FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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
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(Exact name of registrant as specified in its charter)
Delaware 13-5549268
- --------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
40 Lane Road, Fairfield, NJ 07004
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(Address or principal executive office) (Zip code)
(973) 882-9000
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(Registrant's telephone number including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of the registrant's Common Stock outstanding as of May 1,
2003 was 49,824,251 shares. The number of shares of the registrant's $1.875
Cumulative Convertible Preferred Stock (Series A) outstanding as of May 1, 2003
was 33,049 shares.
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COVANTA ENERGY CORPORATION (DEBTOR IN POSSESSION) AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED
OPERATIONS AND COMPREHENSIVE LOSS
FOR THE THREE MONTHS ENDED MARCH 31,
2003 2002
---- ----
(As Restated)
(In Thousands of Dollars, Except Per Share Amounts)
Service revenues $ 125,743 $ 129,840
Electricity and steam sales 88,488 79,282
Construction revenues 6,007 12,394
Other revenues-net 7
-------- --------
Total revenues 220,238 221,523
-------- --------
Plant operating expenses 137,437 122,424
Construction costs 5,566 12,648
Depreciation and amortization 22,765 24,521
Debt service charges-net 18,954 21,004
Other operating costs and expenses 1,806 12,307
Net loss (gain) on sale of businesses (417) 7,040
Selling, administrative and general expenses 9,797 17,897
Project development expenses 1,213
Other (income) expense-net (563) 33,665
-------- --------
Total costs and expenses 195,345 252,719
-------- --------
Equity in income from unconsolidated investments 4,441 3,855
-------- --------
Operating income (loss) 29,334 (27,341)
Interest expense (net of interest income of $667 and $617,
respectively and excluding post-petition contractual
interest of $243 and zero for 2003 and 2002, respectively) (11,015) (11,783)
Reorganization items (15,494)
-------- --------
Income (loss) from continuing operations before income
taxes, minority interests, discontinued operations and
the cumulative effect of change in accounting principle 2,825 (39,124)
Income tax (expense) benefit (1,253) 7,593
Minority interests (2,564) (1,555)
-------- --------
Loss from continuing operations before discontinued
operations and change in accounting principle (992) (33,086)
Loss from discontinued operations (net of income tax
expense of $15 in 2002) (17,866)
Cumulative effect of change in accounting principle (net
of income tax benefit of $5,532 in 2003 and zero in 2002) (8,538) (7,842)
-------- --------
Net loss (9,530) (58,794)
-------- --------
Other comprehensive income (loss), net of income tax:
Foreign currency translation adjustments (net of
income taxes of: zero and ($415) respectively) 807 (1,430)
Less: reclassification adjustment for translation
adjustments included in:
loss from continuing operations 1,233
loss from discontinued operations 297
Unrealized holding losses arising during period (net of
income taxes benefit of $3 in 2002) (4)
-------- --------
Other comprehensive income 807 96
-------- --------
Comprehensive loss $(8,723) $(58,698)
======== =========
Basic loss per share:
Loss from continuing operations $(0.02) $(0.66)
Loss from discontinued operations (0.36)
Cumulative effect of change in accounting principle (0.17) (0.16)
-------- --------
Net loss $(0.19) $(1.18)
======== =========
Diluted loss per share:
Loss from continuing operations $(0.02) $(0.66)
Loss from discontinued operations (0.36)
Cumulative effect of change in accounting principle (0.17) (0.16)
-------- --------
Net loss $(0.19) $(1.18)
======== =========
See notes to condensed consolidated financial statements.
COVANTA ENERGY CORPORATION (DEBTOR IN POSSESSION) AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 DECEMBER 31, 2002
-------------- -----------------
(In Thousands of Dollars, Except Per Share Amounts)
Assets
Current Assets:
Cash and cash equivalents $ 100,297 $ 115,815
Restricted funds held in trust 124,127 92,039
Receivables (less allowances: 2003, $20,395 and 2002, 246,307 259,082
$20,476)
Deferred income taxes 11,200 11,200
Prepaid expenses and other current assets 87,182 85,997
----------- -----------
Total current assets 569,113 564,133
Property, plant and equipment-net 1,651,251 1,661,863
Restricted funds held in trust 149,211 169,995
Unbilled service and other receivables (less allowances of
$2,957 in 2003 and 2002) 144,946 147,640
Unamortized contract acquisition costs-net 59,101 60,453
Other intangible assets-net 7,506 7,631
Investments in and advances to investees and joint ventures. 169,577 166,465
Other assets 60,999 61,927
----------- -----------
Total Assets $ 2,811,704 $ 2,840,107
=========== ===========
Liabilities and Shareholders' Deficit
Liabilities:
Current Liabilities:
Current portion of long-term debt $ 17,733 $ 16,450
Current portion of project debt 114,239 115,165
Accounts payable 25,726 23,593
Federal and foreign income taxes payable 200
Accrued expenses 257,322 254,964
Deferred income 41,545 41,402
----------- -----------
Total current liabilities 456,765 451,574
Long-term debt 24,679 23,779
Project debt 1,101,880 1,128,217
Deferred income taxes 245,497 249,600
Deferred income 148,493 151,000
Other liabilities 77,806 80,369
Liabilities subject to compromise 898,933 892,012
Minority interests 38,662 35,869
----------- -----------
Total Liabilities 2,992,715 3,012,420
----------- -----------
Shareholders' Deficit:
Serial cumulative convertible preferred stock, par value
$1.00 per share,
authorized, 4,000,000 shares; shares outstanding: 33,049 in 2003
and 2002, net of treasury shares of 29,820 in 2003 and 2002 33 33
Common stock, par value $.50 per share; authorized, 80,000,000 shares;
outstanding: 49,824,251 in 2003 and 2002, net of treasury
shares of 4,125,350 in 2003 and 2002 24,912 24,912
Capital surplus 188,156 188,156
Notes receivable from key employees for common stock issuance (870) (870)
Unearned restricted stock compensation (29) (54)
Deficit (393,703) (384,173)
Accumulated other comprehensive income (loss) 490 (317)
----------- -----------
Total Shareholders' Deficit (181,011) (172,313)
----------- -----------
Total Liabilities and Shareholders' Deficit $ 2,811,704 $ 2,840,107
=========== ===========
See notes to condensed consolidated financial statements.
COVANTA ENERGY CORPORATION (DEBTOR IN POSSESSION) AND SUBSIDIARIES
CONDENSED STATEMENTS OF SHAREHOLDERS' DEFICIT
FOR THE THREE MONTHS FOR THE YEAR ENDED
ENDED MARCH 31, 2003 DECEMBER 31, 2002
SHARES AMOUNTS SHARES AMOUNTS
-----------------------------------------------------
(In Thousands of Dollars, Except Per Share Amounts)
SERIAL CUMULATIVE CONVERTIBLE PREFERRED STOCK, PAR VALUE
$1.00 PER SHARE, AUTHORIZED, 4,000,000 SHARES
Balance at beginning of period 62,869 $ 63 63,300 $ 64
Shares converted into common stock (431) (1)
---------- -------- ---------- --------
Total 62,869 63 62,869 63
Treasury shares (29,820) (30) (29,820) (30)
---------- -------- ---------- --------
Balance at end of period (aggregate
involuntary liquidation value-2003, $666) 33,049 33 33,049 33
---------- -------- ---------- --------
COMMON STOCK, PAR VALUE $.50 PER SHARE,
AUTHORIZED, 80,000,000 SHARES:
Balance at beginning of period 53,949,601 26,975 53,947,026 26,974
Conversion of preferred shares 2,575 1
---------- -------- ---------- --------
Total 53,949,601 26,975 53,949,601 26,975
---------- -------- ---------- --------
Treasury shares at beginning of period 4,125,350 2,063 4,111,950 2,056
Cancellation of restricted stock 13,400 7
---------- -------- ---------- --------
Treasury shares at end of period 4,125,350 2,063 4,125,350 2,063
---------- -------- ---------- --------
Balance at end of period 49,824,251 24,912 49,824,251 24,912
---------- -------- ---------- --------
CAPITAL SURPLUS:
Balance at beginning of period 188,156 188,371
Cancellation of restricted stock (215)
--------- --------
Balance at end of period 188,156 188,156
--------- --------
NOTES RECEIVABLE FROM KEY EMPLOYEES FOR
COMMON STOCK ISSUANCE (870) (870)
--------- --------
UNEARNED RESTRICTED STOCK COMPENSATION:
Balance at beginning of period (54) (664)
Cancellation of restricted common stock 222
Amortization of unearned restricted stock compensation 25 388
--------- --------
Balance at end of period (29) (54)
--------- --------
EARNED DEFICIT:
Balance at beginning of period (384,173) (205,262)
Net loss (9,530) (178,895)
--------- --------
Total (393,703) (384,157)
--------- --------
Preferred dividends-per share zero and $.46875, respectively 16
--------- --------
Balance at end of period (393,703) (384,173)
--------- ---------
CUMULATIVE TRANSLATION ADJUSTMENT
Balance at beginning of period (238) (283)
Foreign currency translation adjustments (net of income
taxes of zero and ($415), respectively) 807 (1,485)
Less reclassification adjustments for translation adjustment included in
loss from continuing operations 1,233
loss from discontinued operations 297
--------- ---------
Balance at end of period 569 (238)
--------- ---------
MINIMUM PENSION LIABILITY ADJUSTMENT
Balance at beginning of period 88
Minimum pension liability adjustment 88
--------- ---------
Balance at end of period 88 88
--------- ---------
NET UNREALIZED LOSSES ON SECURITIES
AVAILABLE FOR SALE
Balance at beginning of period (167)
Loss for period (167)
--------- ---------
Balance at end of period (167) (167)
--------- ---------
TOTAL SHAREHOLDERS' DEFICIT $(181,011) $(172,313)
========= =========
See notes to condensed consolidated financial statements.
COVANTA ENERGY CORPORATION (DEBTOR IN POSSESSION) AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE THREE MONTHS ENDED
MARCH 31,
2003 2002
---- ----
(As Restated)
-------------
(In Thousands of Dollars, Except Per Share Amounts)
Cash Flows From Operating Activities:
Net loss $ (9,530) $ (58,794)
Adjustments to Reconcile Net Loss to Net Cash
Provided by Operating Activities of Continuing Operations:
Loss from discontinued operations 17,866
Reorganization items 15,494
Payment of reorganization items (2,356)
Depreciation and amortization 22,765 24,521
Deferred income taxes 228 (9,053)
Provision for doubtful accounts 2,195 4,855
Amortization of financing costs 11,492
Equity in income from unconsolidated investments (4,441) (3,855)
Cumulative effect of change in accounting principle 8,538 7,842
Other (388) 3,444
Management of Operating Assets and Liabilities:
Decrease (Increase) in Assets:
Receivables 10,580 45,343
Other assets 939 (1,928)
Increase (Decrease) in Liabilities:
Accounts payable 2,133 4,980
Accrued expenses (10,780) (5,274)
Deferred income (237) (4,964)
Other liabilities (8,373) (25,918)
-------- --------
Net cash provided by operating activities of continuing operations 26,767 10,557
-------- --------
Cash Flows From Investing Activities:
Net proceeds from sale of businesses and other 417 8,389
Proceeds from sale of property, plant, and equipment 286 54
Proceeds from sale of investment 267
Investments in facilities (5,649) (2,773)
Other capital expenditures (28)
Decrease in other receivables (142)
Distributions from investees and joint ventures 11,186
Increase in investments in and advances to investees
and joint ventures (574)
-------- --------
Net cash provided by (used in) investing activities
of continuing operations (4,707) 16,140
-------- --------
Cash Flows From Financing Activities:
Borrowings for facilities 3,584
New debt 3,990 2,987
Payment of debt (33,849) (33,455)
Dividends paid (16)
Increase in funds held in trust (11,303) (19,813)
Other (237)
-------- --------
Net cash used in financing activities of continuing operations (37,578) (50,534)
-------- --------
Net cash provided by discontinued operations 28,112
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (15,518) 4,275
-------- --------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 115,815 86,773
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $100,297 $ 91,048
======== ========
SUPPLEMENTAL INFORMATION
Cash paid for interest $ 18,257 $ 16,543
======== ========
Cash paid for income taxes $ 1,747 $ 1,276
======== ========
See notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation:
The accompanying unaudited Condensed Consolidated Financial Statements (the
"Financial Statements") have been prepared in accordance with the instructions
to Form 10-Q. As permitted by the rules and regulations of the Securities and
Exchange Commission ("SEC"), the Financial Statements contain certain condensed
financial information and exclude certain footnote disclosures normally included
in annual audited consolidated financial statements prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP"). In the opinion of management, the accompanying Financial Statements
contain all adjustments, including normal recurring accruals, necessary to
present fairly the financial position as of March 31, 2003 and results of
operations and cash flows for the three month periods ended March 31, 2003 and
2002. These Financial Statements should be read in conjunction with the audited
Consolidated Financial Statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2002, filed with the SEC on March 31, 2003.
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the Financial
Statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates include management's estimate of the carrying values of its assets
held for use and related liabilities, estimated useful lives of long-lived
assets, allowances for doubtful accounts receivable, and liabilities for workers
compensation, severance, restructuring and certain litigation.
The Financial Statements include the accounts of Covanta Energy Corporation and
its subsidiaries (together, "Covanta" or "the Company"). Covanta is engaged in
developing, owning and operating power generation projects and providing related
infrastructure services. The Company also offers single source
design/build/operate capabilities for water and wastewater treatment
infrastructure. 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
representation on the Boards of Directors, shareholder rights and ownership in
the operators of the energy facilities owned by these companies. All
intercompany transactions and balances have been eliminated.
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. 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 Financial Statements have been prepared on a "going concern" basis in
accordance with GAAP. The "going concern" basis of presentation assumes that the
Company will continue in operation for the foreseeable future and will be able
to realize its assets and discharge its liabilities in the normal course of
business. Because of the Chapter 11 Cases and the circumstances leading to the
filing thereof, the Company's ability to continue as a "going concern" is
subject to substantial doubt and is dependent upon, among other things,
confirmation of a plan of reorganization, the Company's ability to comply with
the terms of, and if necessary renew at its expiry in October 2003, 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 Financial
Statements, then significant adjustments could be necessary to the carrying
value of assets and liabilities, the revenues and expenses reported, and the
balance sheet classifications used.
The Financial Statements also have been prepared in accordance with The American
Institute of Certified Public Accountants Statement of Position 90-7 ("SOP
90-7"), "Financial Reporting by Entities in Reorganization under the Bankruptcy
Code." Accordingly, all pre-petition liabilities believed to be subject to
compromise have been segregated in the Condensed Consolidated Balance Sheet (the
"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 Condensed Consolidated Statements of Cash Flows.
Changes in Accounting Principles:
In January 2003, the Financial Accounting Standards Board ("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.
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
143, Accounting for Asset Retirement Obligations, effective January 1, 2003.
Under SFAS 143, entities are required to record the fair value of a legal
liability for an asset retirement obligation in the period in which it is
incurred. The Company's legal liabilities include capping and post-closure
costs of landfill cells and site restoration at certain waste-to-energy and
power producing sites. When a new liability is recorded the entity capitalizes
the costs of the liability by increasing the carrying amount of the related
long-lived asset. The liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. At retirement, an entity settles the obligation for its recorded amount
or incurs a gain or loss.
Upon adoption of SFAS 143, the Company recorded an adjustment to increase
Property, plant and equipment-net by $3.6 million, reduce Investments in and
advances to investees and joint ventures by $1.2 million, establish an asset
retirement liability of $16.4 million and record a cumulative effect change in
accounting principle of $8.5 million on January 1, 2003, net of a related tax
benefit of $5.5 million. The effect of establishing the $16.4 million liability
on January 1, 2003 and recording the related accretion expense of $0.2 million
for the quarter ended March 31, 2003, increased the $2.5 million recorded
liability for closure costs at December 31, 2002 to the $19.1 million aggregate
carrying amount of the asset retirement liability at March 31, 2003.
If the newly adopted accounting principle had been applied during all periods
presented, the aggregate carrying amount of the asset retirement liability at
January 1, 2002 would have been approximately $17.6 million and the pre-tax loss
for the quarter ended March 31, 2002 would have been greater by $0.4 million
because of increased depreciation and accretion expenses. The increase in the
pro-forma loss for the quarter ended March 31, 2002 would have affected
pro-forma basic loss per share from continuing operations by less than one cent
per share.
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", 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 March 31, 2003, the Company has three stock-based
employee compensation plans. 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 first quarter 2003 and 2002 net losses, 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 or in the first quarter of 2003. 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
the first quarter 2003 and 2002 net losses 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):
For the Three Months Ended March 31,
2003 2002
- --------------------------------------------------------------------------------
Net loss, as reported.............................. $ (9,530) $ (58,794)
Deduct: Total stock based employee compensation
expense determined under fair value method for all
awards, net of related tax effects............. (744) (1,233)
--------- -----------
Pro forma net loss................................. $(10,274) $ (60,027)
========= ===========
Basic loss per common share:
Basic - as reported................................ $ (0.19) $ (1.18)
=========== ============
Basic - pro forma.................................. $ (0.21) $ (1.21)
=========== ============
Diluted loss per common share:
Diluted - as reported.............................. $ (0.19) $ (1.18)
=========== ============
Diluted - pro forma................................ $ (0.21) $ (1.21)
=========== ============
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 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 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 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.
On June 30, 2002, the Company completed the required impairment evaluation of
goodwill in conjunction with its adoption of SFAS No. 142, "Goodwill and Other
Intangible Assets." As a result of the 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 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. The Company has adopted the
provisions of SFAS No. 145 on December 1, 2002, without impact on its financial
position or results of operations.
Reclassification:
Certain prior year amounts, including various revenues and expenses, have been
reclassified in the Financial Statements to conform with the current year
presentation. Such reclassifications include equity in income from
unconsolidated investments which previously were included in revenues.
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"),
which 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. 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 objector filing the appeal 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 the 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 and DIP Lenders' approval, 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 waste-to-energy projects in respect to which
contracts or leases may be rejected 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 must be in current compliance
with all of its obligations under the assumed contract. With respect to certain
of the Company's energy projects, claims relating to pre-petition obligations
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. 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.
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.
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
credit 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, and filed a
motion in Bankruptcy Court seeking to lift the automatic stay. 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.
There are ongoing discussions with the client communities and other interested
parties to restructure the Onondaga County project discussed in the preceding
paragraph and three other waste-to-energy projects located in Warren County, New
Jersey, the City of Tulsa, Oklahoma and Lake County, Florida. 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.
The Town of Babylon, New York (the "Town") has filed a claim against the
Company for approximately $13.4 million in pre-petition damages and $5.5 million
in post petition damages alleging that the Company has accepted less waste than
required under the service agreement between the Town and the Company. The Town
has also filed a motion to modify the automatic stay in order to permit it to
commence arbitration against the Company. The Company has filed an objection to
the Town's claim and the motion to modify the stay. The Bankruptcy Court has
issued a temporary restraining order barring the Town from proceeding with the
arbitration. The parties are discussing a potential procedure whereby all
disputes between the parties would be resolved before the Bankruptcy Court. The
Company believes that it is in full compliance with the express requirements of
the contract and was entitled to adjust the amount of waste it is required to
accept to reflect the energy content of the waste delivered. It therefore
believes it has valid defenses to the Town's claims.
If the Company were unable to restructure any of our Onondaga, Warren, Tulsa or
Lake County projects, or were the Babylon claim to be resolved in favor of the
Town, 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 five 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 $400 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. Lastly,
the Company could lose its ownership interest in these project assets. At March
31, 2003, these five projects had a net book value of approximately $65.2
million.
The Company's agreement with a client in Montgomery County, Maryland ("the
County") provides that as a result of the credit 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. Since February 1, 2003, the County has reduced it's
monthly service fee by one-twelfth of the $1 million annual reduction.
Regardless of the stay, the Company asserts that this is a one time option and
the County's decision to reduce payments constitutes an exercise of that 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 the County or the agreement will be terminated.
Hennepin County, Minnesota, a waste-to-energy client and the Company have agreed
in principle to enter into a new Service Agreement in connection with the
purchase by the client community of the facility from its current owner,
which leases the Facility to the Company. As part of these transactions, the
Company will continue to operate the facility until 2018 for a fee, but will be
released from its obligations relating to the lease, including obligations to
provide letters of credit to secure deferred lease rent. The Company has agreed
to provide a monthly credit to the county under the new Service Agreement in
respect of the release of its lease obligations. These future monthly credits
will be secured with a new letter of credit. The new letter of credit will
initially be in the same stated amount as the existing letter of credit,
approximately $25 million, but will decrease monthly as payments are made and be
reset to $17 million at the effective date of the Company's Plan of
Reorganization. After the Company emerges from its bankruptcy proceeding,
requirements to provide the letter of credit will remain at $17 million until
2010, and thereafter decrease by $2.5 million annually until 2016, when the
requirement terminates. The transactions are subject to lender group, Bankruptcy
Court and county board approval. At March 31, 2003, the net book value of the
Companies interest in the facility was a negative $11.7 million that will be
adjusted once the transactions close.
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 classes of
interested parties voting on the plan 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 a 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. However,
creditors or equity holders that will receive no distribution under a plan are
generally 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, 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.
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
levels. As part of the reduction in force, waste-to-energy, water 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 may enhance Company cash flows
and thereby the value of the reorganized Company, 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 secured bank creditors. As previously
disclosed, KKR has reduced the value of its offer and, as such, the Company
believes that KKR's proposal would result in recoveries that are inferior to
what creditors would obtain in a stand-alone or other structures now under
consideration. Accordingly, KKR and the secured bank creditors have terminated
discussions, although KKR has expressed a continuing interest in the Company
should other structures not be achieved.
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, determining those assets for
disposition and identifying potential purchasers. 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 all 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 three month period ended March 31, 2003, (in thousands
of dollars):
Legal and professional fees $ 10,240
Severance, retention and office closure costs 1,114
Bank fees related to DIP Credit Facility 840
Other 3,300
---------
Total $15,494
=========
Other consists of a $3.3 million accrual for disputes related to royalty
payments.
Also in accordance with SOP 90-7, interest expense of $0.2 million for the three
month period ended March 31, 2003 has not been recognized on the Company's
subordinated convertible debentures and approximately $10.2 million of other
unsecured debt due to the sellers 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 at March 31, 2003 (in thousands of dollars):
Debt $138,908
Debt under credit arrangement 144,690
Accounts payable 48,242
Other liabilities 186,845
Obligations related to the Centre and the Team 128,500
Obligations related to Arrowhead Pond 103,098
Convertible Subordinated Debentures 148,650
---------
Total $898,933
=========
As also required by SOP 90-7, below are the condensed combined financial
statements of the Debtors since the date of the bankruptcy filing ("the Debtors'
Statements"). The Debtors' Statements have been prepared on the same basis as
the Company's Financial Statements.
DEBTORS' CONDENSED COMBINED STATEMENTS OF OPERATIONS
(In Thousands of Dollars)
For the Three Months Ended For the Period April 1, 2002
March 31, 2003 Through December 31, 2002
Total revenues $138,483 $ 427,548
Operating costs and expenses 106,289 328,363
Cost allocation from non-Debtor subsidiaries 1,257 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 $5,597 and $3,578) (9,484) (63,416)
------- --------
Operating income (loss) 21,453 (39,808)
Reorganization items (15,494) (49,106)
Interest expense, net (10,000) (30,709)
-------- --------
Loss before income taxes (excluding taxes applicable
to non-Debtor subsidiaries), cumulative effect of
change in accounting principle and minority interests (4,041) (119,623)
Income tax (expense) benefit (2,682) 2,290
Minority interests (744) (2,768)
Cumulative effect of change in accounting principle
(net of tax benefit of $1,364) (2,063)
-------- --------
Net loss $ (9,530) $(120,101)
======== ========
DEBTORS' CONDENSED COMBINED BALANCE SHEETS
(In Thousands of Dollars)
March 31, 2003 December 31, 2002
Assets:
Current assets $ 389,313 $ 414,907
Property, plant and equipment-net 1,163,922 1,173,222
Investments in and advances to investees
and joint ventures 3,815 3,815
Other assets 359,144 358,753
Investments in and advances to non-Debtor
subsidiaries, net 107,063 84,678
----------- -----------
Total Assets $ 2,023,257 $ 2,035,375
=========== ===========
Liabilities:
Current liabilities $ 162,066 $ 161,908
Long-term debt 33,779 34,969
Project debt 906,390 931,568
Deferred income taxes 138,879 136,498
Other liabilities 62,218 49,474
Liabilities subject to compromise 898,933 892,012
Minority interests 2,003 1,259
----------- -----------
Total liabilities 2,204,268 2,207,688
Shareholders' Deficit (181,011) (172,313)
----------- -----------
Total Liabilities and Shareholders' Deficit $ 2,023,257 $ 2,035,375
=========== ===========
DEBTORS' CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
For the three Months ended For the Period April 1, 2002
March 31, 2003 through December 31, 2002
Net cash provided by operating activities $ 25,736 $ 84,326
Net cash used in investing activities (4,628) (14,728)
Net cash used in financing activities (26,368) (54,576)
-------- --------
Net (decrease) increase in Cash and Cash Equivalents (5,260) 15,022
Cash and Cash Equivalents at Beginning of Period 80,813 65,791
-------- --------
Cash and Cash Equivalents at End of Period $ 75,553 $ 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 an
allocation of $1.3 million and $7.4 million for the three month period ended
March 31, 2003 and the period April 1,2002 through December 31, 2002,
respectively 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.
Discontinued Operations:
On March 28, 2002, following approval from the Master Credit Facility lenders,
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.
Revenues and income (loss) from discontinued operations (expressed in thousands
of dollars) for the three months ended March 31, 2002 are as follows:
Revenues $ 10,963
========
Loss on disposal of businesses $(17,110)
Operating loss (987)
Interest expense - net 33
--------
Loss before income taxes
and minority interests (18,064)
Income tax benefit (15)
Minority interests 213
----------
Loss from discontinued operations $ (17,866)
==========
Earnings (Loss) Per Share:
For the Three Months Ended March 31,
2003 2002
----------------------------------------------------------------------------------
Loss Shares Per share Loss Shares Per share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ----------
Basic Earnings (Loss)
Per Share:
Loss from continuing
operations $ (992) $(33,086)
Less: Preferred stock
dividend 16
------- ----------
Loss to common stockholders $ (992) 49,824 $ (0.02) $ (33,102) 49,773 $ (0.66)
======= ====== ======== ========== ====== ========
Loss from discontinued operations $ (17,866) 49,773 $ (0.36)
========== ====== ========
Cumulative effect of change in
accounting principles $ (8,538) 49,824 $ (0.17) $ (7,842) 49,773 $ (0.16)
========= ====== ======== ========= ====== ========
Diluted Loss
Per Share:
Loss to common stockholders $ (992) 49,824 $ (0.02) $ (33,102) 49,773 $ (0.66)
======= ====== ======== ========== ====== ========
Loss from discontinued operations $ (17,866) 49,773 $ (0.36)
========== ====== ========
Cumulative effect of change in
accounting principles $ (8,538) 49,824 $ (0.17) $ (7,842) 49,773 $ (0.16)
========= ====== ======== ========= ====== ========
Basic earnings per common share was computed by dividing net loss, reduced by
preferred stock dividends, by the weighted average of the number of shares of
common stock outstanding during each period.
Diluted earnings per common share was computed on the assumption that all
convertible debentures, convertible preferred stock, restricted stock and stock
options converted or exercised during each period, or outstanding at the end of
each period were converted at the beginning of each period or the date of
issuance or grant, if dilutive. This computation provides for the elimination of
related convertible debenture interest and preferred dividends.
Outstanding stock options to purchase common stock with an exercise price
greater than the average market price of common stock were not included in the
computation of diluted earnings per share. The balance of such options were
3,310,002 and 3,805,000 for the three month periods ended March 31, 2003 and
March 31, 2002, respectively. Shares of common stock to be issued, assuming
conversion of convertible preferred stock, the 6% convertible debentures, the 5
3/4% convertible debentures, stock options and unvested restricted stock issued
to employees and directors were not included in computation of diluted earnings
per share if to do so would have been antidilutive.
The common stock excluded from the calculation was 2,175,000 in the first
quarter of 2003 and in the first quarter of 2002 for the 6% convertible
debentures; 1,524,000 in the first quarter of 2003 and the first quarter of 2002
for the 5 3/4% convertible debentures; 0 in the first quarter of 2003 and 2002
for stock options, 198,000 and 198,000 in the first quarter of 2003 and the
first quarter of 2002, respectively, for convertible preferred stock; and 22,000
and 57,000 in the first quarter of 2003 and the first quarter of 2002,
respectively, for unvested restricted stock issued to employees.
Special Charges:
The following is a summary of costs and related payments made during the three
months ended March 31, 2003 and 2002 (expressed in thousands of dollars):
Balance Balance
Sheet at Charges for Amounts Sheet at
December Continuing Paid In March
31, 2002 Operations 2003 31, 2003
---------------------------------------------------
2003
Severance for approximately $1,600 $ (15) $1,585
216 New York city employees
Severance for approximately
80 energy employees 2,500 (48) 2,452
Severance for approximately
71 Employees terminated post 4,350 (1,037) 3,313
petition
Key employee retention plan 700 $600 1,300
Contract termination settlement 400 400
Bank fees 34,000 34,000
Office closure costs 1,200 1,200
------- ------- -------- -------
Total $44,750 $600 $(1,100) $44,250
======= ==== ======== =======
---------------------------------------------------
Balance Balance
Sheet at Charges for Amounts Sheet at
December Continuing Paid In March
31, 2001 Operations 2002 31, 2002
---------------------------------------------------
2002
Severance for approximately $17,500 $ (1,700) $(800) $ 15,000
216 New York city employees
Severance for approximately
80 energy employees 3,800 (1,100) 2,700
Contract termination settlement 400 400
Bank fees 11,000 24,000 (1,000) 34,000
Office closure costs 600 600
------- ------- -------- -------
Total $33,300 $22,300 $(2,900) $52,700
======= ======= ======== =======
Restatement of quarterly results of operations for 2002
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. These changes had no effect on the
Company's reported 2002 quarterly net losses or financial position.
The following table summarizes the results of operations, including the effect
of the restatement of the quarterly period ended March 31, 2002 (In thousands of
dollars, except per-share amounts):
2002 Quarter Ended March 31
----------------------------------------------------------
As Previously
Reported As Restated
-------- -----------
Total revenues from continuing
operations $236,341 $221,523
-------- --------
Loss from continuing operations ($50,952) ($33,086)
--------- ---------
Loss from discontinued operations (17,866)
Cumulative effect of change
in accounting principle (7,842)
-------- --------
Net loss ($50,952) ($58,794)
========= =========
Basic loss per common share:
Loss from continuing operations $(1.02) $(0.66)
Loss from discontinued operations (0.36)
Cumulative effect of change
in accounting principle (0.16)
------- -------
Total $(1.02) ($1.18)
======= =======
Diluted loss per common share:
Loss from continuing operations $(1.02) $(0.66)
Loss from discontinued operations $(0.36)
Cumulative effect of change
in accounting principle (0.16)
------- -------
Total $(1.02) $(1.18)
======= =======
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.
Segment data
The Company's reportable segments are: Domestic energy and water, International
energy and Other. The segment information for prior year 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.
Revenues and income (loss) from continuing operations by segment for the three
months ended March 31, 2003 and 2002 (expressed in thousands of dollars) were as
follows:
2003 2002
- -------------------------------------------------------------------------------------------------------------
Revenues:
Domestic energy and water $ 175,371 $ 169,210
International energy 43,684 42,544
Other 1,183 9,769
----------- -----------
Total revenue 220,238 221,523
----------- -----------
Income (loss) from operations:
Domestic energy and water 32,595 32,384
International energy 10,442 3,157
Other (569) (22,798)
Corporate unallocated income
and expenses-net (13,134) (40,084)
----------- -----------
Operating income (loss) 29,334 (27,341)
Interest expense net (11,015) (11,783)
Reorganization items (15,494)
----------- -----------
Income (loss) from continuing operations before income taxes, minority
interests, discontinued operations and the
cumulative effect of change in accounting principle $2,825 $ (39,124)
========== ===========
Summarized Unaudited Financial Information of Investments in and Advances to
Investees and Joint Ventures
The following disclosure of unaudited results of operations and financial
position are presented as required by the Securities and Exchange Commission
("SEC") rules SX4-08(g) and 3-09 (expressed in thousands of dollars).
Mammoth Pacific Haripur Barge
Quezon Power Plant Plant
(The Philippines) (United States) (Bangladesh)
Condensed Statements of Operations
for the three months ended March 31, 2003:
Revenues $ 45,657 $ 3,967 $ 8,009
Gross profit 22,085 1,098 4,968
Net income 12,172 (998) 1,788
Company's share of net income 3,180 (499) 807
Condensed Statements of Operations
for the three months ended March 31, 2002:
Revenues $ 45,912 $ 2,476 $ 7,954
Gross profit 17,843 (71) 4,794
Net income 9,193 254 1,652
Company's share of net income 2,402 127 745
Mammoth Pacific Haripur Barge
Quezon Power Plant Plant
(The Philippines) (United States) (Bangladesh)
Condensed Balance Sheets at March 31, 2003:
Current assets $ 140,010 $ 12,083 $ 21,694
Non-current assets 755,464 91,588 99,254
Total assets 895,474 103,671 120,948
Current liabilities 68,578 482 15,996
Non-current liabilities 538,528 2,829 67,600
Total liabilities 607,106 3,311 83,596
Condensed Balance Sheets at December 31, 2002:
Current assets $ 115,344 $ 10,048 $ 24,065
Non-current assets 759,278 92,172 100,524
Total assets 874,622 102,220 124,589
Current liabilities 59,940 862 12,160
Non-current liabilities 538,528 71,300
Total liabilities 598,468 862 83,460
The Company's share of the net assets shown above is less than five percent of
consolidated net assets.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward Looking Statements:
This report may contain forward-looking statements relating to future events and
future performance of the Company within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934
including, without limitation, statements regarding the Company's expectations,
beliefs, intentions or future strategies and statements that contain such words
as "expects," "anticipates," "intends," "believes" or similar language. Such
forward-looking statements are inherently uncertain, and actual results could
differ materially from those anticipated in such forward-looking statements. All
forward-looking statements included in this document are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any forward-looking statements. The Company cautions
investors that its business and financial performance are subject to very
substantial risks and uncertainties. The factors that could cause actual results
to differ materially from those suggested by any such statements include, but
are not limited to, those discussed or identified from time to time in the
Company's public filings with the SEC and, more generally, general economic
conditions, including changes in interest rates and the performance of the
financial markets; changes in domestic and foreign laws, regulations, and taxes,
changes in competition and pricing environments; and regional or general changes
in asset valuations.
Results of Operations:
The following discussion should be read in conjunction with the Financial
Statements and the notes to those statements and other financial information
appearing and referred to elsewhere in this report.
Quarter Ended March 31, 2003 vs. Quarter Ended March 31, 2002
Consolidated Results
Service revenues for the first quarter of 2003 were $125.7 million, a decrease
of $4.1 million compared to $129.8 million in the first quarter of 2002. The
decrease was primarily due to a $7.1 million decrease in Other segment service
revenues related to the wind-down and sale of non-energy businesses offset by a
$3.6 million increase in Domestic energy and water segment service revenue
primarily related to increased waste tonnage processed, operating escalations
and higher energy prices at several energy facilities.
Electricity and steam sales revenues for the first quarter of 2003 were $88.5
million, an increase of $9.2 million compared to $79.3 million in the first
quarter of 2002. The increase was primarily due to a $7.5 million increase in
electric and steam sales primarily related to higher electric generation at two
California energy facilities and higher electric and steam rates at two other
plants. In addition, there was a $2.5 million increase in electric sales at the
two plants in India as a result of the pass through of higher fuel oil costs
offset by a reduction in electric sales of $1.2 million at two of the Company's
energy facilities in The Philippines as a result of rate reductions.
Construction revenues for the first quarter of 2003 were $6.0 million, a
decrease of $6.4 million compared to $12.4 million in the first quarter of 2002
primarily due to a $5.5 million decrease in revenue attributable to the
Company's wind-down in construction of the desalination project in Tampa,
Florida combined with a $0.9 million decrease in revenue due to the substantial
completion and termination of various projects.
Other revenues-net for the first quarter of 2003 were comparable to the first
quarter of 2002.
Plant operating expenses were $137.4 million for the first quarter of 2003, an
increase of $15.0 million compared to $122.4 million in the first quarter of
2002 primarily due to a $6.5 million increase in parts and labor related to
timing and frequency of maintenance and overhaul at several domestic energy
facilities. In addition there was a $4.7 million increase in plant operating
costs at four international energy facilities primarily related to an increase
in the cost of fuel oil used to generate electricity. Plant operating expenses
were reduced in the first quarter of 2002 by a $4.4 million adjustment to
operating accruals in 2002.
Construction costs for the first quarter of 2003 were $5.6 million, a decrease
of $7.0 million compared to $12.6 million in the first quarter of 2002. The
decrease is primarily attributable to a $5.5 million decrease due to the
Company's substantial completion of construction of the desalination project in
Tampa, Florida combined with a $1.5 million decrease in revenue due to the
substantial completion and termination of various projects.
Debt service charges for the first quarter of 2003 were $19.0 million, a
decrease of $2.0 million compared to $21.0 million in the first quarter of 2002.
The decrease is primarily the result of a reduction in project debt and a
decrease in variable interest rates.
Depreciation and amortization for the first quarter of 2003 were comparable to
the same period in 2002.
Other operating costs and expenses were $1.8 million for the first quarter of
2003, a decrease of $10.5 million compared to $12.3 million in the first quarter
of 2002 primarily due to the wind-down of many non-energy businesses.
Net gain on sale of business in the first quarter of 2003 of $0.4 million was
related to additional proceeds received from the sale of an aviation business in
France in 2000. Net loss on sale of businesses in the first quarter of 2002 of
$7.0 million was primarily related to a loss on the sale of an investment in an
energy project in Thailand of $6.5 million in March of 2002 and a loss $1.7
million on the sale Compania General De Sondeos in the first quarter of 2002
offset by a $1.0 million gain on the sale of non-Port Authority aviation
fueling.
Selling, administrative and general expenses were $9.8 million for the first
quarter of 2003, a decrease of $8.1 million compared to $17.9 million in the
first quarter of 2002 primarily due to a $2.9 million reduction in professional
fees, reduced costs related to headquarter staff reductions of $1.7 million and
costs savings from the closure of international offices of $1.5 million.
Project development expenses for the first quarter of 2003 decreased by $1.2
million from 2002 primarily due to the reduction of new project development
during 2002.
Other net expenses for the first quarter of 2003 compared to the same period in
2002 decreased by $34.2 million primarily due to a reduction in fees related to
the Master Credit Facility in 2002.
Equity in income of investees and joint ventures for the first quarter of 2003
was comparable to the same period in 2002.
Interest expense-net for the first quarter of 2003 was comparable to the same
period in 2002.
See Notes to the Financial Statements for a discussion of the $15.5 million of
reorganization items.
Minority interest for the first quarter of 2003 was $2.6 million, an increase of
$1.0 million compared to $1.6 million for the same period in 2002, primarily due
to an increase in profits at a domestic energy facility.
The effective tax rate in 2003 was 44.0% compared to 20.0% for the same period
of 2002. 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: For the three months ended March 31, 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 Notes to the Financial
Statements for further discussion.
The cumulative effect of change in accounting principle of $8.5 million in the
first quarter of 2003 related to the January 1, 2003 adoption of SFAS No.143.
The cumulative effect of change in accounting principle of $7.8 million in the
first quarter of 2002 was related to the adoption of SFAS No.142. See Change in
Accounting Principles in the notes to the Financial Statements for further
discussion of the changes in accounting principle.
Property, plant and equipment - net decreased $10.6 million for the first
quarter of 2003 due mainly to depreciation expense of $19.6 million for the
period offset by capital additions of $5.7 million and $3.6 related to amounts
capitalized upon the adoption of SFAS No. 143.
Domestic Energy and Water Segment
Total revenues for the first quarter of 2003 for the Domestic energy and water
segment were $175.4 million, an increase of $6.2 million compared to $169.2
million in the first quarter of 2002, due to a $3.6 million increase in service
revenue primarily related to increased waste tonnage processed at several energy
facilities. In addition there was a $7.5 million increase in electric and steam
sales primarily related to increased electric generation at two California
energy facilities and higher electric and steam rates at two other plants. These
increases are offset by a reduction in construction revenue of $5.5 million
primarily attributable to the Company's wind-down in construction of the
desalination project in Tampa, Florida.
Income from operations for the first quarter of 2003 for the Domestic energy and
water segment was $32.6 million, an increase of $0.2 million compared to $32.4
for the first quarter of 2002 primarily due to the $6.1 million increase in
revenue discussed above combined with an increase in equity in income from
unconsolidated investments of $0.3 million offset by an increase in total costs
and expenses of $6.2 million. The increase in total costs and expenses is
composed primarily of a $6.5 million increase in parts and labor related to
timing and frequency of maintenance and overhaul at several domestic energy
facilities offset by a $5.5 million decrease in construction expenses due to the
Company's wind-down in construction of the desalination project in Tampa,
Florida. Plant operating expenses were reduced by a $4.4 million adjustment to
operating accruals in 2002.
International Energy Segment
Total revenues for the first quarter of 2003 for the International energy
segment were $43.7 million, an increase of $1.2 million compared to $42.5
million in the first quarter of 2002, primarily due to a $2.5 million increase
in electric sales at the two plants in India as a result of the pass through of
higher fuel oil costs offset by a reduction in electric sales of $1.2 million at
two of the Company's energy facilities in The Philippines as a result of rate
reductions.
Income from operations for the first quarter of 2003 for the International
energy segment was $10.4 million, an increase of $7.2 million compared to $3.2
million in the first quarter of 2002 primarily due to an increase in revenue of
$1.2 million, (as discussed above) combined with cost savings of $1.5 million
related to the closure of several offices. The increase in income from
operations in the first quarter of 2003 was also due to a loss on the sale of an
equity investment in an energy project in Thailand of $6.5 million in the first
quarter of 2002. The increase in income from operations for the first quarter of
2003 was offset by an increase in plant operating costs of $4.7 million
primarily related to higher fuel oil prices at the Company's two energy
facilities in India and two in The Philippines.
Other Segment
Total revenues for the first quarter of 2003 for the Other segment were $1.2
million, a decrease of $8.6 million compared to $9.8 million in the first
quarter of 2002. This decrease was due to the wind-down and sale of non-energy
businesses.
Loss from operations for the first quarter of 2003 for the Other segment was
$0.6 million, a decrease of $22.2 million compared to $22.8 million in the first
quarter of 2002 primarily due to a $30.8 million decrease in total costs and
expenses. The decrease of $22.2 million is primarily the result of a $9.7
million reduction in bank fees related to the Master Credit Facility and a
reduction of $18.0 million related to the wind-down and sale of non-energy
businesses offset by a $8.6 million decrease in revenue discussed above.
Capital Investments and Commitments:
At March 31, 2003, capital commitments for continuing operations amounted to
$3.6 million for normal replacement and growth in energy. Other capital
commitments for Domestic energy and water and International energy as of March
31, 2003 amounted to approximately $22.2 million. Included in this amount are 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, a
commitment of $1.6 million for an energy facility project in Italy and a $6.4
million required contribution to the corporate pension plan during 2003.
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.
See Reorganization in the notes to the Financial Statements above for a
discussion of possible commitments related to the Company's reorganization.
In addition, at March 31, 2003, excluding letters of credit and the liabilities
included in the Condensed Consolidated Balance Sheet, the Company has surety
bonds covering the following: performance under its Tampa Bay desalination
construction contract of approximately $29.6 million, performance under its
waste water treatment operating contracts of approximately $12.7 million,
possible closure costs for various energy projects of approximately $11.1
million and performance of contracts related to non-energy businesses of
approximately $43.2 million.
The Company also has additional guarantees that include approximately $22.1
million related to international energy projects, approximately $7.5 million
related to a lease reserve account at a domestic energy project, net
unrecognized guarantees of approximately $19.7 million related the Company's
interests in the Team and the Centre and $0.9 million for other entertainment
facilities.
Liquidity/Cash Flow:
At March 31, 2003, the Company had approximately $100.3 million in cash and cash
equivalents, of which $26.1 million related to cash held in foreign bank
accounts that may be difficult to transfer to the U.S.
Net cash provided by operating activities for the first quarter of 2003 was
$26.7 million compared to net cash provided by operating activities in 2002 of
$10.6 million. The increase of $16.1 million was mainly due to changes in
working capital.
Net cash used in investing activities for the first quarter of 2003 was $4.7
million compared to net cash provided by investing activities of $16.1 million
in 2002. This increase of $20.8 million in cash used in investing activities was
primarily due to decreases in proceeds from the sales of businesses and other of
$8.0 million and distributions from investees and joint ventures of $11.2
million offset by an increase in capital expenditures in facilities of $2.9
million.
Net cash used in financing activities for the first quarter of 2003 was $37.6
million compared to $50.5 million in 2002. This decrease of $12.9 million in
cash used in financing activities was due primarily to a decrease in restricted
funds held in trust combined with an increase in new project borrowings of $4.6
million in 2003.
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 Debtor In Possession
Credit Agreement (as amended, the "DIP Credit Facility") discussed below. This,
as well as the non-compliance with required financial ratios and possible other
items, has caused the Company to be in default of its Master Credit Facility.
However, as previously discussed, 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 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 stays
the appeal. The DIP Credit Facility's current terms are described below.
The DIP Credit Facility is now an approximately $245.0 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 its foreign subsidiaries held by U.S. corporations. 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 which had
exhausted 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, and included in the Company's Report
on Form 10-K for the year ended December 31, 2002, 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 March 31, 2003,
approximately $124.2 million of the secured indebtedness is included in the
Balance Sheet and $84.6 million relates to other commitments. Additional letters
of credit of approximately $173.2 million principally secured the Company's
obligations 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.
The DIP Credit Facility comprises two tranches. The Tranche A Facility provides
the Company with a credit line of approximately $14.2 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 $230.7
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 of 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.
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
10-Q, (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 10-K, 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 DIP Credit facility.
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. On March 25, 2003, an extension
fee of $0.1 million was paid by the Company to the DIP Lenders. In addition on
April 1, 2003, the Company paid an annual administrative fee of $0.4 million.
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 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 is not within the Company's control and no assurances can
be made with respect thereto.
Other:
Quezon Power
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 may 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.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Except as discussed in the following paragraphs there have been no significant
changes in the Company's market risk sensitive assets and liabilities for the
quarter ended March 31, 2003 from the amounts reported at December 31, 2002.
Upon adoption of SFAS No. 133 on January 1, 2001, the Company identified all
derivatives within the scope of SFAS No. 133. The adoption of SFAS No. 133 (as
discussed in the Company's Annual Report on Form 10-K) 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." Since the interest expense, inclusive
of the swap, is passed through to the Client Community, the Company records the
fair value of the swap as an asset or liability in results of operations offset
by the fair value of the right and obligation to pass through the effects of the
swap to the Client Community. The carrying value of this asset and liability
decreased $0.1 million from $19.1 million at December 31, 2002 to $19.0 million
at March 31, 2003.
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.
See Liquidity/Cash Flow and Part II Item 3 Defaults upon Senior Securities for a
discussion of the changes affecting the Company's debt repayment and defaults.
ITEM 4 - DISCLOSURE CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company carried out an
evaluation under the supervision and with the participation of the Company's
management, including the Chief Executive Officer, 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, who also presently performs
the functions of principal financial 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, including any corrective actions
with regard to significant deficiencies and material weaknesses.
PART II - OTHER INFORMATION
ITEM 1 - 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.
A group of plaintiffs, led by Martin County Coal Corporation, have
moved in the Bankruptcy Court for relief from the Chapter 11 automatic stay 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. These cases arise 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. The Company has agreed to a stipulation to lift the stay against OEES
in which the moving plaintiffs stipulate that the bar date has passed for
asserting claims against other debtors. The Company 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 indemnify the purchaser for
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 John F.
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. Since that time, 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. One of these subsidiaries 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 total amount
the Company has to pay for retentions is limited by the maximum
premium calculation contained in the policies. For claims filed
against the sold subsidiaries, the Company is entitled to
reimbursement of such retentions from Avondale or the entity to which
Avondale sold certain of the subsidiaries. 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 this insurer 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 Second
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. See Notes to the Financial
Statements for description of potential settlement prospects for this
matter.
(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. There
are ongoing discussions with the community to restructure this
project. Any agreement to restructure this project would likely entail
a settlement of this litigation. See Notes to the Financial Statements
for description of potential settlement prospects for this matter.
(iv) The Town of Babylon, New York maintains that the Company has failed in
the past and continues to fail to accept the required quantities of
the waste specified in the service agreement between the Company and
the Town relating to the Babylon waste-to-energy facility. The Town
has filed a proof of claim for approximately $13.4 million for alleged
pre-petition defaults and claims damages in excess of $5.5 million for
post-petition defaults and additional expenses incurred by the Town in
connection with the Company's Chapter 11 proceeding. It has also filed
a motion seeking to modify the automatic stay in order to allow it to
commence an arbitration proceeding against the Company concerning the
prepetition claim and purported to commence an arbitration concerning
the post-petition claim. The Company has filed in the Bankruptcy Court
objections to the Town's proof of claim and motion to modify the
automatic stay and sought and obtained a temporary restraining order
("TRO") against the commencement of an arbitration concerning the
post-petition claim. The Company believes that it is in full
compliance with the express requirements of the service agreement and
was entitled to adjust the amount of waste it is required to accept to
reflect the energy content of the waste delivered. It therefore
believes it has valid defenses to the Town's claims. As of the date
hereof, the Bankruptcy Court has continued the TRO with the town's
agreement and has not yet ruled on the Town's motion to modify the
stay or on the Company's objection to the proof of claim. However, the
Company is considering a proposal from the town that the parties agree
to a procedure in which these issues would be resolved in an expedited
proceeding by the Bankruptcy Court, subject to the Town's submission
of a claim more clearly specifying the nature of the claimed default.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
(a) Indebtedness
As previously disclosed, on April 1, 2002, Covanta Energy Corporation
and certain of its domestic subsidiaries filed for reorganization under Chapter
11 of the United States Bankruptcy Code. With respect to the following
indebtedness, and in connection with its Chapter 11 filing, the Company has
ceased to pay principal and interest as they accrued. Enforcement of remedies
under these items of indebtedness as a result of defaults (including payment
defaults and any default purporting to occur as a result of the filing) is
stayed under the Bankruptcy Code and orders entered into by the Bankruptcy
Court.
Indebtedness Nature of Default Amount of Arrearage
9.25% Debentures Bankruptcy filing; non-payment of $14.6 million in interest, as of
($100 million principal) interest due March 1, 2002 March 31, 2003
6% Convertible Debentures Bankruptcy filing; non-payment of $5.1 million in interest, $85
($85 million principal) principal and interest due June million in principal, as of
1, 2002 March 31, 2003
5.75% Convertible Debentures Bankruptcy filing; non-payment of $3.6 million in interest, $63.6
($63.6 million principal) principal and interest due million in principal, as of
October 20, 2002 March 31, 2003
Master Credit Agreement Bankruptcy filing; non-payment of Approximately $259.3 million
principal and interest due June principal, $19.7 million in
1, 2002; expiration of Master interest, as of March 31, 2003;
Credit Agreement without cash plus $378.3 million of unfunded
collateralizing outstanding cash collateral obligations with
letters of credit respect to letters of credit
The Company continues to pay on a timely basis principal and interest on
indebtedness relating to its waste-to-energy facilities and classified on its
Balance Sheet as project debt. The project debt associated with the financing of
waste-to-energy facilities is generally arranged by municipalities through the
issuance by governmental entities of tax-exempt and taxable revenue bonds.
Payment obligations for the project debt associated with waste-to-energy
facilities are limited recourse to the revenues and property, plant and
equipment of the operating subsidiary and non-recourse to the Company, subject
to operating performance guarantees and commitments by the Company. The
automatic stay provided under the Bankruptcy Code and orders entered into by the
Bankruptcy Court would prevent the obligees from exercising remedies under any
of the project debt that might otherwise be deemed to be in default by reason of
the Chapter 11 filing.
In respect to the City of Anaheim, California $126,500,000 Certificates
of Participation (1993 Arena Financing Project), the City of Anaheim sent a
notice of default under the Management Agreement for the Arrowhead Pond of
Anaheim which could constitute a default under a letter of credit reimbursement
agreement with Credit Suisse First Boston. The outstanding principal amount of
the named securities is $113.7 million as of the date of this filing (supported
by a letter of credit that is included in the unfunded letters of credit
referred to above under "Master Credit Facility").
(b) Dividends on Preferred Stock
As disclosed in Note 16 to the Annual Report filed on Form 10-K, in
connection with its Chapter 11 filing, the Company suspended the declaration and
payment of dividends on its Series A $1.875 Cumulative Convertible Preferred
Stock. Under the terms governing the Series A $1.875 Cumulative Convertible
Preferred Stock, the dividends due for the second quarter of 2002 accumulate
without interest or penalty in the amount of $1.875 per share, currently
totaling $15,491.72 per quarter. Despite this accumulation of dividends, the
holders of the preferred shares are not expected to receive any future dividends
on or any value for these shares following the Chapter 11 process.
(c) Other Matters
The Company has also not made any distributions to its partners under
the agreements governing the Covanta Onondaga Limited Partnership. The amounts
that would have been distributed to the Company's partners in this partnership
have been set aside in segregated accounts pursuant to the Bankruptcy Court's
order, and distributions will not be paid to such partners until further order
of the Court.
Pursuant to the Bankruptcy Court's order on December 20, 2002, partner
distributions previously set aside relating to the Covanta Huntington Limited
Partnership were distributed on December 23, 2002 to the partners of such
partnership and distributions to such partners are to be made in the ordinary
course.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as a part of this report:
99.0 Certifications pursuant to Title 18, United States Code,
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 13, 2003 COVANTA ENERGY CORPORATION
(Registrant)
By: /s/ Scott G. Mackin
--------------------------------
Scott G. Mackin
President, Chief Executive
Officer and Principal Financial
Officer
By: /s/ William J. Keneally
--------------------------------
William J. Keneally
Senior Vice President
and Chief Accounting Officer
Certification Required
by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934
I, Scott G. Mackin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Covanta
Energy Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 13, 2003
/s/ Scott G. Mackin
-----------------------------------------
Scott G. Mackin
President and Chief Executive Officer
Certification Required
by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934
I, Scott G. Mackin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Covanta
Energy Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 13, 2003
/s/ Scott G. Mackin
-----------------------------------------
Scott G. Mackin
Principal Financial Officer