FORM 10-Q
UNITED STATES
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 June 30, 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
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-5549268
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
40 Lane Road, Fairfield, NJ 07004
--------------------------------------------------
(Address of Principal Executive Office) (Zip code)
(973) 882-9000
---------------------------------------------------
(Registrant's telephone number including area code)
Not Applicable
----------------------------------------------------
(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 |_|
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of the registrant's Common Stock outstanding as of August
1, 2003 was 49,824,251 shares.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COVANTA ENERGY CORPORATION (DEBTOR IN POSSESSION) AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED
OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE SIX MONTHS FOR THE THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2003 2002 2003 2002
---- ---- ---- ----
(As Restated)
-------------
(In Thousands of Dollars, Except Per Share Amounts)
Service revenues $264,809 $262,419 $139,066 $132,579
Electricity and steam sales 183,874 174,693 95,386 95,411
Construction revenues 9,677 22,544 3,670 10,150
Other revenues-net 7 44 7 37
-------- -------- -------- --------
Total revenues 458,367 459,700 238,129 238,177
-------- -------- -------- --------
Plant operating expenses 278,701 265,020 141,264 141,181
Construction costs 9,094 21,332 3,528 8,684
Depreciation and amortization 43,237 46,195 21,852 23,206
Debt service charges-net 40,651 44,958 20,317 22,422
Other operating costs and expenses 2,659 16,568 853 4,261
Net loss (gain) on sale of businesses (417) 7,040
Selling, administrative and general expenses 20,038 30,213 10,241 12,518
Other (income) expense-net (515) 31,796 48 (1,869)
Write-down of assets held for use 100,647 100,647
Write-down of and obligations related
to assets held for sale 40,000 40,000
-------- -------- -------- --------
Total costs and expenses 393,448 603,769 198,103 351,050
-------- -------- -------- --------
Equity in income from unconsolidated investments 11,574 8,411 7,133 4,556
-------- -------- -------- --------
Operating income (loss) 76,493 (135,658) 47,159 (108,317)
Interest expense (net of interest income of $1,673,
$1,122, $1,006 and $506, respectively, and excluding
post-petition contractual interest of $485,
$2,400, $242 and $2,400, respectively) (21,327) (22,664) (10,312) (10,881)
Reorganization items (25,918) (15,966) (10,424) (15,966)
-------- -------- -------- --------
Income (loss) from continuing operations before income
taxes, minority interests, discontinued operations and
the cumulative effect of change in accounting
principle 29,248 (174,288) 26,423 (135,164)
Income tax (expense) benefit (13,898) 4,311 (12,645) (3,282)
Minority interests (4,852) (4,676) (2,288) (3,121)
-------- -------- -------- --------
Income (loss) from continuing operations before
discontinued operations and change in accounting
principle 10,498 (174,653) 11,490 (141,567)
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 income (loss) 1,960 (200,361) 11,490 (141,567)
-------- -------- -------- --------
Other comprehensive income (loss), net of income tax:
Foreign currency translation adjustments (net of income
taxes of: zero, ($415), zero and zero respectively) 1,855 (1,697) 1,048 (267)
Less: reclassification adjustment for translation
adjustments included in:
loss from continuing operations 1,233
loss from discontinued operations 297
Unrealized holding gains (losses) arising during period
(net of income tax (expense) benefit of ($99), $119,
($99) and $117) 147 (177) 147 (173)
-------- -------- -------- --------
Other comprehensive income (loss) 2,002 (344) 1,195 (440)
-------- -------- -------- --------
Comprehensive income (loss) $ 3,962 $(200,705) $ 12,685 $(142,007)
======== ========== ======== ==========
Basic income (loss) per share:
Income (loss) from continuing operations $ 0.21 $ (3.51) $ 0.23 $ (2.84)
Loss from discontinued operations (0.36)
Cumulative effect of change in accounting principle (0.17) (0.16)
-------- -------- -------- --------
Net income (loss) $ 0.04 $ (4.03) $ 0.23 $ (2.84)
======== ========== ======== ==========
Diluted income (loss) per share:
Income (loss) from continuing operations $ 0.21 $ (3.51) $ 0.23 $ (2.84)
Loss from discontinued operations (0.36)
Cumulative effect of change in accounting principle (0.17) (0.16)
-------- -------- -------- --------
Net income (loss) $ 0.04 $ (4.03) $ 0.23 $ (2.84)
======== ========== ======== ==========
See notes to condensed consolidated financial statements.
COVANTA ENERGY CORPORATION (DEBTOR IN POSSESSION) AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2003 DECEMBER 31, 2002
------------- -----------------
(In Thousands of Dollars, Except Share and Per Share Amounts)
Assets
Current Assets:
Cash and cash equivalents $ 98,973 $ 115,815
Restricted funds held in trust 118,601 92,039
Receivables (less allowances: 2003, $21,381 and 2002, 271,357 259,082
$20,476)
Deferred income taxes 11,200 11,200
Prepaid expenses and other current assets 86,031 85,997
----------- -----------
Total current assets 586,162 564,133
Property, plant and equipment-net 1,637,066 1,661,863
Restricted funds held in trust 148,337 169,995
Unbilled service and other receivables (less allowances of
$2,957 in 2003 and 2002) 143,204 147,640
Unamortized contract acquisition costs-net 57,748 60,453
Other intangible assets-net 7,352 7,631
Investments in and advances to investees and joint ventures 175,651 166,465
Other assets 60,699 61,927
----------- -----------
Total Assets $ 2,816,219 $ 2,840,107
=========== ===========
Liabilities and Shareholders' Deficit
Liabilities:
Current Liabilities:
Current portion of long-term debt $ 17,973 $ 16,450
Current portion of project debt 112,628 115,165
Accounts payable 27,540 23,593
Federal and foreign income taxes payable 636
Accrued expenses 234,312 254,964
Deferred income 37,923 41,402
----------- -----------
Total current liabilities 431,012 451,574
Long-term debt 24,090 23,779
Project debt 1,087,628 1,128,217
Deferred income taxes 251,750 249,600
Deferred income 145,778 151,000
Other liabilities 65,511 80,369
Liabilities subject to compromise 939,358 892,012
Minority interests 39,406 35,869
----------- -----------
Total Liabilities 2,984,533 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 (17) (54)
Deficit (382,213) (384,173)
Accumulated other comprehensive income (loss) 1,685 (317)
----------- -----------
Total Shareholders' Deficit (168,314) (172,313)
----------- -----------
Total Liabilities and Shareholders' Deficit $ 2,816,219 $ 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 SIX MONTHS FOR THE YEAR ENDED
ENDED JUNE 30, 2003 DECEMBER 31, 2002
SHARES AMOUNTS SHARES AMOUNTS
------------ ------------- ------------ -------------
(In Thousands of Dollars, Except Share and Per Share Amounts)
SERIAL CUMULATIVE CONVERTIBLE PREFERRED STOCK,
PAR VALUE $1.00 PER SHARE, AUTHORIZED
4,000,000 SHARES:
Balance at beginning of period 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 37 388
------------ ------------
Balance at end of period (17) (54)
------------ ------------
DEFICIT:
Balance at beginning of period (384,173) (205,262)
Net income (loss) 1,960 (178,895)
------------ ------------
Total (382,213) (384,157)
------------ ------------
Preferred dividends-per share of zero and $.46875, respectively 16
------------ ------------
Balance at end of period
(382,213) (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) 1,855 (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 1,617 (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 GAIN (LOSS) ON SECURITIES
AVAILABLE FOR SALE:
Balance at beginning of period (167)
Gain (loss) for period (net of income tax (expense)
benefit of ($99) and $112, respectively) 147 (167)
------------ ------------
Balance at end of period (20) (167)
------------ ------------
TOTAL SHAREHOLDERS' DEFICIT $ (168,314) $ (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 SIX MONTHS ENDED
JUNE 30,
2003 2002
---- ----
(As Restated)
-------------
(In Thousands of Dollars)
Cash Flows From Operating Activities:
Net income (loss) $ 1,960 $ (200,361)
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by Operating Activities of Continuing Operations:
Loss from discontinued operations 17,866
Reorganization items 25,918 15,966
Payment of reorganization items (13,193) (9,122)
Depreciation and amortization 43,237 46,195
Deferred income taxes 6,975 (8,601)
Provision for doubtful accounts 4,904 9,354
Bank fees 23,842
Write down of and obligation related to assets held 40,000
for sale
Write down of assets held for use 100,647
Equity in income from unconsolidated investments (11,574) (8,411)
Cumulative effect of change in accounting principle, net 8,538 7,842
Other 2,499 1,294
Management of Operating Assets and Liabilities:
Decrease (Increase) in Assets:
Receivables (17,179) 24,680
Other assets 2,158 352
Increase (Decrease) in Liabilities:
Accounts payable 15,957 19,214
Accrued expenses (15,471) (27,576)
Deferred income (3,479) (2,134)
Other liabilities (10,412) (32,399)
----------- -----------
Net cash provided by operating activities
of continuing operations 40,838 18,648
----------- -----------
Cash Flows From Investing Activities:
Net proceeds from sale of businesses and other 417 8,389
Proceeds from sale of investment 286
Proceeds from sale of property, plant, and equipment 260 236
Proceeds from sale of marketable securities available
for sale 224 324
Investments in facilities (10,398) (10,555)
Other capital expenditures (1,060) (1,008)
Increase in other receivables (143)
Distributions from investees and joint ventures 1,000 14,287
Increase in investments in and advances to investees
and joint ventures (574)
----------- -----------
Net cash provided by (used in) investing activities
of continuing operations (9,271) 10,956
----------- -----------
Cash Flows From Financing Activities:
Borrowings for facilities 3,584
New debt 5,694 2,146
Increase in funds held in trust (4,901) (11,875)
Payment of debt (52,786) (47,321)
Dividends paid (16)
Other (2,775)
----------- -----------
Net cash used in financing activities of continuing (48,409) (59,841)
operations ----------- -----------
Net cash provided by discontinued operations 28,112
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (16,842) (2,125)
----------- -----------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 115,815 86,773
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 98,973 $ 84,648
=========== ===========
SUPPLEMENTAL INFORMATION
Cash paid for interest $ 48,094 $ 46,218
=========== ===========
Cash paid for income taxes $ 3,212 $ 4,044
=========== ===========
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 (the "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 June 30, 2003 and
results of operations for the three and six month periods and cash flows for the
six month periods ended June 30, 2003 and 2002. These Financial Statements
should be read in conjunction with the audited Consolidated Financial Statements
and the notes thereto included in Covanta Energy Corporation'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
nonetheless has significant influence over their operations 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 (the "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 the Petition Date, 31 additional subsidiaries have
filed petitions for reorganization under Chapter 11 of the Bankruptcy Code. In
addition, four subsidiaries which had filed petitions on the Petition Date 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. 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 filings.
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 on October 1, 2003, the
debtor in possession financing facility, and the Company's ability to generate
sufficient cash flows from operations, asset sales and financing arrangements to
meet its obligations. 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, 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, "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7").
Accordingly, all pre-petition liabilities believed to be subject to compromise
have been segregated in the 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, as appropriate. 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 (the "FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN No.
46"). FIN No. 46 clarifies the application of Accounting Research Bulletin No.
51, "Consolidated Financial Statements," and applies immediately to any variable
interest entities created after January 31, 2003 and to variable interest
entities in which an interest is obtained after that date. FIN No. 46 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" ("SFAS No. 143"), effective
January 1, 2003. Under SFAS No. 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 for asset
retirement obligations 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.
The Company adopted SFAS No. 143 on January 1, 2003 and recorded a cumulative
effect change in accounting principle of $8.5 million net of a related tax
benefit of $5.5 million.
The following table summarizes the impact on the Company's Balance Sheet
following the adoption of SFAS No. 143 (in thousands):
Change
Balance at resulting from Balance at
December 31, Application of January 1,
2002 SFAS No. 143 2003
------------ -------------- ----------
Property, plant and equipment $ 2,378,672 $ 6,509 $ 2,385,181
Less: Accumulated depreciation (716,809) (2,935) (719,744)
----------- ----------- -----------
Net property, plant and equipment $ 1,661,863 $ 3,574 $ 1,665,437
Investments in and advances to
investees and joint ventures $ 166,465 $ (1,223) $ 165,242
Deferred income taxes $ 249,600 $ (5,532) $ 244,068
Non-current asset retirement $ $ 19,136 $ 19,136
obligation
The changes to the non-current asset retirement obligation for the six months
ended June 30, 2003 are as follows (in thousands):
Non-current
asset retirement
obligation
Balance at December 31, 2002 $
Asset retirement obligation
as of January 1, 2003 19,136
Accretion expense 678
--------
Balance at June 30, 2003 $ 19,814
========
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"). 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 June 30, 2003, the Company had
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 net income (loss)in the
first six months of 2003 and 2002, 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 six months 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 net income (loss) in the first six months of
2003 and 2002 is less than that which would have been recognized if the fair
value based method had been applied to all awards since the original effective
date of SFAS No. 123.
The following table summarizes the pro forma impact to net income (loss) and
income (loss) per common share for the three and six months ended June 30, 2003
of the accounting changes implemented beginning January 1, 2003 and 2002
including the effect on net income (loss) and income (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 Six Months For the Three Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss), as reported $ 1,960 $ (200,361) $ 11,490 $ (141,567)
Deduct:
SFAS No. 123 total stock based employee
compensation expense determined under the fair
value method for all awards, net of related
tax effects (1,488) (2,467) (744) (1,233)
SFAS No. 143 depreciation and accretion expense (678) (339)
--------- ----------- --------- ------------
Pro forma net income (loss) $ 472 $ (203,506) $ 10,746 $ (143,139)
========= =========== ========= ============
Basic income (loss) per common share:
Basic - as reported $ 0.04 (4.03) $ 0.23 $ (2.84)
========= =========== ========= ============
Basic - pro forma $ 0.01 $ (4.09) $ 0.22 $ (2.87)
========= =========== ========= ============
Diluted income (loss) per common share:
Diluted - as reported $ 0.04 $ (4.03) $ 0.23 $ (2.84)
========= =========== ========= ============
Diluted - pro forma $ 0.01 $ (4.09) $ 0.21 $ (2.87)
========= =========== ========= ============
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others - an interpretation of FASB Statements No. 5, 57, and 107
and rescission of FASB Interpretation No. 34" ("FIN No. 45"). FIN No. 45
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. FIN No. 45 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. FIN No. 45 does not
prescribe a specific approach for subsequently measuring the guarantor's
recognized liability over the term of the related guarantee. FIN No. 45 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 FIN
No. 45 are applicable on a prospective basis to guarantees issued or modified
after December 31, 2002, irrespective of the guarantor's fiscal year-end. The
requirements in FIN No. 45 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 which did not have an effect on the
Company's financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities"( SFAS No. 146"). 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" ("SFAS No. 142"). 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, and 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" ("SFAS No. 145"). 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 adopted the provisions of SFAS No. 145 on December 1, 2002, without
impact on its financial position or results of operations.
New Accounting Pronouncements:
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS No.
150"). SFAS No. 150 establishes standards for how an issuer classifies and
measures in its statement of financial position certain financial instruments
with characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability because
that financial instrument embodies an obligation of the issuer. The requirements
of SFAS No. 150 are effective for financial instruments entered into or modified
after May 31, 2003. For financial instruments created prior to the issuance date
of SFAS No. 150, transition shall be achieved by reporting the cumulative effect
of a change in accounting principle. The Company adopted the provisions of SFAS
No. 150 on July 1, 2003, without impact on its financial position or results of
operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149
amends and clarifies the accounting and reporting for derivative instruments,
including certain derivatives embedded in other contracts, and for hedging
activities under SFAS No. 133, "Accounting for Derivatives Instruments and
Hedging Activities" ("SFAS No. 133"). The amendments in SFAS No. 149 require
that contracts with comparable characteristics be accounted for similarly. SFAS
No. 149 clarifies under what circumstances a contract with an initial net
investment meets the characteristics of a derivative according to SFAS No. 133
and when a derivative contains a financing component that warrants special
reporting in the statement of cash flows. In addition, SFAS No. 149 amends the
definition of an "underlying" to conform it to language used in FIN No. 45 and
amends certain other existing pronouncements. The provisions of SFAS No. 149
that relate to SFAS No. 133 "Implementation Issues" that have been effective for
periods that began prior to June 15, 2003 should continue to be applied in
accordance with their respective effective dates. The requirements of SFAS No.
149 are effective for contracts entered into or modified after June 30, 2003 and
for hedging relationships designated after June 30, 2003. The Company does not
expect the adoption of SFAS No. 149 to have a material effect on its financial
position and results of operations.
Reclassification:
Certain prior period amounts, including various revenues and expenses, have been
reclassified in the Financial Statements to conform with the current period
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, as amended, (the "DIP Credit Facility")
with the lenders (the "DIP Lenders") who had participated in the Company's
Revolving Credit and Participation Agreement, dated as of March 14, 2001(the
"Master Credit Facility"), 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 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
the Bankruptcy Court's and the DIP Lenders' approval, to assume or reject
executory contracts-which generally means a contract under which there are
outstanding obligations among the parties thereto- 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 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
defaults 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 the contracts the Company wishes to
assume. In some instances, the Company believes these claims are overstated.
Prior to emergence from Chapter 11, 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.
Developments in Project Restructurings:
A public authority in Onondaga County, New York (the "Agency") and the Company
have several commercial disputes between them. Among these disputes is a January
16, 2002 demand by the Agency to provide credit enhancement required by a
service agreement between the Agency and the Company 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 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 New York State court with respect to such disputes as well as the
Agency's right to terminate the service agreement.
As previously reported, following the commencement of the Chapter 11 Cases, the
Agency sought in New York state court a declatory judgment confirming its
purported termination while the Company asserted that the automatic stay applied
to the litigation. Ultimately, the Bankruptcy Court 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.
In the meantime, the parties, together with the principal bondholder of the
Agency's bonds and the limited partners in the Company's operating subsidiary
(which is a limited partnership controlled by the subsidiaries of the Company)
have reached a tentative agreement to settle the litigation and restructure the
commercial agreements and debt related to the project. The restructuring, which
is subject to definitive documentation and DIP Lender and Bankruptcy Court
approval, reduces the Agency annual debt service and operating fee payable to
the Company's operating subsidiary. If the Agency's revenues are insufficient to
pay debt service on all project bonds prior to their maturity in 2015, then one
series of bonds is expected to be repaid after 2015, if project revenues then
are sufficient. Any debt to be repaid after 2015 will continue to be secured by
a mortgage on the project. The operating fee reductions will reduce the cash
flow that otherwise would be distributed to the limited partners. Both the
bondholders of the debt that may be deferred and the limited partners have
agreed to rely upon available project revenues after 2015 (when the service
agreement with the Agency expires) for repayment.
The Company's operating subsidiary will continue to operate the project and will
realize less value from the project than it would otherwise have realized after
2015 until any deferred debt and amounts owed to the limited partners are
repaid. In addition, the Company's obligation to provide credit support will be
eliminated and its contingent liability if the contract were to be terminated
for its default will be materially reduced. If this tentative agreement can be
documented and all other approvals obtained before the end of August 2003, the
Company intends to seek Bankruptcy Court approval and close the transaction
shortly thereafter. If the settlement and restructuring is not consummated, and
if thereafter 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
pre-petition obligations to the limited partners in the project. If the
restructuring occurs as contemplated above, there will be no material adverse
effect to the Company.
The Company's waste-to-energy project in Warren County, New Jersey provides
service under a contract with the Warren County Pollution Control Authority (the
"Authority"). Since the mid-1990s, the Authority has been unable to generate
sufficient revenues from waste tipping fees and electricity sales to pay all
amounts owed to the Company and to project bondholders. The State of New Jersey
has paid all project debt service since late 1999, while the parties have
attempted to restructure the project's commercial and debt arrangements,
together with the Municipal Bond Insurance Association, which insures the
project bonds. The parties have reached a tentative agreement on such a
restructuring. The restructuring would extend the Company's operating contract
with the Authority, and reduce its contingent liability if the contract were
terminated due to the Company's default. The restructuring would transfer title
to the project to the Authority, thereby providing it with control over its
residual value after the contract with the Company expires. The restructuring is
subject to numerous approvals, including the Company's DIP Lenders, the
Bankruptcy Court, and the commitment of the State of New Jersey to continue
paying periodic debt service on project bonds until they mature in 2007. If the
restructuring is not consummated, the operating contract could be terminated and
the operating subsidiary and the Company, as guarantor, could incur substantial
pre-petition termination obligations. In addition, the Company's operating
subsidiary could lose its ownership interest in, and its rights to operate the
project. If the restructuring occurs as contemplated above, it will result in a
reorganization expense of $33.4 million and a tax charge of $15.9 million.
The Company is engaged in discussions with other interested parties to
restructure the waste-to-energy project located in the City of Tulsa, Oklahoma.
Such a restructuring would require approval of the Bankruptcy Court.
In the case of the Company's Lake County, Florida waste-to-energy project, the
Company has filed motions with the Bankruptcy Court to approve the assumption of
the service contract for that project. The Company expects that Lake County will
object to assumption on the basis that the service contract is void. The
Bankruptcy Court has yet to rule on the motion.
There can be no assurance that the outcome of the Company's efforts in this
regard will result in a final agreement on restructuring any of these four
projects.
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 in excess of $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
and seeking recovery of certain costs incurred by the Town as a result of the
Company's Chapter 11 proceedings. The parties and the Bankruptcy Court have
agreed to a procedure whereby all disputes between the parties would be
arbitrated before the Bankruptcy Court which would finally decide the matter.
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 its 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 the contract for 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
priority administrative bankruptcy claims in the bankruptcy proceedings. Lastly,
the Company could lose its ownership interest in these project assets. At June
30, 2003, these five projects had a net book value of approximately $70.7
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 stay the County's
ability to terminate. Since February 1, 2003, the County has reduced its 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 and the Company have restructured the Hennepin County
waste-to-energy project in connection with the purchase by Hennepin County of
the facility from its prior owner, General Electric Capital Corporation
("GECC"), which leased the facility to the Company. Under the new project
structure, the Company will continue to operate the facility until 2018 for a
fee, but will be released from all obligations relating to the lease, including
obligations to provide letters of credit to secure deferred lease rent. The
Company and Hennepin County have entered into a new operating contract under
which the Company will provide Hennepin County a monthly credit against its
operating fee owed to the Company's operating subsidiary. The credits will
continue through 2018. Hennepin County's right to receive future monthly credits
will be secured by a new letter of credit for the benefit of Hennepin County.
The new letter of credit will initially be in the same stated amount as the
prior letter of credit held by GECC, approximately $25 million, but will
decrease monthly as credits are applied, and be reset to $17 million at the
effective date of the Company's plan of reorganization. After such effective
date, 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 Company's operating subsidiary also has agreed to provide Hennepin County,
on the effective date of the Company's plan of reorganization, a security
interest in its on-site inventory and equipment. Lastly, the Company's operating
subsidiary has assigned its interest in the electricity sales contract for the
project. This assignment does not affect the share of electricity revenues to
which the Company's operating subsidiary is entitled. The transactions have been
approved by the Bankruptcy Court, FERC has approved the assignment of the
electricity sales agreement, and the new agreements are in effect. The
restructuring occurred on July 8, 2003 and will result in a reorganization
expense of $12.0 million and a tax charge of $5.7 million in the third quarter
of 2003.
Developments in Plan of Reorganization:
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 exclusive periods during
which they may file a plan of reorganization and solicit acceptances thereof.
The Debtors have requested and obtained extensions of the exclusivity periods
and have requested that the Bankruptcy Court extend such exclusivity period
further. The exclusive period to file a plan currently expires on August 14,
2003 and the Debtors have requested an extension of such exclusive period to
November 21, 2003. Although there can be no assurances that such extension will
be obtained, the Company expects exclusivity to be extended to November 21, 2003
despite the filing of objections by an informal committee of holders of the
Company's 9.25% Debentures and by an individual creditor with a purported
secured claim.
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 a 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 Court may confirm a plan notwithstanding the
non-acceptance of the plan by one or more impaired classes of creditors or
equity holders if certain requirements of the Bankruptcy Code are met. As a
result of the amount of pre-petition indebtedness, 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 Company has not yet filed a plan of reorganization setting forth its
proposal for emergence from Chapter 11. The Company is reviewing with its
secured and unsecured creditors possible capital and debt structures for the
reorganized company. As part of this review, the Company, pursuant to an order
of the Bankruptcy Court dated July 1, 2003, entered into an agreement with a
trust company to provide certain evaluation services in connection with a
possible plan of reorganization involving an employee stock ownership plan.
However, the Company has made no decision to file such a plan of reorganization
and, accordingly, the Company may pursue other capital and debt structures.
Regardless of the exact structure, the Company currently believes that the
restructured entity will likely focus on the U.S. energy and water markets,
predominately the waste-to-energy market.
In addition, in order to enhance the value of the Company's core energy
business, on September 23, 2002, management announced a reduction in non-plant
personnel, closure of satellite development offices and a 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. 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 the 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.
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").
On January 9, 2003, the Team filed for protection with the Ontario Superior
Court of Justice (the "Canadian Court") and was granted protection under
Canada's Companies' Creditors Arrangement Act ("CCAA"). PricewaterhouseCoopers
Inc. was appointed as monitor under the CCAA insolvency proceedings and is
supervising endeavors to sell the Team's franchise under the direction of the
Canadian Court. On April 25, 2003, the monitor entered into an asset purchase
agreement with Capital Sports & Entertainment Inc. ("CSE") pursuant to which CSE
agreed to purchase the Team's franchise and certain related assets. The Canadian
Court approved the asset purchase agreement on May 9, 2003. The asset purchase
agreement is conditional on the consummation of a transaction to purchase the
Centre. On May 27, 2003, upon a motion by Covanta as senior secured creditor to
Palladium Corporation ("Palladium"), the Canadian Court appointed Ernst & Young
Inc. as interim receiver of Palladium, the owner of the Centre. On June 4, 2003,
the interim receiver entered into an asset purchase agreement with Capital
Sports Properties Inc. ("CSP"), an affiliate of CSE, pursuant to which CSP
agreed to purchase the Centre and certain related assets. The Canadian Court
approved the asset purchase agreement on June 20, 2003. The asset purchase
agreement is conditional on a number of items, including evidence of approval of
Covanta's debtor-in-possession lenders. The transactions are expected to close
in the third quarter of 2003.
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 of 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 six and three month periods ended June 30, 2003 (in
thousands of dollars):
For the Six Months Ended For the Three Months Ended
Legal and professional fees $ 19,304 $ 9,064
Severance, retention and office closure costs 2,235 1,122
Bank fees related to DIP Credit Facility 1,079 238
Other 3,300
--------- -----------
Total $25,918 $10,424
========= ===========
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 and $0.5 million for
the three and six month periods ended June 30, 2003, respectively, has not been
recognized on 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 June 30, 2003 (in thousands of dollars):
Debt $138,908
Debt under credit arrangement 144,690
Accounts payable 54,953
Other liabilities 218,494
Obligations related to the Centre and the Team 128,500
Obligations related to Arrowhead Pond 105,163
Convertible Subordinated Debentures 148,650
--------
Total $939,358
========
As 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 For the Three For the Six
Months Ended Months Ended Months Ended
June 30, 2003 June 30, 2002 June 30, 2003
Total revenues $153,687 $155,095 $292,170
Operating costs and expenses 112,895 125,728 219,184
Cost allocation from non-Debtor subsidiaries (1,532) 7,911 (275)
Write down of assets held for use 22,195
Write down of and obligations related to assets held
for sale 40,000
Equity in earnings of non-Debtor Subsidiaries (net
of tax benefit (expense) of $683, ($2,542) and ($6,280) 2,956 (81,005) (6,528)
-------- --------- --------
Operating income (loss) 45,280 (121,744) 66,733
Reorganization items (10,424) (15,966) (25,918)
Interest expense, net (9,298) (8,429) (19,298)
-------- --------- --------
Income (loss) before income taxes (excluding taxes
applicable to non-Debtor subsidiaries),
cumulative effect of change in accounting
principle and minority interests 25,558 (146,139) 21,517
Income tax (expense) benefit (13,328) 5,824 (16,010)
Minority interests (740) (1,252) (1,484)
Cumulative effect of change in accounting principle
(net of tax benefit of $1,364) (2,063)
-------- ---------- --------
Net income (loss) $ 11,490 $ (141,567) $ 1,960
======== ========== ========
DEBTORS' CONDENSED COMBINED BALANCE SHEETS
(In Thousands of Dollars)
June 30, 2003 December 31, 2002
Assets:
Current assets $ 393,021 $ 414,907
Property, plant and equipment-net 1,191,128 1,173,222
Investments in and advances to investees
and joint ventures 3,815 3,815
Other assets 370,616 358,753
Investments in and advances to non-Debtor
subsidiaries, net 192,918 84,678
----------- -----------
Total Assets $ 2,151,498 $ 2,035,375
=========== ===========
Liabilities:
Current liabilities $ 182,758 $ 161,908
Long-term debt 31,708 34,969
Project debt 896,993 931,568
Deferred income taxes 191,456 136,498
Other liabilities 74,797 49,474
Liabilities subject to compromise 939,358 892,012
Minority interests 2,742 1,259
----------- -----------
Total liabilities 2,319,812 2,207,688
Shareholders' Deficit (168,314) (172,313)
----------- -----------
Total Liabilities and Shareholders' Deficit $ 2,151,498 $ 2,035,375
=========== ===========
DEBTORS' CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
For the six Months ended For the Period April 1, 2002
June 30, 2003 through June 30, 2002
Net cash provided by operating activities $ 32,539 $ 15,553
Net cash used in investing activities (6,690) (6,779)
Net cash used in financing activities (37,822) (9,788)
--------- ---------
Net decrease in Cash and Cash Equivalents (11,973) (1,014)
Cash and Cash Equivalents at Beginning of Period 80,813 65,791
--------- ---------
Cash and Cash Equivalents at End of Period $ 68,840 $ 64,777
========= =========
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 $(0.3) million and $7.4 million for the six month period ended
June 30, 2003 and the period from April 1, 2002 through December 31, 2002,
respectively, of costs incurred by the non-Debtor subsidiaries that provide
significant support to the Debtors, offset by costs incurred by the Debtor
subsidiaries that provide significant support to the non-debtors. All of 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 loss from discontinued operations for the six months ended June 30,
2002 are as follows (expressed in thousands of dollars):
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 June 30,
2003 2002
---------------------------------------------------------------------------
(In Thousands of Dollars, Except Per Share Amounts)
Income Shares Per share Loss Shares Per share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
Basic Earnings (Loss)
Per Share:
Income (loss) from continuing
operations $ 11,490 $ (141,567)
Less: Preferred stock
dividend -------- ----------
Income (loss) to common stockholders $ 11,490 49,818 $ 0.23 $ (141,567) 49,799 $ (2.84)
======== ====== ====== ========== ====== ========
Effect of Dilutive Securities:
Stock options (A) (A)
Restricted stock 6 (A)
Convertible preferred stock 198 (A)
6% convertible debentures (A)
5 3/4% convertible debentures (A)
----- ------
Diluted Earnings (Loss)
Per Share:
Income (loss) to common stockholders $ 11,490 50,022 $ 0.23 $ (141,567) 49,799 $ (2.84)
======== ====== ====== ========== ====== ========
For the Six Months Ended June 30,
2003 2002
----------------------------------------------------------------------------
(In Thousands of Dollars, Except Per Share Amounts)
Income Shares Per share Loss Shares Per share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
Diluted Earnings (Loss)
Per Share:
Income (loss) from continuing
operations $ 10,498 $(174,653)
Less: Preferred stock
dividend 16
-------- -----------
Income (loss) to common stockholders $ 10,498 49,816 $ 0.21 $ (174,669) 49,786 $ (3.51)
======== ====== ======= =========== ====== ========
Loss from discontinued operations $ (17,866) 49,786 $ (0.36)
========== ====== ========
Cumulative effect of change in
accounting principles $ (8,538) 49,816 $ (0.17) $ (7,842) 49,786 $ (0.16)
========= ====== ======== ========= ====== ========
Effect of Dilutive Securities:
Stock options (A) (A)
Restricted stock 3 (A)
Convertible preferred stock 99 (A)
6% convertible debentures (A)
5 3/4% convertible debentures (A)
------ ------
Diluted Earnings (Loss)
Per Share:
Income (loss) to common stockholders $ 10,498 49,918 $ 0.21 $ (174,669) 49,786 $ (3.51)
======== ====== ======= =========== ====== ========
Loss from discontinued operations $ (17,866) 49,786 $ (0.36)
========== ====== ========
Cumulative effect of change in
accounting principles $ (8,538) 49,918 $ (0.17) $ (7,842) 49,786 $ (0.16)
========= ====== ======== ========= ====== ========
(A) Antidilutive
Basic earnings per common share was computed by dividing net income (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 was
3,043,000 and 3,177,000 for the three and six month periods ended June 30, 2003
and 3,653,000 and 3,729,000 for the three and six months ended June 30, 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 were zero in the second quarter
of 2003 and 1,458,000 in the second quarter of 2002 for the 6% convertible
debentures; zero in the second quarter of 2003 and 1,524,000 in the second
quarter of 2002 for the 5 3/4% convertible debentures; zero in the second
quarter of 2003 and the second quarter of 2002, respectively for stock options,
zero and 198,000 in the second quarter of 2003 and the second quarter of 2002,
respectively for convertible preferred stock; and zero and 29,000 in the second
quarter of 2003 and the second quarter of 2002 for unvested restricted stock
issued to employees.
The common stock excluded from the calculation were zero for the six months
ended June 30,2003 and 2,175,000 for the six months ended June 30,2002 for the
6% convertible debentures; zero for the six months ended June 30,2003 and
1,524,000 for the six months ended June 30,2002 for the 5 3/4% convertible
debentures; zero for the six months ended June 30,2003 and the second quarter
ended June 30,2002, respectively for stock options, 99,000 and 198,000 for the
six months ended June 30,2003 and the second quarter ended June 30,2002,
respectively for convertible preferred stock; and 3,000 and 43,000 for the six
months ended June 30,2003 and the second quarter ended June 30,2002 for unvested
restricted stock issued to employees.
Special Charges:
The following is a summary of costs and related payments made during the three
and six months ended June 30, 2003 (expressed in thousands of dollars):
Balance Balance
Sheet at Charges for Amounts Sheet at
December Continuing Paid In June
31, 2002 Operations 2003 30, 2003
---------------------------------------------------
2003
Severance for approximately $1,600 $ (325) $1,275
216 New York city employees
Severance for approximately
80 Energy employees 2,500 (113) 2,387
Severance for approximately
71 Employees terminated post petition 4,350 (1,443) 2,907
Key employee retention plan 700 $1,200 1,900
Contract termination settlement 400 400
Bank fees 34,000 34,000
Office closure costs 1,200 1,200
------- ------ -------- -------
Total $44,750 $1,200 $(1,881) $44,069
======= ====== ======== =======
Balance Balance
Sheet at Charges for Amounts Sheet at
March Continuing Paid In June
31, 2003 Operations 2003 30, 2003
---------------------------------------------------
2003
Severance for approximately $1,585 $ (310) $1,275
216 New York city employees
Severance for approximately
80 Energy employees 2,452 (65) 2,387
Severance for approximately
71 Employees terminated post petition 3,313 (406) 2,907
Key employee retention plan 1,300 $600 1,900
Contract termination settlement 400 400
Bank fees 34,000 34,000
Office closure costs 1,200 1,200
------- ------ -------- -------
Total $44,250 $600 $ (781) $44,069
======= ====== ======== =======
Restatement of Quarterly Results of Operations for 2002
Subsequent to the issuance of the Company's quarterly report on 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 unaudited condensed
consolidated financial statements. As a result, the Company's condensed
consolidated financial information for the six months ended June 30, 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 six months ended June 30, 2002 (In thousands of
dollars, except per-share amounts):
Six Months Ended June 30, 2002
----------------------------------------------------------
As Previously
Reported As Restated
-------- -----------
Total revenues from continuing
operations $470,663 $459,700
---------- --------
Loss from continuing operations ($192,519) ($174,653)
---------- ----------
Loss from discontinued operations (17,866)
Cumulative effect of change
in accounting principle (7,842) (7,842)
---------- ---------
Net loss ($200,361) ($200,361)
========== ==========
Basic loss per common share:
Loss from continuing operations $(3.87) $(3.51)
Loss from discontinued operations (0.36)
Cumulative effect of change
in accounting principle $(0.16) (0.16)
========== ----------
Total $(4.03) ($4.03)
========== ==========
Diluted loss per common share:
Loss from continuing operations $(3.87) $(3.51)
Loss from discontinued operations $(0.36)
Cumulative effect of change
in accounting principle (0.16) (0.16)
---------- ---------
Total $ (4.03) $(4.03)
========== =========
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 the 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 six and
three month periods ended June 30, 2003 and 2002 (expressed in thousands of
dollars) were as follows:
Six Months Ended Three Months Ended
June 30, June 30,
2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------
Revenues:
Domestic energy and water $ 367,383 $ 355,356 $ 192,100 $ 185,873
International energy 88,594 91,517 44,822 49,246
Other 2,390 12,827 1,207 3,058
---------- ---------- ---------- ----------
Total revenue 458,367 459,700 238,129 238,177
---------- ---------- ---------- ----------
Income (loss) from operations:
Domestic energy and water 86,656 72,705 54,158 40,384
International energy 18,790 13,187 8,259 9,964
Other (572) (28,787) (4) (5,989)
Write down of assets held for use or sale:
Domestic energy and water (22,195) (22,195)
International energy (78,452) (78,452)
Other (40,000) (40,000)
Corporate unallocated income
and expenses-net (28,381) (52,116) (15,254) (12,029)
---------- ---------- ---------- ----------
Operating income (loss) 76,493 (135,658) 47,159 (108,317)
Interest expense - net (21,327) (22,664) (10,312) (10,881)
Reorganization items (25,918) (15,966) (10,424) (15,966)
---------- --------- ---------- ----------
Income (loss) from continuing operations before income taxes,
minority interests, discontinued operations and the
cumulative effect of change in accounting principle $ 29,248 $ (174,288) $ 26,423 $(135,164)
========== ========== ========== ==========
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 SEC's rules pursuant to Regulation S-X
Rule 4-08(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 June 30, 2003:
Revenues $ 53,054 $ 4,005 $ 8,644
Gross profit 28,750 723 4,736
Net income 18,646 738 1,863
Company's share of net income 4,871 369 840
Condensed Statements of Operations
for the three months ended June 30, 2002:
Revenues $48,348 $3,576 $8,665
Gross profit 24,848 443 4,869
Net income 14,205 707 1,644
Company's share of net income 3,711 353 741
Condensed Statements of Operations
for the six months ended June 30, 2003:
Revenues $ 98,711 $ 7,972 $ 16,653
Gross profit 50,835 1,821 9,704
Net income (loss) 30,818 (260) 3,651
Company's share of net income (loss) 8,051 (130) 1,647
Condensed Statements of Operations
for the six months ended June 30, 2002:
Revenues $ 94,260 $ 6,052 $ 16,619
Gross profit 42,691 372 9,663
Net income 23,398 960 3,296
Company's share of net income 6,113 480 1,486
Mammoth
Pacific Haripur Barge
Quezon Power Plant Plant
(The Philippines) (United States) (Bangladesh)
----------------- --------------- ------------
Condensed Balance Sheets at June 30, 2003:
Current assets $ 140,772 $ 13,304 $ 27,054
Non-current assets 749,943 90,368 97,949
Total assets 890,715 103,672 125,003
Current liabilities 45,214 690 18,188
Non-current liabilities 538,528 2,884 67,600
Total liabilities 583,742 3,574 85,788
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 the Company's 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 June 30, 2003 vs. Quarter Ended June 30, 2002
Consolidated Results
Service revenues for the second quarter of 2003 were $139.1 million, an increase
of $6.5 million compared to $132.6 million in the second quarter of 2002. The
increase was primarily due to a $8.4 million increase in Domestic energy and
water segment service revenue primarily related to increased waste tonnage
processed, service fee escalations and higher energy prices at several energy
facilities partially offset by a $3.0 million decrease in Other segment service
revenues related to the wind-down and sale of non-energy businesses.
Electricity and steam sales for the second quarter of 2003 were comparable to
the second quarter of 2002.
Construction revenues for the second quarter of 2003 were $3.7 million, a
decrease of $6.4 million compared to $10.1 million in the second quarter of 2002
primarily due to the Company's substantial completion of construction of the
desalination project in Tampa, Florida.
Other revenues-net for the second quarter of 2003 were comparable to the second
quarter of 2002.
Plant operating expenses for the second quarter of 2003 were comparable to the
second quarter of 2002.
Construction costs for the second quarter of 2003 were $3.5 million, a decrease
of $5.2 million compared to $8.7 million in the second quarter of 2002. The
decrease is primarily due to the Company's substantial completion of
construction of the desalination project in Tampa, Florida. At June 30, 2003,
$2.4 million of additional costs were accrued for work required by a resolution
of issues raised by the client as to the final acceptance standards for the
project. The Company believes that the project had met acceptance standards
without this additional work with construction revenues approximately matching
construction costs. It also believes that the issues raised by the client
reflect the client's concern about the Company's bankruptcy proceedings.
Nevertheless, the Company determined to accommodate the client's concerns in
order to promptly resolve the matter. At June 30, 2003, $2.4 million of
previously accrued costs related to domestic waste-to-energy projects under the
Clean Air Act Amendments of 1990 were reversed following formal acceptance,
review or closure of the projects.
Debt service charges for the second quarter of 2003 were $20.3 million, a
decrease of $2.1 million compared to $22.4 million in the second 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 second quarter of 2003 were comparable to
the same period in 2002.
Other operating costs and expenses were $0.9 million for the second quarter of
2003, a decrease of $3.4 million compared to $4.3 million in the second quarter
of 2002 primarily due to the wind-down of many non-energy businesses.
Selling, administrative and general expenses for the second quarter of 2003 were
$10.2 million, a decrease of $2.3 million compared to $12.5 million for the same
period in 2002 primarily due to the reduction of new project development during
2002.
Other net expenses for the second quarter of 2003 were comparable to the same
period in 2002.
The Company recorded a $100.6 million pre-tax impairment charge at June 30, 2002
related to one domestic and two international energy projects. The impairment
charges were the result of an updated review under SFAS No. 144, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS No. 144").
The Company recorded a $40.0 million pre-tax impairment charge at June 30, 2002
related to the Company's lease transaction with the Arrowhead Pond. See Note 4
in the Company's Financial Statements included in the Annual Report on Form 10-K
for the year ended December 31, 2002 for further discussion.
Equity in income of investees and joint ventures for the second quarter of 2003
was $7.1 million, an increase of $2.5 million compared to $4.6 million for the
same period in 2002, primarily due to an increase in profits at the Mammoth,
California and Quezon energy facilities.
Interest expense-net for the second quarter of 2003 was comparable to the same
period in 2002.
See Notes to the Financial Statements for a discussion of the reorganization
items.
Minority interests for the second quarter of 2003 were comparable to the same
period in 2002.
The effective tax rate in 2003 was 47.8% compared to 2.4% 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.
Domestic Energy and Water Segment
Total revenues for the second quarter of 2003 for the Domestic energy and water
segment were $192.1 million, an increase of $6.2 million compared to $185.9
million in the second quarter of 2002, mainly due to a $8.4 million increase in
service revenue primarily related to increased waste tonnage processed, service
fee escalations and higher energy prices at several energy facilities. In
addition, there was a $5.5 million increase in electric and steam sales
primarily related to increased electricity generation at several energy
facilities and higher electric and steam rates at two other plants. These
increases were offset by a reduction in construction revenue of $7.6 million
primarily attributable to the Company's substantial completion of construction
of the desalination project in Tampa, Florida.
Income from operations for the second quarter of 2003 for the Domestic energy
and water segment was $54.2 million, an increase of $36.0 million compared to
$18.2 for the second quarter of 2002 primarily due to the $6.2 million increase
in revenue discussed above and a decrease in total costs and expenses of $27.3
million. The decrease in total costs and expenses is composed primarily of a
$6.3 million decrease in construction expenses due to the Company's substantial
completion of construction of the desalination project in Tampa, Florida and a
$22.2 million pre-tax impairment charge at June 30, 2002 related to the
Company's energy project in Tulsa, Oklahoma.
International Energy Segment
Total revenues for the second quarter of 2003 for the International energy
segment were $44.8 million, a decrease of $4.4 million compared to $49.2 million
in the second quarter of 2002, primarily due to a $4.1 million decrease in
electricity sales at the two plants in India combined with a reduction in
electricity sales of $1.4 million at two of the Company's energy facilities in
The Philippines as a result of rate reductions.
Income from operations for the second quarter of 2003 for the International
energy segment was $8.3 million, an increase of $76.8 million compared to a loss
of $68.5 million in the second quarter of 2002 primarily due to a $78.5 million
pre-tax impairment charge at June 30, 2002 related to two Philippine energy
projects. The decrease in revenue of $4.4 million discussed above was offset by
an increase in equity earnings of $1.6 million.
Other Segment
Total revenues for the second quarter of 2003 for the Other segment were $1.2
million, a decrease of $1.8 million compared to $3.0 million in the second
quarter of 2002. This decrease was due to the wind-down and sale of non-energy
businesses.
Loss from operations for the second quarter of 2003 for the Other segment was
less than $0.1 million, a decrease of $46.0 million compared to $45.9 million in
the second quarter of 2002 primarily due to a $40.0 million pre-tax impairment
charge at June 30, 2002 related to the Company's lease transaction with the
Arrowhead Pond (see Note 4 in the Company's Financial Statements included in the
Annual Report on Form 10-K for the year ended December 31, 2002 for further
discussion,) the decrease in revenue discussed above and a similar decrease in
expenses.
Six-Months Ended June 30, 2003 vs. Six-Months Ended June 30, 2002
Consolidated Results
Service revenues for the first six months of 2003 were $264.8 million, an
increase of $2.4 million compared to $262.4 million in the first six months of
2002. The increase was due to a $11.6 million increase in Domestic energy and
water segment service revenue primarily related to increased waste tonnage
processed, service fee escalations and higher energy prices at several energy
facilities offset by a $10.1 million decrease in Other segment service revenues
related to the wind-down and sale of non-energy businesses.
Electricity and steam sales revenues for the first six months of 2003 were
$183.9 million, an increase of $9.2 million compared to $174.7 million in the
first six months of 2002. The increase was primarily due to higher electricity
generation at several facilities.
Construction revenues for the first six months of 2003 were $9.7 million, a
decrease of $12.8 million compared to $22.5 million in the first six months of
2002 primarily due to a $12.1 million decrease in revenue attributable to the
Company's substantial completion of construction of the desalination project in
Tampa, Florida.
Other revenues-net for the first six months of 2003 were comparable to the first
six months of 2002.
Plant operating expenses were $278.7 million for the first six months of 2003,
an increase of $13.7 million compared to $265.0 million in the first six months
of 2002 primarily due to a $7.1 million increase in parts and labor related to
timing and frequency of maintenance and overhaul at several domestic energy
facilities. In addition plant operating expenses were reduced in the first six
months of 2002 by a $4.4 million adjustment to operating accruals in 2002.
Construction costs for the first six months of 2003 were $9.1 million, a
decrease of $12.2 million compared to $21.3 million in the first six months of
2002. The decrease is primarily attributable to a $12.1 million decrease due to
the Company's substantial completion of construction of the desalination project
in Tampa, Florida. At June 30, 2003, $2.4 million of additional costs were
accrued for work required by a resolution of issues raised by the client as to
the final acceptance standards for the project. The Company believes that the
project had met acceptance standards without this additional work with
construction revenues approximately matching construction costs. It also
believes that the issues raised by the client reflect the client's concern about
the Company's bankruptcy proceedings. Nevertheless, the Company determined to
accommodate the client's concerns in order to promptly resolve the matter. At
June 30, 2003, $2.4 million of previously accrued costs related to domestic
waste-to-energy projects under the Clean Air Act Amendments of 1990 were
reversed following formal acceptance, review or closure of the projects.
Debt service charges for the first six months of 2003 were $40.7 million, a
decrease of $4.3 million compared to $45.0 million in the first six months 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 six months of 2003 were comparable
to the same period in 2002.
Other operating costs and expenses were $2.7 million for the first six months of
2003, a decrease of $13.9 million compared to $16.6 million in the first six
months of 2002 primarily due to the wind-down of many non-energy businesses.
Net gain on sale of business in the first six months 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 six months 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 $6.4 million in March of 2002 and a $1.7
million loss on the sale of Compania General De Sondeos in the first quarter of
2002 offset by a $1.0 million gain on the sale of the non-Port Authority
aviation fueling operations.
Selling, administrative and general expenses were $20.0 million for the first
six months of 2003, a decrease of $10.2 million compared to $30.2 million in the
first six months of 2002 primarily due to a $3.3 million reduction in
professional fees, reduced costs related to headquarter staff reductions of $3.2
million and a $2.6 million reduction in new project development expenses during
2002.
Other net expenses for the first six months of 2003 compared to the same period
in 2002 decreased by $32.3 million primarily due to a reduction in fees related
to the Master Credit Facility in 2002.
The Company recorded a $100.6 million pre-tax impairment charge at June 30, 2002
related to one domestic and two international energy projects. The impairment
charges were the result of an updated review under SFAS No. 144.
The Company recorded a $40.0 million pre-tax impairment charge at June 30, 2002
related to the Company's lease transaction with the Arrowhead Pond. See Note 4
in the Company's Financial Statements included in the Annual Report on Form 10-K
for the year ended December 31, 2002 for further discussion.
Equity in income of investees and joint ventures for the first six months of
2003 was $11.6 million, an increase of $3.2 million compared to $8.4 million for
the same period in 2002, primarily due to an increase in profits at the Mammoth,
California and Quezon energy facilities.
Interest expense-net for the first six months of 2003 was comparable to the same
period in 2002.
See Notes to the Financial Statements for a discussion of reorganization items.
Minority interests for the first six months of 2003 were comparable to the same
period in 2002.
The effective tax rate in 2003 was 47.5% compared to 2.5% 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 six months ended June 30, 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 a change in accounting principle of $8.5 million in the
first six months of 2003 related to the January 1, 2003 adoption of SFAS No.143.
The cumulative effect of a change in accounting principle of $7.8 million in the
first six months 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 $24.7 million for the first six
months of 2003 due mainly to depreciation expense of $40.4 million for the
period offset by capital additions of $11.4 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 six months of 2003 for the Domestic energy and
water segment were $367.4 million, an increase of $12.0 million compared to
$355.4 million in the first six months of 2002, mainly due to a $11.6 million
increase in service revenue primarily related to increased waste tonnage
processed, service fee escalations and higher energy prices at several energy
facilities. In addition there was a $13.0 million increase in electricity and
steam sales primarily related to increased electricity generation at several
energy facilities and higher electricity and steam rates at two other plants.
These increases were partially offset by a reduction in construction revenue of
$12.6 million primarily attributable to the Company's substantial completion of
construction of the desalination project in Tampa, Florida.
Income from operations for the first six months of 2003 for the Domestic energy
and water segment was $86.6 million, an increase of $36.1 million compared to
$50.5 for the first six months of 2002 primarily due to the $12.0 million
increase in revenue discussed above combined with an increase in equity in
income from unconsolidated investments of $1.0 million and a decrease in total
costs and expenses of $22.8 million. The decrease in total costs and expenses is
composed primarily of a $22.2 million pre-tax impairment charge at June 30, 2002
related to the Company's energy project in Tulsa, Oklahoma and a $11.9 million
decrease in construction expenses due to the Company's substantial completion of
construction of the desalination project in Tampa, Florida. These decreases are
offset by a $7.1 million increase in parts and labor related to timing and
frequency of maintenance and overhaul at several domestic energy facilities. In
addition plant operating expenses were reduced in the first six months of 2002
by a $4.4 million adjustment to operating accruals in 2002.
International Energy Segment
Total revenues for the first six months of 2003 for the International energy
segment were $88.6 million, a decrease of $2.9 million compared to $91.5 million
in the first six months of 2002, primarily due to a $1.7 million decrease in
electricity sales at the Company's two plants in India combined with a reduction
in electric sales of $2.6 million at two of the Company's energy facilities in
The Philippines as a result of rate reductions.
Income from operations for the first six months of 2003 for the International
energy segment was $18.8 million, an increase of $84.0 million compared to a
loss of $65.2 million in the first six months of 2002 primarily due to a $78.5
million pre-tax impairment charge at June 30, 2002 related to two Philippine
energy projects. The decrease in revenue of $2.9 million discussed above was
offset by a similar decrease in plant operating costs. The increase in income
from operations in the first six months of 2003 was also due to a loss on the
sale of an equity investment in an energy project in Thailand of $6.4 million in
the first six months of 2002.
Other Segment
Total revenues for the first six months of 2003 for the Other segment were $2.4
million, a decrease of $10.4 million compared to $12.8 million in the first six
months of 2002. This decrease was due to the wind-down and sale of non-energy
businesses.
Loss from operations for the first six months of 2003 for the Other segment was
$0.6 million, a decrease of $68.2 million compared to $68.8 million in the first
six months of 2002 primarily due to a $40.0 million pre-tax impairment charge at
June 30, 2002 related to the Company's lease transaction with the Arrowhead Pond
(see Note 4 in the Company's Financial Statements included in the Annual Report
on Form 10-K for the year ended December 31, 2002 for further discussion,) a
decrease in revenue discussed above and a similar reduction in expenses.
Capital Investments and Commitments:
At June 30, 2003, capital commitments for continuing operations amounted to $7.2
million for normal replacement and growth in energy. Other capital commitments
for Domestic energy and water and International energy as of June 30, 2003
amounted to approximately $25.8 million. Included in this amount are commitments
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. The
Company expects these commitments to be funded through operations.
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 June 30, 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
wastewater treatment operating contracts of approximately $12.7 million,
possible closure costs for various energy projects of approximately $10.8
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 June 30, 2003, the Company had approximately $99.0 million in cash and cash
equivalents, of which $28.4 million related to cash held in foreign bank
accounts that may be difficult to transfer to the United States.
Net cash provided by operating activities for the first six months of 2003 was
$40.8 million compared to net cash provided by operating activities in 2002 of
$18.6 million. The increase of $22.2 million was mainly due to changes in
working capital.
Net cash used in investing activities for the first six months of 2003 was $9.3
million compared to net cash provided by investing activities of $11.0 million
in 2002. This increase of $20.3 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 $13.2
million.
Net cash used in financing activities for the first six months of 2003 was $48.4
million compared to $59.8 million in 2002. This decrease of $11.4 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 $7.1
million in 2003.
The Company entered into a Revolving Credit and Participation Agreement (the
"Master Credit Facility") as of 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 under 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 the DIP Credit Facility with the lenders who
provided the revolving credit facility under the Master Credit Facility. On
April 5, 2002, the Bankruptcy Court issued its interim order approving the DIP
Credit Facility and on May 15, 2002, a final order approving the DIP Credit
Facility. On August 2, 2002, the Bankruptcy Court issued an order that overruled
objections by holders of minority interests in two limited partnerships who
disputed the inclusion of the limited partnerships in the DIP Credit Facility.
Although the holders of such interests at one of the limited partnerships have
appealed the order, they have reached an agreement with the Company that stays
the appeal. The DIP Credit Facility's current terms are described below.
The DIP Credit Facility is now an approximately $233.1 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 that 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 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.
Of these remaining outstanding letters of credit at June 30, 2003, approximately
$124.2 million secures indebtedness that is included in the Balance Sheet and
$84.6 million relates to other commitments. Additional letters of credit of
approximately $163.7 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 $11.9 million in commitments for
the issuance of certain letters of credit and for cash borrowings under a
revolving credit line. On July 1, 2003, the Tranche A Facility was reduced by
$2.3 million in commitments for letters of credit as a result of the reduced
need for a letter of credit in connection with the Company's Hennepin project.
The Tranche B Facility consists of approximately $221.2 million in commitments
solely for the extension 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 for 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 $5.4 million in new letters of credit have been
issued under Tranche A of the DIP Credit facility as of June 30, 2003.
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.
The Company's Haverhill, Massachusetts waste-to-energy facility sells
electricity to USGen New England, Inc. ("USGen"). On July 7, 2003, USGen and
certain of its affiliates filed a petition under Chapter 11 of the United States
Bankruptcy Code. USGen owed approximately $1.3 million to the Company at the
time USGen's petition was filed. The Company is closely monitoring this
proceeding and is a member of USGen's Official Committee of Unsecured Creditors.
The impact on the Company's earnings, financial position and liquidity of this
development depends on how USGen treats its contract with the Company in the
proceeding, which is not determinable at this time.
The Company believes that its contract provides for energy rates at or below
both current and projected market rates, and that it is possible that the
contract will be assumed or assumed and assigned. Were the contract assumed or
assumed and assigned on its current terms, the current receivable would have to
be paid. Thus, assumption on these terms would not have a material impact on the
Company. However, it is also possible that USGen would seek to reject the
contract or renegotiate it on less favorable terms to the Company. Depending on
the treatment of the contract in the proceeding and any such negotiations, the
Company may recognize gain as a result of the termination of its obligation to
deliver electricity for which a prepayment was previously made under the
contract. The Company may incur substantial state and federal taxes on such gain
which would be material to it, and currently payable. Also, if the contract were
rejected, the Company's potential liability to refund such prepayment would be
eliminated, and the Company would seek to sell the project's electricity to a
new purchaser at rates higher than those paid by USGen.
Other:
Quezon Power
Manila Electric Company ("Meralco"), the power purchaser for the Company's
Quezon Project, is engaged in discussions and legal proceedings with the
government of The Philippines relating to Meralco's financial condition. 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 June 30, 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 for the fiscal year ended
December 31, 2002) 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 on the balance sheet and changes in the value in the
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 increased $1.2 million from $19.1 million at
December 31, 2002 to $20.3 million at June 30, 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
As of the quarter ended June 30, 2003, management, including the Company's Chief
Executive Officer, who also presently performs the functions of principal
financial officer, has evaluated the effectiveness of the design and operation
of the Company's disclosure controls and procedures. Based upon that evaluation,
and as of the end of the quarter for which this report is made, the Chief
Executive Officer, who also presently performs the functions of principal
financial officer, concluded that the disclosure controls and procedures were
effective, in all material respects, to ensure that information required to be
disclosed in the reports the Company files and submits under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported as and when required.
There has been no change in the Company's internal control over financial
reporting during the Company's quarter ended June 30, 2003 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On the Petition Date, Covanta Energy Corporation and 123 of its
domestic subsidiaries filed voluntary petitions for reorganization under the
Bankruptcy Code in the Bankruptcy Court. Since the Petition Date, 31 additional
subsidiaries have filed a petition for reorganization under Chapter 11 of the
Bankruptcy Code. In addition, four subsidiaries which had filed petitions on the
Petition Date 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), et
al)." 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 the Petition Date 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. The 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 formulating 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 Environmental Protection Agency (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, in
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 the 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 that 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 New York 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 ("Avondale"), 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 on December 3, 2001in 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 on February
26, 2002 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 for the Northern District of New York 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 for
the Southern District of New York. The Agency also filed a request
with the Bankruptcy Court asking that the automatic stay be lifted to
permit the state court action to proceed, which request was denied by
the Bankruptcy Court. See Notes to the Financial Statements for
description of potential settlement prospects for this matter.
(iii) As previously disclosed, on October 10, 2000 Lake County, Florida
commenced a lawsuit in the 5th Judicial Circuit Court, Lake County,
Florida, against the Company's subsidiary that owns and operates its
Lake County waste-to-energy project. In the lawsuit, Lake County seeks
to have its agreement with the Company's subsidiary declared void on
various state constitutional and public policy grounds. Lake 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 Lake 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 have been ongoing discussions with the County to restructure
this project, and any agreement to restructure this project would
likely entail a settlement of this litigation. The Company has filed
motions in the Bankruptcy Court seeking to resolve the validity and
enforceability of the agreement, and the County has agreed to have
these issues resolved in that forum. See Notes to the Financial
Statements for a description of potential settlement prospects for
this matter.
(iv) 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 in excess of $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 and seeking recovery of
certain costs incurred by the Town as a result of the Company's
Chapter 11 proceedings. The parties and the Bankruptcy Court have
agreed to a procedure whereby all disputes between the parties would
be arbitrated before the Bankruptcy Court which would finally decide
the matter. 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.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
(a) Indebtedness
As previously disclosed, on the Petition Date, Covanta Energy
Corporation and certain of its domestic subsidiaries filed for reorganization
under Chapter 11 of the 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 $17.0 million in interest, as of
($100 million principal) interest due March 1, 2002 June 30, 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 June 30, 2003
5.75% Convertible Debentures ($63.6 Bankruptcy filing; non-payment of $3.6 million in interest, $63.6
million principal) principal and interest due million in principal, as of
October 20, 2002 June 30, 2003
Master Credit Facility Bankruptcy filing; non-payment of Approximately $259.3 million
principal and interest due June principal, $24.5 million in
1, 2002; expiration of Master interest, as of June 30, 2003;
Credit Facility 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 Company's Financial Statements included
in the Annual Report on Form 10-K for the year ended December 31, 2002, 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 of 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:
10.1(t) Seventh Amendment to the Debtor-in-Possession Credit Agreement
and Limited Consent, dated as of May 23, 2003, by and among
the Company, the Subsidiaries of the Company listed on the
signature page thereof as Borrowers, the Subsidiaries of the
Company listed on the signature page thereof as Subsidiary
Guarantors, the Lenders party thereto, Bank of America, N.A.
as Administrative Agent for the Lenders, and Deutsche Bank AG,
New York Branch, as Documentation Agent for the Lenders.
31 Rule 13a-14(a)/15d-14(a) Certifications.
32 Section 1350 Certifications
(b) Reports on Form 8-K:
None
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: August 7, 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