when considered in relation
to the basic Consolidated Financial Statements taken as a whole, present fairly
in all material respects the information set forth therein.
As discussed in Notes 1 and 2, the Company and various domestic subsidiaries
filed voluntary petitions for reorganization under Chapter 11 of the Federal
Bankruptcy Code. The accompanying financial statements do not purport to reflect
or provide for the consequences of the bankruptcy proceedings. In particular,
such financial statements do not purport to show (a) as to assets, their
realizable value on a liquidation basis or their availability to satisfy
liabilities; (b) as to prepetition liabilities, the amounts that may be allowed
for claims or contingencies, or the status and priority thereof; (c) as to
stockholder accounts, the effect of any changes that may be made in the
capitalization of the Company; or (d) as to operations, the effect of any
changes that may be made in their businesses.
In addition, as discussed in Note 4, based upon various events related to the
bankruptcy, the Company recorded write-downs and obligations related to certain
non-energy assets.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Notes 1 and 2, the
Company's dependence 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, and the Company's
ability to generate sufficient cash flows from operations, asset sales and
financing arrangements to meet its obligations, raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans
concerning these matters are also discussed in Notes 1 and 2. The financial
statements do not include adjustments that might result from the outcome of this
uncertainty.
As discussed in Notes 1 and 11, on January 1, 2002, the Company adopted
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" and Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" and on January
1, 2001, the Company adopted Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities", as amended.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 28, 2003
Covanta Energy Corporation (Debtor in Possession) and Subsidiaries
REPORT OF MANAGEMENT
Covanta's management is responsible for the information and representations
contained in this annual report. Management believes that the financial
statements have been prepared in conformity with accounting principles generally
accepted in the United States of America appropriate in the circumstances to
reflect in all material respects the substance of events and transactions that
should be included and that the other information in the annual report is
consistent with those statements. In preparing the financial statements,
management makes informed judgments and estimates of the expected effects of
events and transactions currently being accounted for.
On April 1, 2002, Covanta Energy Corporation and various domestic subsidiaries
filed voluntary petitions for reorganization under Chapter 11 of the United
States Bankruptcy Code. The Company's Consolidated Financial Statements have
been prepared on a "going concern" basis in accordance with accounting
principles generally accepted in the United States of America. The "going
concern" basis of presentation assumes that Covanta will continue in operation
for the foreseeable future and will be able to realize its assets and discharge
its liabilities in the normal course of business. Because of the Chapter 11
Cases and the circumstances leading to the filing thereof, the Company's ability
to continue as a "going concern" is subject to substantial doubt and is
dependent upon, among other things, confirmation of a plan of reorganization,
the Company's ability to comply with, and if necessary renew, the terms of the
Debtor in Possession Financing Facility (see Note 1 and 2 to the Company's
Consolidated Financial Statements), and the Company's ability to generate
sufficient cash flows from operations, asset sales and financing arrangements to
meet its obligations. There can be no assurances this can be accomplished and if
it were not, the Company's ability to realize the carrying value of its assets
and discharge its liabilities would be subject to substantial uncertainty.
Therefore, if the "going concern" basis were not used for the Company's
Consolidated Financial Statements, significant adjustments could be necessary to
the carrying value of assets and liabilities, the revenues and expenses
reported, and the balance sheet classifications used.
The Company's Consolidated Financial Statements have also been prepared in
accordance with the American Institute of Certified Public Accountants'
Statement of Position No. 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" ("SOP 90-7"). Substantially all
unsecured liabilities as of the Petition Date are subject to compromise or other
treatment under a plan of reorganization which must be confirmed by the
Bankruptcy Court after submission to any required vote by affected parties. For
financial reporting purposes, those liabilities and obligations whose treatment
and satisfaction is dependent on the outcome of the Chapter 11 Cases are
segregated and classified as Liabilities Subject to Compromise in the
Consolidated Balance Sheet.
In meeting its responsibility for the reliability of the financial statements,
management depends on the Corporation's internal control structure. This
structure is designed to provide reasonable assurance that assets are
safeguarded and transactions are executed in accordance with management's
authorization and recorded properly to permit the preparation of financial
statements in accordance with accounting principles generally accepted in the
United States of America. In designing control procedures, management recognizes
that errors or irregularities may nevertheless occur. Also, estimates and
judgments are required to assess and balance the relative cost and expected
benefits of such controls. Management believes that the Company's internal
control structure provides reasonable assurance that errors or irregularities
that could be material to the financial statements are prevented and would be
detected within a timely period by employees in the normal course of performing
their assigned functions.
The Board of Directors pursues its oversight role for these financial statements
through the Audit Committee, which is composed solely of nonaffiliated
directors. The Audit Committee, in this oversight role, meets periodically with
management to monitor their responsibilities. The Audit Committee also meets
periodically with the independent auditors and the internal auditors, both of
whom have free access to the Audit Committee without management present.
The independent auditors elected by the shareholders express an opinion on our
financial statements. Their opinion is based on procedures they consider to be
sufficient to enable them to reach a conclusion as to the fairness of the
presentation of the financial statements.
Scott G. Mackin William J. Keneally
President and Chief Executive Officer Senior Vice President and
Chief Accounting Officer
Covanta Energy Corporation (Debtor in Possession) and Subsidiaries
QUARTERLY RESULTS OF OPERATIONS (Unaudited)
(In thousands of dollars, except per-share amounts)
Subsequent to the issuance of the Company's Form 10-Q for the quarterly period
ended September 30, 2002, it was determined that the results of operations of
two energy subsidiaries in Thailand that were disposed of in March 2002 should
have been classified in discontinued operations under Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" (SFAS No. 144"). The results of operations of these
subsidiaries had previously been disclosed and reported in continuing operations
in the Company's 2002 interim condensed consolidated financial statements. As a
result, the Company's condensed consolidated financial information for the three
months ended March 31, 2002 has been restated from the amounts previously
reported to present the results of operations of the energy subsidiaries in
Thailand in discontinued operations and, as required by SFAS No. 144, the 2001
quarterly amounts have been reclassified to conform with the 2002 presentation.
These changes had no effect on the Company's reported 2002 or 2001 quarterly net
losses or financial position.
The following table summarizes the 2002 quarterly results of operations,
including the effect of the restatement of the quarterly period ended March 31,
2002:
2002 Quarter Ended March 31 June 30 September 30 December 31
- ------------------------------------------------------------------------------------------------------------------------------------
As Previously
Reported As Restated
-------- -----------
Total revenues from continuing operations $236,341 $221,523 $238,177 $234,784 $225,796
-------- -------- -------- -------- --------
Gross profit from continuing operations $ 46,909 $58,861 $59,004 $50,909
--------- --------- ---------- ------- --------
Income (loss) from continuing operations ($50,952) ($33,086) $(141,567) $17,459 $4,007
Loss from discontinued operations (17,866)
Loss from cumulative effect of change
in accounting principle (7,842)
--------- --------- ---------- ------- --------
Net income (loss) ($50,952) ($58,794) $(141,567) $17,459 $4,007
========= ========= ========== ======= ========
Basic earnings (loss) per common share:
Income (loss) from continuing operations $(1.02) $(0.66) $(2.84) $0.35 $0.08
Loss from discontinued operations (0.36)
Loss from cumulative effect of change
in accounting principle (0.16) (0.16)
--------- --------- ---------- -------- --------
Total $(1.18) ($1.18) $(2.84) $0.35 $0.08
========= ========= ========== ======= ========
Diluted earnings (loss) per common share
Income (loss) from continuing operations $(1.02) $(0.66) $(2.84) $0.35 $0.08
Loss from discontinued operations (0.36)
Loss from cumulative effect of change
in accounting principle (0.16) (0.16)
--------- --------- ---------- -------- --------
Total $(1.18) $(1.18) $(2.84) $0.35 $0.08
========= ========= ========== ======= ========
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets", which required the Company to perform a transitional
goodwill impairment test within six months of the date of adoption. The Company
completed this test and accounted for the write-off of goodwill totaling $7.8
million as a cumulative effect of a change in accounting principle. In addition,
the Company has reclassified equity in income from unconsolidated investments,
which were previously included in revenues (see Note 1 to the consolidated
financial statements.)
The following table summarizes the 2001 quarterly results of operations, which
have been reclassified to conform with the 2002 presentation:
2001 Quarter Ended March 31 June 30
- ----------------------------------------------------------------------------------------------------------------------------------
As Previously As As Previously As
Reported Reclassified Reported Reclassified
-------- ------------ -------- ------------
Total revenue from continuing operations $248,922 $233,421 $ 299,898 $ 281,255
-------- -------- --------- ---------
Gross profit from continuing operations $ 61,355 $ 54,256 $ 88,184 $ 78,490
-------- -------- --------- ---------
Income (loss) from continuing operations $ 9,415 $ 8,662 $ 14,458 $ 13,990
Income from discontinued operations 753 468
-------- -------- --------- ---------
Net income (loss) $ 9,415 $ 9,415 $ 14,458 $ 14,458
======== ======== ========= =========
Basic earnings (loss) per common share:
Income (loss) from continuing operations $ 0.19 $ 0.17 $ 0.29 $ 0.28
Income from discontinued operations 0.02 0.01
-------- -------- --------- ---------
Total $ 0.19 $ 0.19 $ 0.29 $ 0.29
======== ======== ========= =========
Diluted earnings (loss) per common share:
Income (loss) from continuing operations $ 0.19 $ 0.17 $ 0.29 $ 0.28
Income from discontinued operations 0.02 0.01
-------- -------- --------- ---------
Total $ 0.19 $ 0.19 $ 0.29 $ 0.29
======== ======== ========= =========
2001 Quarter Ended September 30 December 31
- ----------------------------------------------------------------------------------------------------------------------------------
As Previously As As Previously As
Reported Reclassified Reported Reclassified
-------- ------------ -------- ------------
Total revenue from continuing operations $270,706 $251,490 $ 266,009 $ 255,857
-------- -------- --------- ---------
Gross profit from continuing operations $ 64,263 $ 53,851 $ 69,775 $ 68,211
-------- -------- --------- ---------
Income (loss) from continuing operations $ (6,162) $ (6,949) $(248,738) $(250,432)
Income from discontinued operations 787 1,694
-------- -------- --------- ---------
Net income (loss) $ (6,162) $ (6,162) $(248,738) $(248,738)
======== ======== ========= =========
Basic earnings (loss) per common share:
Income (loss) from continuing operations $ (0.12) $ (0.14) $ (5.01) $ (5.04)
Income from discontinued operations 0.02 0.03
-------- -------- --------- ---------
Total $ (0.12) $ (0.12) $ (5.01) $ (5.01)
======== ======== ========= =========
Diluted earnings (loss) per common share:
Income (loss) from continuing operations $ (0.12) $ (0.14) $ (5.01) $ (5.04)
Income from discontinued operations 0.02 0.03
-------- -------- --------- ---------
Total $ (0.12) $ (0.12) $ (5.01) $ (5.01)
======== ======== ========= =========
See Note 2, 3, 4, 5, 9, 11, 17 and 25 to the Consolidated Financial Statements
for information regarding reorganization items, write-offs and special charges
during the years ended December 31, 2002 and 2001.
SCHEDULE II
ITEM 15.(a)(2). FINANCIAL STATEMENT SCHEDULES
COVANTA ENERGY CORPORATION (DEBTOR IN POSSESSION) AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands of dollars)
FOR THE YEAR ENDED DECEMBER 31, 2002
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS
------------------------------
BALANCE AT CHARGED TO
BEGINNING CHARGED TO COSTS OTHER BALANCE AT
DESCRIPTION OF PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
- ------------------------------------------------------------------------------------------------------------------------------------
ALLOWANCES DEDUCTED IN THE BALANCE SHEET
FROM THE ASSETS TO WHICH THEY APPLY:
DOUBTFUL RECEIVABLES - CURRENT $16,444 $17,056 $ 12,789 (A) $20,476
235 (B)
DOUBTFUL RECEIVABLES -NON CURRENT 2,957 2,957
---------------------------------------------------------------------------
TOTAL $16,444 $20,013 $ 13,024 $23,433
===========================================================================
ALLOWANCES NOT DEDUCTED:
RESERVES RELATING TO TAX INDEMNIFICATION AND
OTHER CONTINGENCIES IN CONNECTION WITH THE
SALE OF LIMITED PARTNERSHIP INTERESTS IN AND
RELATED TAX BENEFITS OF A WASTE-TO-ENERGY FACILITY $ 300 $ 300
---------------------------------------------------------------------------
TOTAL $ 300 $ 300
===========================================================================
NOTES:
(A) WRITE-OFFS OF RECEIVABLES CONSIDERED UNCOLLECTIBLE
(B) COMPANY SOLD
SCHEDULE II
ITEM 15.(a)(2). FINANCIAL STATEMENT SCHEDULES
COVANTA ENERGY CORPORATION (DEBTOR IN POSSESSION) AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands of dollars)
FOR THE YEAR ENDED DECEMBER 31, 2001
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS
------------------------------
BALANCE AT CHARGED TO
BEGINNING CHARGED TO COSTS OTHER BALANCE AT
DESCRIPTION OF PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
- ------------------------------------------------------------------------------------------------------------------------------------
ALLOWANCES DEDUCTED IN THE BALANCE SHEET
FROM THE ASSETS TO WHICH THEY APPLY:
DOUBTFUL RECEIVABLES - CURRENT $19,234 $14,212 $ 1,215 (B) $ 6,026 (A) $16,444
12,191 (C)
---------------------------------------------------------------------------
TOTAL $19,234 $14,212 $ 1,215 $ 18,217 $16,444
===========================================================================
ALLOWANCES NOT DEDUCTED:
RESERVES RELATING TO TAX INDEMNIFICATION AND
OTHER CONTINGENCIES IN CONNECTION WITH THE
SALE OF LIMITED PARTNERSHIP INTERESTS IN AND
RELATED TAX BENEFITS OF A WASTE-TO-ENERGY FACILITY $ 300 $ 300
---------------------------------------------------------------------------
TOTAL $ 300 $ 300
===========================================================================
NOTES:
(C) WRITE-OFFS OF RECEIVABLES CONSIDERED UNCOLLECTIBLE
(D) TRANSFER FROM OTHER ACCOUNTS
(E) RECLASSIFICATION TO ASSETS HELD FOR SALE
SCHEDULE II
ITEM 15.(a)(2). FINANCIAL STATEMENT SCHEDULES
COVANTA ENERGY CORPORATION (DEBTOR IN POSSESSION) AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands of dollars)
FOR THE YEAR ENDED DECEMBER 31, 2000
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS
------------------------------
BALANCE AT CHARGED TO
BEGINNING CHARGED TO COSTS OTHER BALANCE AT
DESCRIPTION OF PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
- ------------------------------------------------------------------------------------------------------------------------------------
ALLOWANCES DEDUCTED IN THE BALANCE SHEET
FROM THE ASSETS TO WHICH THEY APPLY:
DOUBTFUL RECEIVABLES - CURRENT $17,942 $15,598 $1,272 (B) $ 15,578 (A) $19,234
---------------------------------------------------------------------------
TOTAL $17,942 $15,598 $1,272 $ 15,578 $19,234
===========================================================================
ALLOWANCES NOT DEDUCTED:
RESERVES RELATING TO TAX INDEMNIFICATION AND
OTHER CONTINGENCIES IN CONNECTION WITH THE
SALE OF LIMITED PARTNERSHIP INTERESTS IN AND
RELATED TAX BENEFITS OF A WASTE-TO-ENERGY FACILITY $ 300 $ 300
---------------------------------------------------------------------------
TOTAL $ 300 $ 300
===========================================================================
NOTES:
(A) WRITE-OFFS OF RECEIVABLES CONSIDERED UNCOLLECTIBLE
(B) TRANSFER FROM OTHER ACCOUNTS
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF COVANTA
DIRECTORS OF COVANTA
PRINCIPAL FIRST BECAME
NAME, AGE(1), AND OTHER INFORMATION OCCUPATION A DIRECTOR TERM EXPIRES
----------------------------------- ---------- ---------- ------------
Anthony J. Bolland: Age 49 Managing Director, Boston 1998 2004
Member of Covanta's Audit Committee; Director of Ventures Management, Inc.
Production Resource Group, Inc. and Northern
Light Technology Corporation
Norman G. Einspruch: Age 70 Professor and Senior Fellow, 1981 2003(2)
Chairman of Covanta's Compensation Committee College of Engineering,
University of Miami
George L. Farr: Age 61 Principal, Muirhead Holdings, 1999 2002(2)
Chairman of Covanta's Board of Directors; LLC; former Vice Chairman, The
Director of Swiss Reinsurance Company, Zurich, American Express Company
Switzerland; Director of MISYS PLC, London,
England
Jeffrey F. Friedman: Age 56 Investment Manager, Dreyfus 1998 2002(2)
Chairman of Covanta's Audit Committee and member Corporation
of Covanta's Compensation Committee
Veronica M. Hagen: Age 57 Vice President, Alcoa, Inc.; 2001 2002(2)
Member of Covanta's Audit and Compensation President, Alcoa Engineered
Committees Products
Scott G. Mackin: Age 46 President and Chief Executive 1999 2004
Officer, Covanta and Covanta
Energy Group, Inc., a Covanta
subsidiary
Craig G. Matthews: Age 60 Retired Vice Chairman and Chief 2000 2004
Member of Covanta's Audit and Governance Operating Officer, KeySpan
Committees; Director of Amerada Hess Corp. Corporation
Homer A. Neal: Age 60 Samuel A. Goudsmit Distinguished 1988 2003(2)
Chairman of Covanta's Governance Committee and University Professor of Physics
member of Covanta's Compensation Committee; and Director of Project Atlas,
Director of Ford Motor Company University of Michigan
Robert E. Smith: Age 67 Counsel, Katten Muchin Zavis 1990 2004
Member of Covanta's Governance Committee Rosenman, a law firm
Joseph A. Tato: Age 49 Partner, LeBoeuf, Lamb, Greene & 2000 2003(2)
Member of Covanta's Governance Committee MacRae, LLP, a law firm
Helmut F.O. Volcker: Age 68 Professor of Energy Technology, 1994 2002(2)
University of Essen, Germany
Robert R. Womack: age 65 Retired Chairman and Chief 2000 2003(2)
Member of Covanta's Audit and Compensation Executive Officer, Zurn
Committees; Chairman of the Board of Precision Industries, Inc.
Partners, Inc.; Director of Commercial Metals
Company and U.S. Industries, Inc.
- ------------------------------------------------------------------
(1) All information is as of March 15, 2003.
(2) Due to Covanta's pending bankruptcy, these directors shall continue to serve
as directors until the earlier of (a) their resignation or (b) the election and
qualification of a replacement.
Mr. Bolland was founder and has served as Managing Director of Boston
Ventures Management, Inc., Boston, Massachusetts, from 1983 to present.
Dr. Einspruch has served as Senior Fellow in Science and Technology at
the University of Miami from 1990 to present. He is also a Professor in the
Department of Electrical and Computer Engineering at the University of Miami
from 1977 to present and Professor in the Department of Industrial Engineering
from 1994 to present.
Mr. Farr has served as a Managing Partner of Muirhead Holdings, LLC, a
private equity investment company in Connecticut from 1998 to present. From 1995
to 1998, he was Vice Chairman of American Express Company.
Mr. Friedman has served as Investment Manager, Director of Risk
Management Activity and Corporate Hedging at Dreyfus Corporation, New York, New
York from 1994 to present.
Ms. Hagen has served as Vice President of Alcoa Inc. and President of
Alcoa Engineered Products, Chicago, Illinois from 1999 to present. Prior to
working for Alcoa, she served as Executive Vice President, Distribution &
Industrial Products, Alumax, Inc., Cressona, Pennsylvania (formerly Cressona
Aluminum Company) from 1996 to 1998.
Mr. Matthews retired from KeySpan Corporation in 2002 where he served
as Vice Chairman and Chief Operating Officer and a Director of the KeySpan Board
from 2001 to 2002, President and Chief Operating Officer of KeySpan Corporation
from 1999 to 2001 and as Executive Vice President and Chief Financial Officer of
KeySpan Corporation from 1998 to 1999. From 1996 to 1998, he served as President
and Chief Operating Officer of Brooklyn Union Corporation.
Dr. Neal has served as Professor of Physics and Vice President for
Research at the University of Michigan, Ann Arbor, Michigan, for more than the
past five years.
Mr. Smith has been a Partner in the law firm KMZ Rosenman, New York,
New York, since its creation in 2002 resulting from the merger of Katten Muchin
Zavis and Rosenman and Collin. Prior to 2002, Mr. Smith was a partner in the law
firm of Rosenman and Collin for more than the prior five years.
Mr. Tato has been a Partner in the law firm LeBoeuf, Lamb, Greene &
MacRae, New York, New York, and Head of the firm's Global Project and
Infrastructure Finance Group for more than five years.
Dr. Volcker has been a professor of energy technology at the University
of Essen and has served as a consultant for international energy projects from
1998 to present.
Mr. Womack retired in 2000 from USI Bath and Plumbing Products where he
served as Chairman of the Board of Directors and Chief Executive Officer from
1998 to 2000. From 1994 to 2000, he served as Chairman and Chief Executive
Officer of Zurn Industries.
EXECUTIVE OFFICERS OF COVANTA
Set forth below are the names, ages, current positions and terms of
office of Covanta's current executive officers.
CONTINUALLY
POSITION AND AGE AS OF AN EXECUTIVE
NAME OFFICE HELD 3/15/03 OFFICER SINCE
Scott G. Mackin President and Chief 46 1992
Executive Officer
Bruce W. Stone Senior Vice President, 55 1997
Business Development and Construction
Jeffrey R. Horowitz Senior Vice President, 53 2001
General Counsel and Secretary
Anthony J. Orlando Senior Vice President, 43 2001
Business and Financial Management
Paul B. Clements Senior Vice President, 47 2001
International Business Management and Operations
Lynde H. Coit Senior Vice President 48 1991
B. Kent Burton Senior Vice President, 51 1997
Policy and International
Government Relations
Stephen M. Gansler Senior Vice President, 48 2001
Human Resources
Louis M. Walters Vice President 50 2001
and Treasurer
William J. Keneally Senior Vice President 40 2002
and Chief Accounting
Officer
John M. Klett Senior Vice President, 56 2003
Domestic Operations
The term of office of all officers shall be until the next election of
directors and until their respective successors are chosen and qualified.
The following briefly describes the business experience, principal
occupation and employment of the foregoing executive officers during the past
five years:
Scott G. Mackin has served as President and Chief Executive Officer of
Covanta since September 1999. Prior thereto he served as Executive Vice
President of Covanta from January 1997 to September 1999 and as President and
Chief Operating Officer of Covanta Energy Group, Inc., a Covanta subsidiary,
since January 1991.
Bruce W. Stone was named Senior Vice President, Business Development
and Construction in March 2003. From January 2001 until March 2003, Mr. Stone
served as Covanta's Executive Vice President and Chief Administrative Officer.
Previously, Mr. Stone served as Executive Vice President and Managing Director
of Covanta Energy Group, Inc., a Covanta subsidiary, a position he held starting
in January 1991.
Jeffrey R. Horowitz was named Senior Vice President, General Counsel
and Secretary of Covanta in August 2001. From June 2001 to August 2001, Mr.
Horowitz served as Senior Vice President for Legal Affairs and Secretary and
prior to that time as Executive Vice President, General Counsel and Secretary of
Covanta Energy Group, Inc, a Covanta subsidiary. Mr. Horowitz joined Covanta in
1991.
Anthony J. Orlando was named Senior Vice President, Business and
Financial Management in March 2003. From January 2001 until March 2003, Mr.
Orlando served as Covanta's Senior Vice President, Waste to Energy. Previously
he served as Executive Vice President of Covanta Energy Group, Inc., a Covanta
subsidiary. Mr. Orlando joined the Company in 1987.
Paul B. Clements was named Senior Vice President, International
Business Management and Operations in March 2003. From January 2001 until March
2003, Mr. Clements served as Covanta's Senior Vice President, Independent Power
Operations. Mr. Clements previously served as Executive Vice President of
Covanta Energy Group, Inc., and President of Covanta Energy West, Inc., both of
which are Covanta subsidiaries. Mr. Clements joined the Company in 1988.
Lynde H. Coit currently serves as Senior Vice President of Covanta.
Prior to August 2001, Mr. Coit served as Senior Vice President and General
Counsel of Covanta. Mr. Coit joined Covanta in 1989.
B. Kent Burton has served as Senior Vice President - Policy and
International Government Relations of Covanta since May 1999. From May 1997 to
May 1999 he served as Vice President - Policy and Communications of Covanta and
prior thereto he served as Senior Vice President of the Covanta Energy Group,
Inc., a Covanta subsidiary, in political affairs and lobbying activities.
Stephen M. Gansler was named Senior Vice President, Human Resources of
Covanta in March 2003. From March 2001 to March 2003, Mr. Gansler served as Vice
President, Human Resources of Covanta. From 1998 to March 2001, Mr. Gansler was
Worldwide Vice President, Human Resources, at a Johnson & Johnson affiliate.
Prior to that time, Mr. Gansler held various positions in Human Resources with
Johnson & Johnson for more than 20 years.
Louis M. Walters was named Vice President and Treasurer of Covanta in
2001. Prior to that time and since January 2000, Mr. Walters served as Treasurer
of Covanta Energy Group, Inc. Prior to joining Covanta, Mr. Walters was
Treasurer at Conectiv from 1998 to January 2000. Prior to that time, Mr. Walters
was Treasurer at Atlantic Energy for more than five years.
William J. Keneally was named Senior Vice President and Chief
Accounting Officer of Covanta in April, 2002. Prior to joining Covanta, Mr.
Keneally was Vice President - Controller and Treasurer for Metion, Inc. since
October 2000, a partner with BDO Seidman, LLP since July 1999 and Senior Vice
President - Financial Controller of Inter-Continental Hotels and Resorts since
May 1994.
John M. Klett was named Senior Vice President, Domestic Operations in
March 2003. Prior thereto he served as Executive Vice President of Covanta Waste
to Energy, Inc. for more than five years.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires Covanta's
directors, officers and persons who beneficially own more than 10% of any class
of Covanta's equity securities to file certain reports concerning their
beneficial ownership and changes in their beneficial ownership of Covanta's
equity securities. Covanta believes that during fiscal year 2002 all persons who
were required to file reports did so on a timely basis.
Item 11. EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth the aggregate cash
and non-cash compensation for each of the last three fiscal years awarded to,
earned by or paid to the CEO of Covanta and each of Covanta's four other most
highly compensated executive officers whose salary and bonus exceeded $100,000
for fiscal year 2002:
SUMMARY COMPENSATION TABLE(1)
ANNUAL COMPENSATION LONG TERM COMPENSATION
NAME AND YEAR SALARY BONUS OTHER ANNUAL RESTRICTED SECURITIES ALL OTHER COMPENSTION
PRINCIPAL POSITION COMPENSATION (2) STOCK UNDERLYING
AWARDS OPTIONS DISPUTE
(4) (#) RESOLUTION (6) OTHER (3)
------------------ ---- ------ ----- --------------- ---------- ---------- -------------- ---------
Scott G. Mackin 2002 $625,000 $973,755(5) $ 0 $ 0 0 $ 0 $209,135
President and Chief 2001 625,000 650,000 254,146 0 0 212,212 62,860
Executive Officer 2000 600,000 650,000 0 89,700 60,000 0 55,075
Bruce W. Stone 2002 $325,000 $ 379,935(5) $ 0 $ 0 0 $ 0 $95,800
Senior Vice President, 2001 325,000 240,000 212,626 0 0 184,657 28,610
Business Development 2000 302,702 240,000 0 60,000 40,000 0 24,570
and Construction
Jeffrey R. Horowitz 2002 $260,000 $290,525(5) $ 0 $ 0 0 $ 0 $78,867
Senior Vice President, 2001 260,000 250,000 0 0 0 0 24,360
General Counsel 2000 209,796 220,000 0 50,000 40,000 0 16,772
and Secretary
Anthony J. Orlando 2002 $245,000 $337,345(5) $ 0 $ 0 0 $ 0 $75,348
Senior Vice President, 2001 245,000 260,000 0 0 0 0 23,110
Business and Financial 2000 221,375 210,000 0 40,000 40,000 0 19,075
Management
Paul B. Clements 2002 $250,000 $291,165(5) $ 0 $ 0 0 $ 0 $75,880
Senior Vice President, 2001 250,000 235.000 0 0 0 0 24,434
International Business 2000 235,000 195,000 0 45,000 40,000 0 0
Management and Operations
(1) Includes annual compensation awarded to, earned by or paid to the individual
during the last three fiscal years, or any portion thereof that the named
individual was employed by Covanta.
(2) Amounts in this column represent, for fiscal year ending December 31, 2001,
tax gross-up payment in settlement of dispute as mentioned in footnote (6) below
and further detailed in Item 13, Certain Relationships and Related Transactions,
of this document for Messrs. Mackin and Stone of $254,146 and $212,262,
respectively.
(3) Includes, for the fiscal year ending December 31, 2002: (i) contributions in
the amount of $8,000 credited to the account balances of each of Messrs. Mackin,
Stone, Horowitz, Orlando and Clements under the Company's 401(k) Savings Plan;
(ii) a cash payment to Messrs. Mackin, Stone, Horowitz, Orlando and Clements in
the amount of $44,802, $15,133, $12,867, $12,681 and $11,880 respectively
representing the excess of the amount of the contribution that could have been
made to their Covanta Profit-Sharing Plan account pursuant to the formula
applicable to all employees over the maximum contribution to such plan permitted
by the Employee Retirement Income Security Act of 1974, as amended, and (iii)
amounts paid pursuant to Covanta's Special Retention Bonus Plan under the
Bankruptcy Court approved Key Employee Retention Plan implemented in 2002
following the Chapter 11 filing to Messrs. Mackin, Stone, Horowitz, Orlando and
Clements of $156,333, $72,667, $58,000, $54,667 and $56,000, respectively.
(4) Awards of restricted stock are based on the closing price of Covanta Common
Stock on the date of award and vest at the rate of 50% each year over a period
of two years from the date of award. The number (and value) of the aggregate
restricted stock holdings at December 31, 2002 for each of Messrs. Mackin,
Stone, Horowitz, Orlando and Clements are 2,500 ($25), 1,700 ($17), 1,400 ($14),
1,150 ($11), and 1,300 ($13), respectively, based on the last trading price for
Covanta Common Stock in trading on over the counter markets.
(5) The amounts shown represent the full amount of the annual bonuses
attributable to 2002, which were paid in February 2003.
(6) For fiscal year ending December 31, 2001, the amounts set forth for Messrs.
Mackin and Stone represent loan forgiveness in settlement of dispute as
mentioned in footnote (2) above and further detailed in Item 13 "Certain
Relationships and Related Transactions" of this document. On August 6, 1999,
Covanta made loans to Messrs. Mackin and Stone for the purpose of paying the
exercise price and withholding taxes in connection with their exercise of
Covanta stock options which were expiring on August 9, 1999. Both loans were
evidenced by demand notes with interest accruing thereon at the short-term
applicable federal rate compounded annually. In 2001, as settlement of a dispute
surrounding the circumstances under which the loans were originally granted, the
Company forgave a portion of the loan and reduced the amount of the loan to the
then fair market value of the stock. From the date of the settlement, the
balance of each note will fluctuate with the fair market value of the stock. No
interest will be payable. Upon any sale of the stock, the executive must pay the
net proceeds to the Company.
Aggregated Option exercises in Last Fiscal Year
And FY-End Options Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the- Money Options
Options at FY-End at FY-End
Shares Acquired Value Exercisable/ Exercisable/
Name On Exercise (#) Realized Unexercisable (#) Unexercisable
---- --------------- -------- ---------------------- ---------------------
Scott G. Mackin 0 $0 744,000/56,000 $0/$0
Bruce W. Stone 0 $0 68,334/26,666 $0/$0
Jeffrey R. Horowitz 0 $0 89,334/50,660 $0/$0
Anthony J. Orlando 0 $0 97,334/32,666 $0/$0
Paul B. Clements 0 $0 133,334/31,666 $0/$0
COVANTA ENERGY GROUP PENSION PLAN
Scott G. Mackin, Jeffrey R. Horowitz, Bruce W. Stone, Anthony J.
Orlando and Paul B. Clements participate in the Company's Energy Group Pension
Plan, a tax-qualified defined benefit plan subject to the provisions of the
Employee Retirement Income Security Act of 1974, as amended. Under the Energy
Group Pension Plan each participant who meets the plan's vesting requirements
will be provided with an annual benefit at or after age 65 equal to 1.5% of the
participant's average compensation during the five consecutive calendar years of
employment out of the ten consecutive calendar years immediately preceding his
retirement date or termination date during which such average is the highest,
multiplied by his total years of service. Compensation includes salary and other
compensation received during the year and deferred income earned, but does not
include imputed income, severance pay, special discretionary cash payments or
other non-cash compensation. The relationship of the covered compensation to the
annual compensation shown in the Summary Compensation Table would be the Salary
and Bonus columns and any car allowance. A plan participant who is at least age
55 and who retires after completion of at least five years of employment
receives a benefit equal to the amount he would have received if he had retired
at age 65, reduced by an amount equal to 0.5% of the benefit multiplied by the
number of months between the date the participant commences receiving benefits
and the date he would have commenced to receive benefits if he had not retired
prior to age 65.
Messrs. Mackin, Horowitz, Stone, Orlando and Clements also participate
in the Company's Energy Group Supplementary Benefit Plan, a deferred
compensation plan that is not qualified for federal income tax purposes. The
Energy Group Supplementary Benefit Plan provides that, in the event that the
annual retirement benefit of any participant in the Energy Group Pension Plan,
determined pursuant to such plan's benefit formula, cannot be paid because of
certain limits on annual benefits and contributions imposed by the Code, the
amount by which such benefit must be reduced represents an unfunded liability
and will be paid to the participant from the general assets of the Company.
The following table shows the estimated annual retirement benefits
payable in the form of a life annuity at age 65 under the Energy Group Pension
Plan and the Energy Group Supplemental Benefit Plan. Benefits payable under the
Energy Group Supplemental Benefit Plan are paid in the form of a lump sum. Mr.
Mackin has 16.5 years, Mr. Stone has 26.8 years, Mr. Horowitz has 11.5 years,
Mr. Orlando has 15.7 years and Mr. Clements has 7.7 years of credited service
under the Energy Group Pension Plan as of December 31, 2002 and had annual
average earnings for the last five years of $1,152,562, $531,749, $407,600,
$424,891 and $421,506 respectively.
AVERAGE ANNUAL
EARNINGS IN 5
CONSECUTIVE HIGHEST PAID
YEARS OUT OF LAST 10 YEARS
PRECEDING RETIREMENT
ESTIMATED ANNUAL RETIREMENT BENEFITS BASED ON YEARS OF SERVICE
5 10 15 20 25 30
360,000 27,000 54,000 81,000 108,000 135,000 162,000
375,000 28,125 56,250 84,375 112,500 140,625 168,750
400,000 30,000 60,000 90,000 120,000 150,000 180,000
425,000 31,875 63,750 95,625 127,500 159,375 191,250
450,000 33,750 67,500 101,250 135,000 168,750 202,500
500,000 37,500 75,000 112,500 150,000 187,500 225,000
550,000 41,250 82,500 123,750 165,000 206,250 247,500
600,000 45,000 90,000 135,000 180,000 225,000 270,000
625,000 46,875 93,750 140,625 187,500 234,375 281,250
900,000 67,500 135,000 202,500 270,000 337,500 405,000
950,000 71,250 142,500 213,750 285,000 356,250 427,500
1,000,000 75,000 150,000 225,000 300,000 375,000 450,000
1,050,000 78,750 157,500 236,250 315,000 393,750 472,500
1,100,000 82,500 165,000 247,500 330,000 412,500 495,000
1,150,000 86,250 172,500 258,750 345,000 431,250 517,500
1,200,000 90,000 180,000 270,000 360,000 450,000 540,000
DIRECTOR COMPENSATION
(a) Director's Fees
Through March 31, 2002 each director, other than the Chairman, who was
not an employee of Covanta or a Covanta subsidiary received an annual director's
retainer fee of $35,000 plus a meeting fee of $1,500 for each Board of Directors
meeting attended. Each non-employee director also received a meeting fee of
$1,500 for each committee meeting attended. All directors are reimbursed for
expenses incurred in attending Board of Directors and committee meetings.
Directors who are employees of Covanta or a Covanta subsidiary receive no
additional compensation for serving on the Board of Directors or any committee.
On January 21, 2002, the Board of Directors voted to pay all non-employee
directors compensation in the form of cash rather than 50% cash and 50%
restricted stock as had been the practice. Effective April 1, 2002 the annual
retainer fee and meeting fees were decreased by ten percent by resolution of the
Board of Directors.
In May 2001, the Compensation Committee reviewed the compensation
payable to Mr. Farr as compensation for his duties as Chairman of the Board and
determined that it was appropriate to adjust the monthly retainer of $35,000 to
$20,000 for such time as the Chairman remained in this special role. In
accordance with the January 21, 2002 resolution of the Board of Directors, such
monthly retainer shall be paid in cash. Effective April 1, 2002, Mr. Farr's
monthly retainer was further reduced by ten percent by resolution of the Board
of Directors.
(b) Stock Options
Pursuant to the Covanta Amended and Restated 1999 Stock Incentive Plan
(the "1999 Plan"), the Board of Directors may award annual grants of Directors
Stock Options and limited stock appreciation rights of up to 2,500 shares of
Covanta Common Stock to each non-employee director, at an exercise price equal
to the fair market value on the date of grant. There were no options granted to
non-employee directors in 2002.
(c) Restricted Stock
On February 17, 2000, the Board of Directors adopted the Covanta
Restricted Stock Plan for Non-Employee Directors (the "Director's Restricted
Stock Plan") which is administered by the Board of Directors and provides that
only non-employee directors are eligible to receive awards. Each award of
restricted stock will vest upon the earliest of the third month following the
date of grant; the non-employee director's attainment of normal retirement age;
the non-employee director's disability; or the non-employee director's death.
Shares are freely transferable after they become vested subject to meeting
certain SEC requirements. All unvested shares of restricted stock are forfeited
upon the director's termination of directorship for any reason, other than death
or disability. Shares become fully vested upon a change-in-control of the
Company. Shares of Common Stock to be issued under the Director's Restricted
Stock Plan will be made from shares held in Covanta's treasury, the maximum
aggregate number of shares authorized to be issued is 100,000 shares and the
purchase price for each share issued is zero. There were no awards of restricted
stock granted to non-employee directors in 2002.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
EMPLOYMENT CONTRACTS
The Company is reviewing its employment contracts with employees in view of the
Chapter 11 proceedings.
The Compensation Committee of the Board of Directors has authorized the
rejection of all of the following employment contracts in the Chapter 11
proceedings.
(A) Mr. Mackin is employed by Covanta as its President and Chief Executive
Officer, pursuant to an employment agreement dated as of October 1, 1998
and amended November 26, 2001 for a five year term commencing October 1,
1998 and continuing through September 30, 2003 and year to year thereafter,
subject to the right of either party to terminate the agreement on any
September 30th upon at least sixty (60) days prior written notice. The
agreement provides for an annual salary in the amount of $625,000 or such
higher rate as may be determined from time to time by the Board of
Directors, and an annual incentive bonus in such amount as may be
determined by the Board of Directors. The agreement also provides that if
Mr. Mackin terminates his employment for good reason, including a change in
control (as defined in the agreement), or if his employment is terminated
by Covanta for any reason other than for cause (as defined in the
agreement) then he is entitled to a lump sum cash payment equal to the
product of five times his base salary at the highest annual rate in effect
at any time prior to the termination date, and the highest amount of annual
bonus payable at any time prior to the termination date and, if applicable,
an additional payment equal to the amount of any excise tax imposed on any
payments made under the agreement (including the additional payment)
pursuant to the excess parachute payment provisions of the Code.
(B) Mr. Stone is employed by Covanta as its Senior Vice President, Business
Development and Construction pursuant to an employment agreement dated May
1, 1999 and continues until May 1, 2004, and thereafter from year to year.
The annual salary under the agreement is $291,059 or such higher rate as
may be determined from time to time by the Board of Directors with an
annual incentive bonus in such amount as determined by the Board of
Directors. The agreement also provides that if Mr. Stone's employment is
terminated by Covanta Energy Group, Inc. for any reason other than for
cause (as defined in the agreement) or if Mr. Stone terminates his
employment for good reason, including a change in control (as defined in
the agreement), then Mr. Stone is entitled to a lump sum cash payment equal
to the product of five times his annualized base salary at the highest
annual rate in effect at any time prior to the termination date and the
highest amount of annual bonus payable at any time prior to the termination
date.
(C) Mr. Horowitz is employed by Covanta as its Senior Vice President, General
Counsel and Secretary, pursuant to an employment agreement dated May 1,
1999 and continuing until May 1, 2004 and thereafter from year to year. The
annual salary under the agreement is $201,721 or such higher rate as may be
determined from time to time by the Board of Directors with an annual
incentive bonus in such amount as determined by the Board of Directors. The
Agreement also provides that if Mr. Horowitz's employment is terminated by
Covanta Energy Group, Inc. for any reason other than for cause (as defined
in the agreement) or if Mr. Horowitz terminates his employment for good
reason, including a change in control (as defined in the agreement), then
Mr. Horowitz would be entitled to a lump sum cash payment equal to the
product of five times his annualized base salary at the highest annual rate
in effect at any time prior to the termination date and the highest amount
of annual bonus payable at any time prior to the termination date.
(D) Mr. Orlando is employed by Covanta as its Senior Vice President, Business
and Financial Management, pursuant to an employment agreement dated May 1,
1999 and continuing until May 1, 2004 and thereafter from year to year. The
annual salary under the agreement is $201,250 or such higher rate as may be
determined from time to time by the Board of Directors with an annual
incentive bonus in such amount as determined by the Board of Directors. The
Agreement also provides that if Mr. Orlando's employment is terminated by
Covanta Energy Group, Inc. for any reason other than for cause (as defined
in the agreement) or if Mr. Orlando terminates his employment for good
reason, including a change in control (as defined in the agreement), then
Mr. Orlando would be entitled to a lump sum cash payment equal to the
product of five times his annualized base salary at the highest annual rate
in effect at any time prior to the termination date and the highest amount
of annual bonus payable at any time prior to the termination date.
(E) Mr. Clements is employed by Covanta as its Senior Vice President,
International Business Management and Operations, pursuant to an employment
agreement dated May 1, 1999 and continuing until May 1, 2004 and thereafter
from year to year. The annual salary under the agreement is $220,000 with
an annual incentive bonus in such amount as determined by the Board of
Directors. The agreement also provides that if Mr. Clements employment is
terminated by Covanta Energy Group, Inc. for any reason other than for
cause (as defined in the agreement) or if Mr. Clements terminates his
employment for good reason, including a change in control (as defined in
the agreement), then Mr. Clements is entitled to a lump sum cash payment
equal to the product of five times his annualized base salary at the
highest annual rate in effect at any time prior to the termination date and
the highest amount of annual bonus payable at any time prior to the
termination date.
TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS
Retention Program. Effective September 18, 2002, Covanta adopted a Key
Employee Retention Program (the "Key Employee Retention Program") in the form
approved by the Bankruptcy Court on that date. The Key Employee Retention
Program consists of three components: the Key Employee Severance Plan (the
"Severance Plan"), the Key Employee Retention Bonus Plan (the "Retention Bonus
Plan") and the Long-Term Incentive Plan (the "LTIP"). Each of the named
executive officers participates in the Key Employee Retention Program.
Severance Plan. In general, under the terms of the Severance Plan, in
the event of a participant's termination by Covanta "Without Cause" or
resignation for "Mutual Benefit" (as each such term is defined in the Key
Employee Retention Program), such participant is eligible to receive cash
severance benefits, payable in a lump sum, equal to 200%, in the case of Mr.
Mackin, and 150%, in the case of the other four named executive officers, of
such individual's base salary and continued coverage under Covanta's medical and
dental plans for eighteen months following termination. Severance benefits are
reduced, however, to the extent that any portion would not be deductible under
the provisions of the Internal Revenue Code relating to excess parachute
payments. A participant is required to provide a general release of claims to
Covanta and to comply with certain other covenants as a condition to receipt of
any severance benefits under the Severance Plan.
Retention Bonus Plan. Under the Retention Bonus Plan, a participant,
including each of the named executive officers, is eligible to receive a cash
retention bonus equal to a percentage of such participant's base salary, payable
in three equal installments, generally provided the participant is continuously
employed until the applicable payment date for each such installment. Mr. Mackin
is eligible to receive a cash retention bonus equal to 75% of his base salary,
in the aggregate, and each of the other four named executive officers is
eligible to receive a cash retention bonus equal to 67% of such officer's base
salary, in the aggregate. The first installment amount was paid to eligible
participants, including each of the named executive officers, on September 30,
2002. The second installment amount will become vested and payable generally on
the earlier of (i) September 30, 2003 and (ii) the consummation of Covanta's
plan of reorganization or the consummation of one or a series of transactions
pursuant to which all or substantially all of Covanta's assets are sold (a
"Trigger Event"). The third installment will become vested and payable generally
on the date a Trigger Event occurs. In addition, if a Trigger Event occurs prior
to April 1, 2003, additional cash retention bonuses would become payable to
eligible participants, provided that the aggregate amount of such additional
bonuses may not exceed $1 million. In the event of a participant's termination
by Covanta Without Cause, resignation for Mutual Benefit, or termination due to
the participant's death or disability, a pro rata portion of such participant's
then unpaid retention bonus award would become immediately vested and payable,
except that, if such termination or resignation occurs after payment of the
second installment, payment of the third installment would be made on the date
the Trigger Event occurs. In the event of any other termination, any unpaid
portion of a participant's retention bonus award is forfeited.
LTIP. A Participant in the LTIP will generally be eligible to receive a
lump sum cash incentive bonus award in the event that, prior to the first
anniversary of the date the Bankruptcy Court confirms a plan of reorganization
for Covanta, such participant's employment is terminated by Covanta Without
Cause or such participant resigns for Mutual Benefit. Except in the event of an
alternative transaction, as described below, any incentive bonus award that
becomes payable to an eligible participant will equal a specified percentage of
an LTIP bonus pool established under the LTIP. Amounts will be credited to the
LTIP Pool based on the Value Realized (as defined in the LTIP) by Covanta and
its affiliates in connection with any asset sales or eliminations of
pre-petition letters of credit during the bankruptcy proceedings and the
enterprise value of Covanta and its affiliates upon emergence from bankruptcy.
Each participant's percentage interest in the LTIP pool is established by the
Compensation Committee of Covanta's Board of Directors, in consultation with the
Chief Executive Officer, within a range provided under the LTIP, except that Mr.
Mackin's percentage interest is fixed at 35%. The range of percentage interest
of each of Messrs. Stone, Horowitz and Orlando is 9.5% to 14.5% and for Mr.
Clements is 8.8% to 13.8%.
In the event of an alternative transaction (e.g., an investment by
Kohlberg Kravis Roberts & Co. of new equity capital in exchange for 50% of the
equity securities of Covanta or Covanta's emergence from bankruptcy as a
stand-alone, going concern entity), any incentive bonus award that becomes
payable to an eligible participant will equal a percentage of such participant's
base salary and annual bonus, reduced by any amount payable to the participant
under the Severance Plan. Such percentage for Mr. Mackin is 200% and for each of
the other four named executive officers is 150%.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of Covanta's Compensation Committee are Norman G.
Einspruch, Chairman; Jeffrey F. Friedman, Veronica M. Hagen, Homer A. Neal, and
Robert R. Womack. All of the foregoing members are "non-employee directors"
within the meaning of revised Rule 16b-3 promulgated under Section 16(b) of the
Securities Exchange Act of 1934, as amended, and "outside directors" within the
meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended, who
are not employees or members of management of Covanta or any of its
subsidiaries.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Covanta has been advised by Dimensional Fund Advisors, Inc. that it,
along with certain members of its group (as that term is used in Section
13(d)(3) of the Securities Exchange Act of 1934, as amended) or respective
investment managers, are the beneficial owner of more than 5% of Covanta's
Common Stock, which shares were acquired for investment purposes for certain of
their advisory clients. The following table sets forth certain information
concerning the foregoing:
TITLE OF NAME AND ADDRESS AMOUNT AND NATURE PERCENT
CLASS OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OF CLASS
Common Dimensional Fund Advisors, Inc. 2,607,201 shares (1) 5.2
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401
- ---------------------------------
(1) A Schedule 13G Report dated January 30, 2002 shows that 2,607,201 shares are
held with sole power to vote or to direct the vote and sole power to dispose or
direct the disposition thereof.
SECURITY OWNERSHIP BY MANAGEMENT
Information about the Common Stock beneficially owned as of March 31, 2003 by
each nominee, each director, each executive officer named in the summary
compensation table and all directors and executive officer of Covanta as a group
is set forth as follows:
NAME OF BENEFICIAL OWNER AMOUNT AND NATURE OF
- ------------------------ BENEFICIAL OWNERSHIP (1)(2)
Anthony J. Bolland 58,291(3)
Paul B. Clements 162,573(4)
Norman G. Einspruch 25,514(3)
George L. Farr 280,384(3)
Jeffrey F. Friedman 51,705(3)
Veronica M. Hagen 2,550
Jeffrey R. Horowitz 112,667(4)
Scott G. Mackin 836,200(4)
Craig G. Matthews 7,668(3)
Homer A. Neal 12,106(3)
Anthony J. Orlando 124,090(4)
Robert E. Smith 12,779(3)
Bruce W. Stone 119,284(4)
Joseph A. Tato 16,191(3)
Helmut F.O. Volcker 39,394(3)
Robert R. Womack 21,562(3)
All executive officers and directors as a group
(26 persons) including those named above 2,475,980(5)
- ---------------------------------------
(1) Except as otherwise noted, each individual owns all shares directly and has
sole investment and voting power with respect to all shares. No officer or
director owns shares of Covanta Series A Preferred Stock.
(2) The beneficial ownership of each individual is less than 1.0% of the class.
(3) Includes: 31,667 shares for Mr. Bolland, 6,667 shares for Dr. Einspruch,
137,667 shares for Mr. Farr, 31,667 shares for Mr. Friedman, 3,334 shares for
Mr. Matthews, 6,667 shares for Dr. Neal, 6,667 shares for Mr. Smith, 13,334
shares for Mr. Tato, 26,667 shares for Dr. Volcker and 13,334 shares for Mr.
Womack subject to stock options which are exercisable and restricted stock which
will vest within 60 days of March 31, 2002. Also includes: 2,735 shares held in
a Keogh Plan and 16,112 shares held in a revocable trust by Dr. Einspruch,
100,000 shares held by a partnership in which Mr. Farr is a partner, 12,000
shares held by Mr. Friedman in an IRA, and 100 shares held by Dr. Neal jointly
with his wife over which Dr. Neal has shared voting and investment authority
with his wife.
(4) Includes: 151,667 shares for Mr. Clements; 106,667 shares for Mr. Horowitz;
772,000 shares for Mr. Mackin; 116,668 shares for Mr. Orlando and 81,667 shares
for Mr. Stone, subject to stock options which are exercisable within 60 days of
March 31, 2003.
(5) This amount reflects shares subject to stock options which are exercisable
and restricted stock which becomes vested within 60 days of March 31, 2003.
EQUITY COMPENSATION PLAN INFORMATION
The following table includes information as of December 31, 2002
with respect to Covanta's equity compensation plans. These plans include the
Ogden Corporation 1990 Stock Option Plan, as Amended and Restated September 18,
1997 (the "Ogden Stock Option Plan"), the Ogden Corporation 1999 Stock Incentive
Plan, as Amended and Restated January 1, 2000 (the "Ogden Stock Incentive
Plan"), the Covanta Energy Corporation Restricted Stock Unit Plan for
Non-Employee Directors, as Amended and Restated May 23, 2001 (the "Non-Employee
Director Restricted Stock Unit Plan"), and the Ogden Corporation Restricted
Stock Plan (the "Restricted Stock Plan").
- ----------------------------------------------------------------------------------------------------------------------
Number of securities to Weighted-average exercise Number of securities
Plan Category be issued upon exercise price of outstanding remaining available for
of outstanding options, options, warrants and future issuance under equity
warrants and rights (a) rights (b) compensation plans (excluding
securities reflected in
column (a)) (c)
- ----------------------------------------------------------------------------------------------------------------------
Equity compensation plans 3,313,335 18.7233 5,016,001 (2)
approved by
stockholders(1)
- ----------------------------------------------------------------------------------------------------------------------
Equity compensation plans not 0 0 528,633 (4)
approved by stockholders(3)
- ----------------------------------------------------------------------------------------------------------------------
Total 3,313,335 18.7233 5,544,634
- ----------------------------------------------------------------------------------------------------------------------
- ---------------
1 Consists of the Ogden Stock Option Plan and the Ogden Stock Incentive Plan.
2 Up to 160,000 shares under the Non-Employee Director Restricted Stock Unit
Plan may be issued in connection with restricted stock units or pursuant to
unrestricted stock grants. Up to 500,000 shares may be issued in connection with
restricted stock awards under the Restricted Stock Plan.
3 Consists of the Non-Employee Director Restricted Stock Unit Plan and the
Restricted Stock Plan.
4 Up to 160,000 shares under the Non-Employee Director Restricted Stock Unit
Plan may be issued in connection with restricted stock units or pursuant to
unrestricted stock grants. Up to 500,000 shares may be issued in connection with
restricted stock awards under the Restricted Stock Plan.
The following two equity compensation plans have not been approved by the
Company's stockholders.
The Non-Employee Director Restricted Stock Unit Plan
The Non-Employee Director Restricted Stock Unit Plan is an amendment
and restatement of the Ogden Corporation Restricted Stock Plan for Non-Employee
Directors. The Plan provides for (i) the automatic grant of restricted stock
units to non-employee directors of the Company with respect to fifty percent of
their annual retainer fees, (ii) the automatic grant of common stock to
non-employee directors with respect to fifty percent of their meeting fees, and
(iii) non-employee directors to elect to receive restricted stock units in lieu
of common stock and cash with respect to the retainer and meeting fees not
automatically paid in restricted stock units. Notwithstanding the foregoing, on
January 21, 2002, the Board of Directors voted to pay all non-employee director
compensation in the form of cash rather than 50% cash and 50% restricted stock,
as had been the practice.
Retainer Fees. The restricted stock units respecting fifty percent
of the non-employee director's annual retainer fees were granted on the first
Board meeting of the Company's fiscal year. These restricted stock units vested
on the earliest to occur of the first anniversary of the grant date, the
non-employee director's attainment of age 72, the non-employee director's
disability, or the non-employee director's death. Prior to vesting, non-employee
directors had no rights as shareholders with respect to their restricted stock
units. Upon vesting, shares of Company common stock were issued to the
non-employee directors, unless the non-employee director elected to defer
receipt of the shares. The remaining fifty percent of a non-employee director's
retainer was paid in cash or, if a deferral election was made by the
non-employee director, in restricted stock units payable in shares of common
stock upon the director's termination of service on the Board or on the date or
dates elected by the non-employee director. Notwithstanding the foregoing, the
Chairman of the Board received his retainer fee in four equal quarterly
installments. Fifty percent of the Chairman's retainer fee was paid in common
stock or, in the case of a deferral election, in restricted stock units, and the
remaining fifty percent was paid in cash or, in the case of a deferral election,
in restricted stock units.
Meeting Fees. Fifty percent of each non-employee director's meeting
fees, which are paid quarterly, are paid in the form of Company common stock or,
in the case of a deferral election, in restricted stock units. Unless otherwise
determined by the Board, the Chairman shall not be entitled to meeting fees.
In the event of a change in control as defined in the Non-Employee
Director Restricted Stock Unit Plan of the Company, unvested restricted stock
units become immediately vested, deferred amounts are paid, and fees that
otherwise would be paid for the quarter in which the change in control occurs
are paid at the time of the change in control.
Only shares of common stock reacquired by the Company and held in
treasury may be issued under the Plan. The aggregate number of shares of common
stock which may be issued under the plan shall not exceed 160,000 shares,
subject to antidilution adjustments in the event of certain recapitalizations,
reorganizations, of other changes in the Company's capital structure. The
Company shall have no obligation to issue shares under the plan unless and until
the Company's shares are listed on a national securities exchange or system
sponsored by a national securities association. As of December 31, 2002, 0
restricted stock unit awards were outstanding and 107,533 shares of Company
common stock had been issued under the plan pursuant to vested restricted unit
awards and common stock grants. The Board may amend, suspend, or terminate the
plan at any time, provided such action does not impair the rights of plan
participants without their consent.
The Restricted Stock Plan
The Restricted Stock Plan was adopted by the Company effective
February 10, 2000. The plan provides for the issuance of restricted stock awards
to key employees of the Company and its affiliates. The Plan is administered by
a committee (the "Committee") comprised of members of the Company's Board of
Directors. The Committee determines the terms and conditions of restricted stock
awards made under the plan, including which key employees are eligible to
receive awards, the number of restricted shares subject to the awards, vesting
schedules and acceleration thereof. The Committee has authority to amend the
terms restricted stock awards prospectively or retroactively, provided such
amendment does not impair the rights of any holder without his or her consent.
No more than 500,000 shares may be issued pursuant to restricted stock awards
under the plan, subject to antidilution adjustments in the event of certain
recapitalizations, reorganizations, of other changes in the Company's capital
structure. Restricted shares are subject to forfeiture and transfer limitations.
Upon vesting, shares of unrestricted common stock are issued to the participant.
During the restricted period, unless otherwise determined by the Committee,
holders of restricted shares have all of the rights of a holder of shares of
Company common stock including the right to receive dividends and the right to
vote such shares. Upon a change in control of the Company, all restricted stock
awards become immediately vested and shares of unrestricted common stock are
issued to the participant. The Board or the Committee may amend, suspend, or
terminate the plan at any time, provided such action does not impair the rights
of plan participants without their consent.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A loan was made by Covanta in 1989 to Lynde H. Coit, Senior Vice
President and General Counsel of Covanta, to assist Mr. Coit in the purchase of
a home in connection with his relocation. The loan is evidenced by a demand
note, bearing interest at the rate of 8% per annum and is secured by a second
mortgage on the premises. The maximum amount outstanding under the loan during
2002 was $168,200. As of December 31, 2002, there was an outstanding balance of
$168,200. This loan was repaid in full on March 10, 2003.
In 1990, a loan was made by Covanta Energy to Bruce W. Stone, an
Executive Officer of Covanta, for the purpose of assisting him in the purchase
of his home. The loan is evidenced by a demand note bearing interest at the rate
8% per annum. As of December 31, 2002, there was an outstanding balance of
$95,999, including accrued interest. The maximum amount outstanding during 2002
is the amount outstanding on December 31, 2002. This loan was repaid in full on
February 27, 2003.
On August 6, 1999, Covanta made loans to Messrs. Mackin, Stone and Coit
for the purpose of paying the exercise price and withholding taxes in connection
with their exercise of Covanta stock options which were expiring on August 9,
1999. All loans were evidenced by demand notes with interest accruing thereon at
the short-term applicable federal rate compounded annually. On November 26, 2001
these notes were restructured as a settlement of a dispute surrounding the
circumstances under which the loans were originally granted. That settlement
changed the notes from a fixed principal amount which accrued interest to a
variable amount equal to the market value, from time to time, of the Covanta
common shares purchased by the officers when exercising the above-mentioned
stock options.
No interest will be payable. Upon any sale of the stock, the executive
must pay the net proceeds to the Company. The Company also made a tax gross-up
payment to the executives. These amounts are reflected in the Summary
Compensation Table. The largest amount of indebtedness outstanding since January
1, 2002 for Messrs. Mackin, Stone and Coit was $132,888, $113,904 and $28,476,
respectively, including accrued interest. As of December 31, 2002 based on the
fair market value of the stock on such date, the balances for Messrs. Mackin,
Stone and Coit were $235, $202 and $50, respectively.
Robert E. Smith, a Covanta director, is counsel to the law firm of
Katten Muchin Zavis Rosenman which during 2002 rendered legal services to
Covanta principally in the area of litigation management.
Joseph A. Tato, a Covanta director, is a partner of the law firm of
LeBoeuf, Lamb, Greene & MacRae, LLP which rendered legal services during 2002 to
Covanta Energy Group, Inc., a Covanta subsidiary.
Item 14. 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, who also presently performs
the functions of principal financial officer, of the effectiveness of the design
and operation of the Company's disclosure controls and procedures. There are
inherent limitations to the effectiveness of any system of disclosure controls
and procedures, including the possibility of human error and the circumvention
or overriding of the controls and procedures. Accordingly, even effective
disclosure controls and procedures can only provide reasonable assurance of
achieving their control objectives. Based upon and as of the date of the
Company's evaluation, the Chief Executive 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 IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
(1) All financial statements: see Index to financial statements,
see Part II, Item 8.
(2) Financial statement schedules: see Index to financial
statements, see Part II, Item 8.
(b) During the fourth quarter of 2002 and first quarter of 2003, no
Reports on Form 8-K were filed.
(c) Those exhibits required to be filed by Item 601 of Regulation S-K:
EXHIBITS
3. Articles of Incorporation and By-laws.
3.1 (a) The Company's Restated Certificate of Incorporation as
amended.*
(b) Certificate of Ownership and Merger, Merging Ogden-Covanta,
Inc. into Ogden Corporation, dated March 7, 2001.*
3.2 The Company's By-Laws, as amended through April 8, 1998.*
4. Instruments Defining Rights of Security Holders.
4.1 Fiscal Agency Agreement between Covanta and Bankers Trust Company,
dated as of June 1, 1987, and Offering Memorandum dated June 12,
1987, relating to U.S. $85 million Ogden 6% Convertible
Subordinated Debentures, Due 2002.*
4.2 Fiscal Agency Agreement between the Company and Bankers Trust
Company, dated as of October 15, 1987, and Offering Memorandum,
dated October 15, 1987, relating to U.S. $75 million Ogden 5-3/4%
Convertible Subordinated Debentures, Due 2002.*
4.3 Indenture dated as of March 1, 1992 from the Company Corporation to
Wells Fargo Bank Minnesota, National Association, as Trustee (as
successor in such capacity to The Bank of New York, Trustee),
relating to the Company's $100 million debt offering.*
10. Material Contracts
10.1 (a) U.S. $95 million Term Loan and Letter of Credit and
Reimbursement Agreement among the Company, the Deutsche Bank
AG, New York Branch and the signatory Banks thereto, dated
March 26, 1997.*
(b) Revolving Credit and Participation Agreement, dated as of
March 14, 2001, among the Company, the Lenders listed
therein, Bank of America, NA, as Administrative Agent,
Co-Arranger and Co-Book Runner and Deutsche Bank AG, New
York Branch, as Documentation Agent, Co-Arranger and Co-Book
Runner.*
(c) First Amendment to Revolving Credit and Participation
Agreement, dated as of July 30, 2001, among the Company, the
Lenders listed therein, Bank of America, NA, as
Administrative Agent, Co-Arranger and Co-Book Runner and
Deutsche Bank AG, New York Branch, as Documentation Agent,
Co-Arranger and Co-Book Runner.*
(d) Second Amendment to Revolving Credit and Participation
Agreement, dated as of August 31, 2001, among the Company,
the Lenders listed therein, Bank of America, NA, as
Administrative Agent, Co-Arranger and Co-Book Runner and
Deutsche Bank AG, New York Branch, as Documentation Agent,
Co-Arranger and Co-Book Runner.*
(e) Third Amendment to Revolving Credit and Participation
Agreement, dated as of December 20, 2001, among the Company,
the Lenders listed therein, Bank of America, NA, as
Administrative Agent, Co-Arranger and Co-Book Runner and
Deutsche Bank AG, New York Branch, as Documentation Agent,
Co-Arranger and Co-Book Runner.*
(f) Fourth Amendment to Revolving Credit and Participation
Agreement, dated as of January 31, 2002, among the Company,
the Lenders listed therein, Bank of America, NA, as
Administrative Agent, Co-Arranger and Co-Book Runner and
Deutsche Bank AG, New York Branch, as Documentation Agent,
Co-Arranger and Co-Book Runner.*
(g) Fifth Amendment to Revolving Credit and Participation
Agreement, dated as of February 21, 2002, among the Company,
the Lenders listed therein, Bank of America, NA, as
Administrative Agent, Co-Arranger and Co-Book Runner and
Deutsche Bank AG, New York Branch, as Documentation Agent,
Co-Arranger and Co-Book Runner.*
(h) Sixth Amendment to Revolving Credit and Participation
Agreement, dated as of March 12, 2002, among the Company,
the Lenders listed therein, Bank of America, NA, as
Administrative Agent, Co-Arranger and Co-Book Runner and
Deutsche Bank AG, New York Branch, as Documentation Agent,
Co-Arranger and Co-Book Runner.*
(i) Seventh Amendment to Revolving Credit and Participation
Agreement, dated as of March 22, 2002, among the Company,
the Lenders listed therein, Bank of America, NA, as
Administrative Agent, Co-Arranger and Co-Book Runner and
Deutsche Bank AG, New York Branch, as Documentation Agent,
Co-Arranger and Co-Book Runner.*
(j) Debtor In Possession Credit and Participation Agreement,
dated as of April 1, 2002, among the Company, the Company's
U.S. Subsidiaries listed therein, the Lenders listed
therein, Bank of America, NA, as Administrative Agent,
Co-Arranger and Co-Book Runner and Deutsche Bank AG, New
York Branch, as Documentation Agent, Co-Arranger and Co-Book
Runner.*
(k) Security Agreement, dated as of April 1, 2002, by and among
the Company, each of the other Borrowers listed on the
signature pages thereof, each of the Subsidiary Guarantors
listed on the signature pages thereof and each Additional
Subsidiary Guarantor and Borrower that may become a party
thereto after the date thereof, and Bank of America, N.A.,
in its capacity as administrative agent for and
representative of Lenders from time to time party to the
Credit Agreement.*
(l) First Amendment to Debtor In Possession Credit Agreement and
Security Agreement, dated as of April 3, 2002, by and among
the Company, the Subsidiaries of the Company listed on the
signature pages thereof as Borrowers, the Subsidiaries of
the Company listed on the signature pages thereof as
Subsidiary Guarantors, the Lenders party thereto, Bank of
America, N.A., as Administrative Agent for the Lenders, and
Deutsche Bank AG, New York Branch, as Documentation Agent
for the Lenders.*
(m) Second Amendment to Debtor in Possession Credit Agreement,
dated as of May 10, 2002, among the Company, the
Subsidiaries listed on the signature pages thereof as
Borrowers, the Subsidiaries listed on the signature pages
thereof as Subsidiary Guarantors, the Lenders listed
therein, Bank of America, N.A., as Administrative Agent, and
Deutsche Bank AG, New York Branch, as Documentation Agent.*
(n) Third Amendment and Limited Waiver to Debtor in Possession
Credit Agreement, dated as of October 4, 2002, among the
Company, the Subsidiaries listed on the signature pages
thereof as Borrowers, the Subsidiaries listed on the
signatures pages thereof as Subsidiary Guarantors, the
Lenders listed therein, Bank of America, N.A., as
Administrative Agent, and Deutsche Bank AG, New York Branch
as Documentation Agent.*
(o) Fourth Amendment to the Debtor-in-Possession Credit
Agreement and Limited Consent, dated as of December 10,
2002, by and among the Company, the Subsidiaries of the
Company listed on the signature page thereof as Borrowers,
the Subsidiaries of the Company listed on the signature page
thereof as Subsidiary Guarantors, the Lenders party thereto,
Bank of America, N.A. as Administrative Agent for the
Lenders, and Deutsche Bank AG, New York Branch, as
Documentation Agent for the Lenders.
(p) Fifth Amendment to the Debtor-in-Possession Credit
Agreement, dated as of December 18, 2002, by and among the
Company, the Subsidiaries of the Company listed on the
signature page thereof as Borrowers, the Subsidiaries of the
Company listed on the signature page thereof as Subsidiary
Guarantors, the Lenders party thereto, Bank of America, N.A.
as Administrative Agent for the Lenders, and Deutsche Bank
AG, New York Branch, as Documentation Agent for the Lenders.
(q) Sixth Amendment to the Debtor-in-Possession Credit
Agreement, Limited Consent and Amendment to Security
Agreement dated as of March 25, 2003, by and among the
Company, the Subsidiaries of the Company listed on the
signature page thereof as Borrowers, the Subsidiaries of the
Company listed on the signature page thereof as Subsidiary
Guarantors, the Lenders party thereto, Bank of America, N.A.
as Administrative Agent for the Lenders, and Deutsche Bank
AG, New York Branch, as Documentation Agent for the Lenders.
(r) First Amendment to Intercreditor Agreement, dated as of
April 1, 2002, by and among the Company, the Subsidiaries of
the Company listed on the signature pages thereof as
Borrowers, the Subsidiaries of the Company listed on the
signature pages thereof as Subsidiary Guarantors, the
financial institutions party thereto, Bank of America, N.A.,
as Administrative Agent for the Lenders, and Deutsche Bank
AG, New York Branch, as Documentation Agent for the
Lenders.*
(s) Subsidiary Guaranty, entered into as of April 1, 2002, by
the Guarantors signatories thereto in favor of and for the
benefit of Bank of America, N.A., as Administrative Agent
for and representative of the Lenders from time to time
party to the Credit Agreement referred to therein.*
10.2 Amended and Restated Rights Agreement between the Company and the
Bank of New York, dated as of September 28, 2000.*
10.3 Executive Compensation Plans and Agreements.
(a) Ogden Corporation 1990 Stock Option Plan as Amended and
Restated as of January 19, 1994.*
(i) Amendment adopted and effective as of September 18,
1997.*
(b) Ogden Corporation 1999 Stock Incentive Plan Amended and
Restated as of January 1, 2000.*
(c) Ogden Energy Select Plan, dated January 1, 2000 (c).*
(d) (i) Ogden Corporation Restricted Stock Plan and Restricted
Stock Agreement.*
(ii) Ogden Corporation Restricted Stock Plan for
Non-Employee Directors and Restricted Stock
Agreement.*
(iii) Covanta Energy Corporation Restricted Stock Unit Plan
for Non-Employee Directors, as Amended and Restated on
May 23, 2001.*
(e) Ogden Corporation Profit Sharing Plan as Amended and
Restated effective as of January 1, 1995.*
(f) Ogden Corporation Core Executive Benefit Program.*
(g) Ogden Projects Pension Plan.*
(i) Covanta Energy Pension Plan, as amended and restated
and effective January 1, 2001.*
(h) Ogden Projects Profit Sharing Plan.*
(i) Covanta Energy Profit Sharing Plan, as amended and
restated December 18, 2001 and effective
January 1, 1998.*
(i) Ogden Projects Supplemental Pension and Profit Sharing
Plans.*
(j) Ogden Projects Core Executive Benefit Program.*
(k) (i) Form of Amended Ogden Projects, Inc. Profit Sharing
Plan, effective as of January 1, 1994.*
(ii) Form of Amended Ogden Projects, Inc. Pension Plan,
effective as of January 1, 1994.*
(l) Ogden Executive Performance Incentive Plan.*
(m) Ogden Key Management Incentive Plan.*
(n) Covanta Energy Corporation Key Employee Severance Plan
(o) Covanta Energy Corporation Key Employee Retention Bonus Plan
(p) Covanta Energy Corporation Long-Term Incentive Plan
10.4 Employment Agreements
(a) Employment Agreement between Scott G. Mackin, Executive Vice
President and the Company dated as of October 1, 1998.*
(i) Amendment to Employment Agreement between Covanta
Energy Corporation and Scott G. Mackin dated November
26, 2001.*
(ii) Supplemental Agreement to Consolidated Amended and
Restated Demand Note between Covanta Energy
Corporation and Scott G. Mackin dated November 26,
2001.*
(iii) Consolidated Amended and Restated Demand Note between
Covanta Energy Corporation and Scott G. Mackin dated
November 26, 2001.*
(b) Employment Agreement between Jeffrey R. Horowitz and Covanta
Energy Group, Inc., dated May 1, 1999.*
(c) Employment Agreement between Paul B. Clements and Covanta
Energy Group, Inc., dated May 1, 1999.*
(d) Employment Agreement between Covanta Energy Group, Inc. and
Bruce W. Stone dated May 1, 1999.*
(i) Supplemental Agreement to Consolidated Amended and
Restated Demand Note between Covanta Energy
Corporation and Bruce W. Stone dated November 26,
2001.*
(ii) Consolidated Amended and Restated Demand Note between
Covanta Energy Corporation and Bruce W. Stone dated
November 26, 2001.*
(e) Employment Agreement between Anthony J. Orlando and Covanta
Energy Group, Inc., dated May 1, 1999.*
21. Subsidiaries of Covanta, transmitted herewith as Exhibit 21.
23. Independent Auditors Consent, transmitted herewith as Exhibit 23.
99. Certifications pursuant to Title 18, United States Code, Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* INCORPORATED BY REFERENCE AS SET FORTH IN THE EXHIBIT INDEX OF THIS ANNUAL
REPORT ON FORM 10-K.
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 annual report on Form 10-K of Covanta Energy
Corporation;
2. Based on my knowledge, this annual 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
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 1 3a-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 annual 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
annual report (the "Evaluation Date"); and
c) presented in this annual 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 fulfilling 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 annual 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: March 31, 2003 /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, Scott G. Mackin, certify that:
1. I have reviewed this annual report on Form 10-K of Covanta Energy
Corporation;
2. Based on my knowledge, this annual 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
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 1 3a-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 annual 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
annual report (the "Evaluation Date"); and
c) presented in this annual 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 fulfilling 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 annual 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: March 31, 2003 /s/ Scott G. Mackin
-------------------- -------------------------------------
Scott G. Mackin
Principle Financial Officer
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COVANTA ENERGY CORPORATION
DATE: March 31, 2003 /s/ Scott G. Mackin
---------------- -------------------------------------
Scott G. Mackin
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated.
SIGNATURE TITLE DATE
/s/ SCOTT G. MACKIN
- ------------------------
SCOTT G. MACKIN President, Chief Executive Officer
and Director March 31, 2003
/s/ SCOTT G. MACKIN
- ------------------------
SCOTT G. MACKIN Principal Financial Officer March 31, 2003
/s/ WILLIAM J. KENEALLY
- ------------------------
WILLIAM J. KENEALLY Senior Vice President,
Chief Accounting Officer March 31, 2003
/s/ ANTHONY J. BOLLAND
- ------------------------
ANTHONY J. BOLLAND Director March 31, 2003
/s/ NORMAN G. EINSPRUCH
- ------------------------
NORMAN G. EINSPRUCH Director March 31, 2003
/s/ GEORGE L. FARR
- ------------------------
GEORGE L. FARR Director March 31, 2003
/s/ JEFFREY F. FRIEDMAN
- ------------------------
JEFFREY F. FRIEDMAN Director March 31, 2003
/s/ VERONICA M. HAGEN
- ------------------------
VERONICA M. HAGEN Director March 31, 2003
/s/ CRAIG G. MATTHEWS
- ------------------------
CRAIG G. MATTHEWS Director March 31, 2003
/s/ HOMER A. NEAL
- ------------------------
HOMER A. NEAL Director March 31, 2003
/s/ ROBERT E. SMITH
- ------------------------
ROBERT E. SMITH Director March 31, 2003
/s/ JOSEPH A. TATO
- ------------------------
JOSEPH A. TATO Director March 31, 2003
/s/ HELMUT F.O. VOLCKER
- ------------------------
HELMUT F.O. VOLCKER Director March 31, 2003
/s/ ROBERT R. WOMACK
- ------------------------
ROBERT R. WOMACK Director March 31, 2003