FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 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
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(Exact name of registrant as specified in its charter)
Delaware 13-5549268
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
40 Lane Road, Fairfield, NJ 07004
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(Address of Principal Executive Office) (Zip code)
(973) 882-9000
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(Registrant's telephone number including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
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 November
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 NINE MONTHS FOR THE THREE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2003 2002 2003 2002
---- ---- ---- ----
(As Restated)
-------------
(In Thousands of Dollars, Except Per Share Amounts)
Service revenues $390,270 $386,999 $125,461 $124,580
Electricity and steam sales 277,669 272,903 93,795 98,210
Construction revenues 11,194 34,323 1,517 11,779
Other revenues-net 8 259 1 215
-------- -------- -------- --------
Total revenues 679,141 694,484 220,774 234,784
-------- -------- -------- --------
Plant operating expenses 411,336 397,978 132,635 132,958
Construction costs 15,412 34,677 6,318 13,345
Depreciation and amortization 62,794 68,002 19,557 21,807
Debt service charges-net 59,933 66,889 19,282 21,931
Other operating costs and expenses 4,685 21,795 2,026 5,227
Net loss (gain) on sale of businesses (1,136) 6,947 (719) (93)
Selling, administrative and general expenses 27,815 42,972 7,777 12,759
Other (income) expense-net 13,801 16,681 14,316 (15,115)
Write-down of assets held for use - 100,647 - -
Obligations related to assets held for sale - 40,000 - -
-------- -------- -------- --------
Total costs and expenses 594,640 796,588 201,192 192,819
-------- -------- -------- --------
Equity in income from unconsolidated investments 17,921 17,001 6,347 8,590
-------- -------- -------- --------
Operating income (loss) 102,422 (85,103) 25,929 50,555
Interest expense (net of interest income of $3,074,
$1,736, $1,401 and $614, respectively, and excluding
post-petition contractual interest of $728, $3,100, $243
and $700, respectively) (30,686) (34,752) (9,359) (12,088)
Reorganization items (60,726) (32,803) (34,808) (16,837)
-------- -------- -------- --------
Income (loss) from continuing operations before income
taxes, minority interests, discontinued operations and
the cumulative effect of change in accounting principle 11,010 (152,658) (18,238) 21,630
Income tax (expense) benefit (4,124) 2,019 9,774 (2,292)
Minority interests (6,648) (6,555) (1,796) (1,879)
-------- -------- -------- --------
Income (loss) from continuing operations before
discontinued operations and change in accounting principle 238 (157,194) (10,260) 17,459
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, zero, zero and zero,
respectively) (8,538) (7,842) - -
-------- -------- -------- --------
Net income (loss) (8,300) (182,902) (10,260) 17,459
-------- -------- -------- --------
Other comprehensive income (loss), net of income tax:
Foreign currency translation adjustments (net of income
taxes of:, zero, ($415), zero, and zero respectively) 2,967 (1,094) 1,112 603
Less: reclassification adjustment for translation
adjustments included in:
loss from continuing operations - 936 - (297)
loss from discontinued operations - 297 - -
Unrealized holding gains (losses) arising during period
(net of income tax (expense) benefit of ($101), $214, ($2)
and $95, respectively) 150 (320) 3 (143)
-------- -------- -------- --------
Other comprehensive income (loss) 3,117 (181) 1,115 163
-------- -------- -------- --------
Comprehensive income (loss) $ (5,183) $(183,083) $ (9,145) $ 17,622
======== ========= ======== ========
Basic income (loss) per share:
Income (loss) from continuing operations $ - $ (3.16) $ (0.21) $ 0.35
Loss from discontinued operations - (0.36) - -
Cumulative effect of change in accounting principle (0.17) (0.16) - -
-------- -------- -------- --------
Net income (loss) $ (0.17) $ (3.68) $ (0.21) $ 0.35
======== ========= ======== ========
Diluted income (loss) per share:
Income (loss) from continuing operations $ - $ (3.16) $ (0.21) $ 0.35
Loss from discontinued operations - (0.36) - -
Cumulative effect of change in accounting principle (0.17) (0.16) - -
-------- -------- -------- --------
Net income (loss) $ (0.17) $ (3.68) $ (0.21) $ 0.35
======== ========= ======== ========
See notes to condensed consolidated financial statements.
COVANTA ENERGY CORPORATION (DEBTOR IN POSSESSION) AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------ -----------------
(In Thousands of Dollars, Except Share and Per Share Amounts)
Assets
Current Assets:
Cash and cash equivalents $ 138,414 $ 115,815
Restricted funds held in trust 142,681 92,039
Receivables (less allowances: 2003, $23,230 and 2002, 254,245 259,082
$20,476)
Deferred income taxes 11,200 11,200
Prepaid expenses and other current assets (less allowance
2003, $3,000) 75,843 85,997
------------ ------------
Total current assets 622,383 564,133
Property, plant and equipment-net 1,538,002 1,661,863
Restricted funds held in trust 152,028 169,995
Unbilled service and other receivables (less allowances of
$2,957 in 2003 and 2002) 134,441 147,640
Unamortized contract acquisition costs-net 56,390 60,453
Other intangible assets-net 7,213 7,631
Investments in and advances to investees and joint ventures 173,659 166,465
Other assets 56,237 61,927
------------ ------------
Total Assets $ 2,740,353 $ 2,840,107
============ ============
Liabilities and Shareholders' Deficit
Liabilities:
Current Liabilities:
Current portion of long-term debt $ 14,788 $ 16,450
Current portion of project debt 108,695 115,165
Accounts payable 28,424 23,593
Accrued expenses 232,867 254,964
Deferred income 38,388 41,402
------------ ------------
Total current liabilities 423,162 451,574
Long-term debt 24,105 23,779
Project debt 1,020,666 1,128,217
Deferred income taxes 243,303 249,600
Deferred income 143,176 151,000
Other liabilities 89,746 80,369
Liabilities subject to compromise 932,746 892,012
Minority interests 40,905 35,869
------------ ------------
Total Liabilities 2,917,809 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 (14) (54)
Deficit (392,473) (384,173)
Accumulated other comprehensive income (loss) 2,800 (317)
------------ ------------
Total Shareholders' Deficit (177,456) (172,313)
------------ ------------
Total Liabilities and Shareholders' Deficit $ 2,740,353 $ 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 NINE MONTHS FOR THE YEAR ENDED
ENDED SEPTEMBER 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 40 388
---------- ----------
Balance at end of period (14) (54)
---------- ----------
DEFICIT:
Balance at beginning of period (384,173) (205,262)
Net loss (8,300) (178,895)
---------- ----------
Total (392,473) (384,157)
---------- ----------
Preferred dividends-per share of zero and $.46875,
respectively - 16
---------- ----------
Balance at end of period (392,473) (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) 2,967 (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 2,729 (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 ($101) and $112, respectively) 150 (167)
---------- ----------
Balance at end of period (17) (167)
---------- ----------
TOTAL SHAREHOLDERS' DEFICIT $ (177,456) $ (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 NINE MONTHS ENDED
SEPTEMBER 30,
2003 2002
---- ----
(As Restated)
(In Thousands of Dollars)
Cash Flows From Operating Activities:
Net loss $ (8,300) $(182,902)
Adjustments to Reconcile Net Loss to Net Cash
Provided by Operating Activities of Continuing Operations:
Loss from discontinued operations - 17,866
Reorganization items 60,726 32,803
Payment of reorganization items (28,130) (18,957)
Depreciation and amortization 62,794 68,002
Deferred income taxes (1,981) (8,258)
Provision for doubtful accounts 11,470 11,842
Bank fees - 23,685
Obligation related to assets held for sale - 40,000
Write down of assets held for use - 100,647
Equity in income from unconsolidated investments (17,921) (17,001)
Cumulative effect of change in accounting principle, net 8,538 7,842
Other 16,904 (9,414)
Management of Operating Assets and Liabilities:
Decrease (Increase) in Assets:
Receivables (4,664) 32,936
Other assets 10,138 8,447
Increase (Decrease) in Liabilities:
Accounts payable 21,449 28,907
Accrued expenses 37,786 (8,651)
Deferred income (2,415) (2,495)
Other liabilities (42,564) (34,677)
--------- ---------
Net cash provided by operating activities
of continuing operations 123,830 90,622
--------- ---------
Cash Flows From Investing Activities:
Proceeds from sale of businesses 1,136 8,389
Proceeds from sale of property, plant, and equipment 365 305
Proceeds from sale of marketable securities available
for sale 230 514
Proceeds from sale of investment 493 -
Investments in facilities (14,151) (13,325)
Other capital expenditures (2,698) (2,337)
Increase in other receivables - (142)
Distributions from investees and joint ventures 9,276 15,463
Increase in investments in and advances to investees
and joint ventures - (574)
--------- ---------
Net cash provided by (used in) investing activities
of continuing operations (5,349) 8,293
--------- ---------
Cash Flows From Financing Activities:
Borrowings for facilities 3,584 -
New debt 5,694 4,781
Increase in funds held in trust (39,245) (40,533)
Payment of debt (65,915) (62,569)
Dividends paid - (16)
Other - (3,402)
--------- ---------
Net cash used in financing activities of continuing
operations (95,882) (101,739)
--------- ---------
Net cash provided by discontinued operations - 28,112
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 22,599 25,288
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 115,815 86,773
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 138,414 $ 112,061
========= =========
SUPPLEMENTAL INFORMATION
Cash paid for interest $ 64,177 $ 63,564
Cash paid for income taxes $ 7,317 $ 5,170
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 audited consolidated financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP"). In the opinion of management, the accompanying Financial
Statements contain all adjustments, including normal recurring accruals,
necessary to present fairly the financial position as of September 30, 2003 and
results of operations for the three and nine month periods and cash flows for
the nine month periods ended September 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 operations. Those companies in which
Covanta owns less than 20% are accounted for using the cost method. All
intercompany transactions and balances have been eliminated.
On April 1, 2002 (the "Petition Date"), Covanta and 123 of its domestic
subsidiaries filed voluntary petitions for relief 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, 32 additional subsidiaries filed petitions 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 nor are they part of the
bankruptcy proceedings. 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.
On September 8, 2003, Covanta and 150 of its then 151 debtor subsidiaries (such
subsidiaries together with Covanta, the "Debtors") filed with the Bankruptcy
Court (i) the Reorganization Plan in connection with the Company and those
subsidiaries that it proposes will remain part of its continuing operations (as
amended, the "Reorganization Plan"), (ii) the Liquidation Plan in connection
with those subsidiaries that it proposes to liquidate (as amended, the
"Liquidation Plan") and (iii) a draft Disclosure Statement. A plan was not filed
as to the Debtor Covanta Warren Energy Resource Co., L.P. In addition, on
September 24, 2003, the Debtors filed the First Amended Heber Reorganization
Plan in connection with certain subsidiaries that the Company proposes to sell
as part of its emergence from bankruptcy (as amended, the "Heber Reorganization
Plan"). On September 28, 2003, the Debtors filed an amended Reorganization Plan,
an amended Liquidation Plan and an amended Heber Reorganization Plan (together,
the "Amended Plans") and also an amended Disclosure Statement (the "Amended
Disclosure Statement") covering the Amended Plans.
At a hearing on October 3, 2003 the Bankruptcy Court approved the adequacy of
the Amended Disclosure Statement and authorized the Debtors to solicit
acceptances with respect to the Amended Plans from those holders of claims and
interests entitled to vote thereon.
On October 29, 2003, Covanta Tampa Construction, Inc. ("CTC") filed a bankruptcy
petition with the Bankruptcy Court, and now is a Debtor. CTC is not included in
the Amended Plans filed on September 28, 2003. In addition, it is anticipated
that the Reorganization will be amended to remove Covanta Tampa Bay, Inc.
("CTB") as a reorganizing Debtor.
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, (i)
confirmation and consummation of a plan of reorganization including obtaining
financing necessary to effect the plan, (ii) the Company's ability to comply
with the terms of, and if necessary renew at its expiry on March 31, 2004, the
debtor in possession financing facility, and (iii) 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 values of assets and liabilities, the revenues and expenses reported,
and the balance sheet classifications used. See Developments in Plan of
Reorganization below for additional information about the Company's proposed
Plan of Reorganization.
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 Sheets (the "Balance
Sheets") 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 May 2003, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("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 adopted
the provisions of SFAS No. 149 on July 1, 2003 without impact on its financial
position or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN No. 46"). FIN No. 46 clarifies the application
of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," and
applies immediately to any variable interest entities created after January 31,
2003 and to variable interest entities in which an interest is obtained after
that date. FIN No. 46 is applicable for the Company on October 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 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 tax liability $ 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 nine months
ended September 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 1,018
--------
Balance at September 30, 2003 $ 20,154
========
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 September 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 nine 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 nine
months of 2003. Awards under the Company's plans vest over periods ranging from
three to five years.
The following table summarizes the pro forma impact to net income (loss) and
income (loss) per common share for the nine and three months ended September 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 Nine Months For the Three Months
Ended September 30, Ended September 30,
2003 2002 2003 2002
---- ---- ---- ----
Income (loss) from continuing operations before
discontinued operations and the change in
accounting principle, as reported $ 238 $(157,194) $(10,260) $ 17,459
Deduct:
SFAS No. 123 total stock based employee
compensation expense determined under the fair
value method for all awards, net of related tax
effects (2,232) (3,700) (744) (1,233)
-------- --------- -------- --------
SFAS No. 143 depreciation and accretion expense - (1,018) - (339)
-------- --------- -------- --------
Pro forma income (loss) from continuing operations
before discontinued operations and the change
in accounting principle $ (1,994) $(161,912) $(11,004) $ 15,887
======== ========= ======== ========
Basic income (loss) from continuing operations per
common share:
Basic - as reported $ - $ (3.16) $ (0.21) $ 0.35
======== ========= ======== ========
Basic - pro forma $ (0.04) $ (3.25) $ (0.22) $ 0.32
======== ========= ======== ========
Diluted income (loss) from continuing operations per
common share:
Diluted - as reported $ - $ (3.16) $ (0.21) $ 0.35
======== ========= ======== ========
Diluted - pro forma $ (0.04) $ (3.25) $ (0.22) $ 0.32
======== ========= ======== ========
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, covered by FIN No. 45, 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.
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, Covanta and certain of its domestic subsidiaries filed
voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code.
The Debtors have 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 authorize: (i) the
retention of professionals to represent and assist the Debtors in the Chapter 11
Cases, (ii) the use and operation of the Debtors' 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, (iii) the payment of
pre-petition employee salaries, wages, health and welfare benefits, retirement
benefits and other employee obligations, (iv) the payment of pre-petition
obligations to certain critical vendors to aid the Debtors in maintaining the
operation of their businesses, (v) the use of cash collateral and the grant of
adequate protection to creditors in connection with such use, (vi) the adoption
of certain employee benefit plans, including a key employee retention plan and a
broad-based severance plan, and (vii) the obtaining of 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, 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 (as amended, the "DIP Credit
Facility") with certain of 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"). Following significant litigation, on
August 2, 2002, the Bankruptcy Court issued an order that overruled objections
by holders of minority interests in two Debtor 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 appealed the
order, they reached an agreement with the Company that in effect deferred the
appeal.
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, in certain circumstances, 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 of 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, a damage claim resulting
from rejection of an executory contract or unexpired lease will be treated as a
general unsecured claim in the Chapter 11 Case for the applicable Debtor that
was party to the rejected contract or lease, unless such claim had been secured
on a pre-petition basis. The Debtors have substantially completed the process of
reviewing their executory contracts and unexpired leases to determine which they
will assume or reject. The Debtors estimate that with respect to executory
contracts and unexpired leases that they intend to assume, the ultimate
liability for the cost of curing existing defaults will be approximately $10-15
million, subject to adjustment depending upon the outcome of matters relating to
certain project restructurings and disputes (see below for a description of
waste-to-energy projects in respect to which contracts and leases may be
rejected if planned restructurings are not achieved).
Based on the Debtors' review of claims filed to date, the amount of the claims
filed or to be filed by the creditors, 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.
The rights of Covanta's creditors will be determined as part of the Chapter 11
process. Holders of existing common equity, preferred stock and convertible
subordinate debentures are not expected to participate in the new capital
structure or realize any value pursuant to the Amended Plans.
Developments in Project Restructurings
The Debtors and contract parties have reached agreement with respect to, or are
in the process of seeking approvals for, material restructuring of their mutual
obligations in connection with five waste-to-energy projects, as further
summarized below. These restructurings have been or will need to be approved by
the Bankruptcy Court, and any executory contracts related thereto will be
modified and assumed pursuant to a plan or otherwise approved by separate order
of the Bankruptcy Court. The Debtors are also involved in material disputes
and/or litigation with respect to the waste-to-energy projects in the Town of
Babylon, New York, and Lake County, Florida, and with respect to one water
project, the Tampa Bay, Florida water desalination project. However, as
described below, aspects of the potential restructurings remain subject to
conditions subsequent and there can be no guarantee that all these conditions
will be satisfied on or before the effective date of the Company's
reorganization. Moreover, there can be no assurance that the Debtors and the
contract parties will reach agreement with respect to the restructuring of their
obligations in connection with the waste-to-energy projects. Please see the
discussions below for possible ramifications if agreement is not reached in
these restructurings.
1. Warren County, New Jersey
Debtor Covanta Warren Energy Resource Co., Limited Partnership ("Covanta
Warren") and the Pollution Control Financing Authority of Warren County ("Warren
Authority") have been engaged in discussions and negotiations for an extended
period of time concerning a potential restructuring of the parties' rights and
obligations under various agreements related to Covanta Warren's operation of a
waste to energy facility located in Oxford Township, Warren County, New Jersey
(the "Warren Facility"). Those negotiations were in part precipitated by a 1997
Federal Court of Appeals decision invalidating certain of New Jersey's
waste-flow laws, which resulted in significantly reduced revenues for the Warren
Facility. Since 1999, New Jersey has been voluntarily making all debt service
payments with respect to the project bonds issued to finance construction of the
Warren Facility, and Covanta Warren has been operating the Warren Facility
pursuant to a letter agreement with the Warren Authority which modifies the
existing service agreement for the Warren Facility.
Although discussions continue, to date Covanta Warren and the Warren Authority
have been unable to reach an agreement to restructure the contractual
arrangements governing Covanta Warren's operation of the Warren Facility. The
Warren Authority has indicated that a consensual restructuring of the parties'
contractual arrangements may be possible in 2004. In addition, the Warren
Authority has agreed to release approximately $1.2 million being held in escrow
to Covanta Warren so that Covanta Warren may perform an environmental retrofit
during 2004. Based upon the foregoing and internal projections which indicate
that Covanta Warren likely will not operate at a loss next year, the Debtors
have determined not to propose a plan of reorganization or plan of liquidation
for Covanta Warren at this time, and instead that Covanta Warren should remain a
debtor-in-possession after the Amended Plans are confirmed with respect to the
other Debtors that are the subject of the Amended Plans. In order to implement
this course of action, the Debtors contemplate that Covanta Energy Resource
Corp. ("CERC") and Covanta OPWH, Inc. ("Covanta OPWH"), Debtors which together
own 100% of the equity in Covanta Warren, will sell such equity to two other
Debtors holding no assets or liabilities, which would operate as holding
companies for Covanta Warren. The Debtors do not believe that this will impair
the other Debtors' ability to confirm and consummate the Amended Plans, or the
terms of any exit financing available to such other Debtors.
In order to emerge from bankruptcy without uncertainty concerning potential
claims against Covanta related to the Warren Facility, Covanta will be rejecting
its guarantees of Covanta Warren's obligations relating to the operation and
maintenance of the Warren Facility. The Debtors anticipate that if a
restructuring is consummated, reorganized Covanta may at that time issue a new
parent guarantee in connection with that restructuring and emergence from
bankruptcy.
In the event the parties are unable to timely reach agreement upon and
consummate a restructuring of the contractual arrangements governing Covanta
Warren's operation of the Warren Facility, the Debtors may, among other things,
elect to litigate with counterparties to certain agreements with Covanta Warren,
assume or reject one or more executory contracts related to the Warren Facility,
attempt to file a plan of reorganization on a non-consensual basis, or liquidate
Covanta Warren.
2. Onondaga County, New York
The litigation arising from the Onondaga County Resource Recovery Agency's
("OCRRA") purported termination of the service agreement between OCRRA and
Covanta Onondaga, LP ("Covanta Onondaga") relating to the waste-to-energy
facility in Onondaga County (the "Onondaga Facility") was resolved on October
10, 2003 by a Bankruptcy Court approved restructuring of that project which
provides for the continued operation of the Onondaga Facility by Covanta
Onondaga, as well as numerous modifications to agreements relating to the
Onondaga Facility, including: (i) the restructuring of the bonds issued to
finance development and construction of the Onondaga Facility; (ii) reduction in
the amount of the service fee payable to Covanta Onondaga; (iii) elimination of
the requirement that Covanta provide letter of credit support, and a reduction
in the maximum amount of the parent company guarantee; and (iv) material
amendments to the agreements between Covanta Onondaga's third party limited
partners and the other Debtors.
3. City of Tulsa, Oklahoma
Covanta Tulsa, Inc. ("Covanta Tulsa") operated the waste-to-energy facility
located in Tulsa, Oklahoma (the "Tulsa Facility") pursuant to a service
agreement with the Tulsa Authority for Recovery of Energy ("TARE"), which, by
its terms, expires in 2007. Covanta leased the facility from CIT Group/Capital
Finance, Inc. ("CIT") under a long-term lease presently expiring in 2012 (the
"CIT Lease").
Covanta Tulsa and CIT have been unable to restructure the contractual
arrangements between them related to Covanta Tulsa's lease of the Tulsa
Facility. This facility was projected to become unprofitable for Covanta Tulsa
unless Covanta Tulsa's agreements with CIT were restructured. As a result, the
Debtors have wound down business operations at the Tulsa Facility, and have
returned the Tulsa Facility to CIT.
Covanta Tulsa has rejected the CIT lease, and have moved to assign certain
executory contracts related to the Tulsa Facility to an affiliate of CIT
(including the service agreement with TARE and the steam purchase agreement with
its energy purchaser) and to reject the balance of its executory contracts. In
addition, Covanta Tulsa has been classified as a liquidating Debtor, and as a
result unsecured creditors of Covanta Tulsa likely will not receive any recovery
on account of their pre-petition claims in the Chapter 11 proceedings except to
the extent insurance proceeds are available for such claims or to the extent CIT
is required to pay such claims as cure costs with respect to assumed contracts.
In addition, CIT has indicated that it intends to assert a material claim
against Covanta, as guarantor of Covanta Tulsa's obligations, which claim the
Debtors believe should be treated as a general unsecured claim against Covanta
under the Reorganization Plan, and it may attempt to assert material
administrative claims against Covanta Tulsa.
The Debtors do not believe that the classification of Covanta Tulsa as a
liquidating Debtor and the cessation of operation of the Tulsa Facility will
impair the other Debtors' ability to confirm and consummate the Amended Plans,
or the terms of any exit financing available to such other Debtors.
4. Hennepin County, Minnesota
On June 11, 2003, the Debtors received Bankruptcy Court approval to restructure
certain agreements relating to the Debtors' waste-to-energy project at Hennepin,
Minnesota. The key elements of the restructuring are: (i) the purchase by
Hennepin County of the ownership interests of General Electric Capital
Corporation and certain of its affiliates (together, "GECC") in the operating
facility, (ii) the termination of certain leases, the existing service agreement
and certain financing and other agreements; (iii) entry into a new service
agreement, guarantee and security agreement, which, among other things, reduces
Hennepin County's payment obligations to the Company's operating subsidiary
under the service agreement and requires the Company's operating subsidiary to
provide a letter of credit in an initial amount not less than that provided to
GECC; (iv) the refinancing of bonds issued in connection with the development
and construction of the project; and (v) assumption and assignment to Hennepin
County of certain interests in the project's electricity sale agreement. The
Hennepin restructuring was completed on July 8, 2003 and resulted in a loss of
$12.4 million, recognized as reorganization expense.
5. Union County, New Jersey
On June 19, 2003, Debtor Covanta Union, Inc. ("Covanta Union") received
Bankruptcy Court approval to restructure certain agreements relating to the
Debtors' waste-to-energy project at Rahway, Union County, New Jersey (the "Union
Facility"), and to settle certain disputes with the Union County Utilities
Authority (the "Union Authority") related to Covanta Union's operation of the
Union Facility. The restructuring facilitates the Union Authority's
implementation of a solid waste flow control program and accounts for the impact
of recent court decisions upon the agreements between Covanta Union and the
Union Authority. Key elements of the restructuring include: (i) modifying the
existing project agreements between Covanta Union and the Union Authority and
(ii) executing a settlement agreement and a release and waiver with the Union
Authority resolving disputes that had arisen between Covanta Union and the Union
Authority regarding unpaid fees. The Union restructuring is complete and now in
effect.
6. Town of Babylon, New York
The Town of Babylon, New York (the "Town") filed a proof of claim against
Covanta Babylon, Inc. ("Covanta Babylon") for approximately $13.4 million in
pre-petition damages and $5.5 million in post-petition damages, alleging that
Covanta Babylon has accepted less waste than required under the service
agreement between the Town and Covanta Babylon and that its filing under Chapter
11 imposed on the town additional costs for which the Company should be
responsible. The Company has filed an objection to the Town's claim. The parties
have agreed that disputes between the parties shall be resolved before the
Bankruptcy Court. The Company believes that it is in full compliance with the
express requirements of the contract and was entitled to adjust the amount of
waste it is required to accept to reflect the energy content of the waste
delivered. It also asserts that the costs arising from its Chapter 11 proceeding
are not recoverable from it by the Town. It therefore believes it has valid
defenses to the Town's claim. In the event the parties are unable to
consensually resolve their differences, and depending upon the outcome and
timing of the litigation with the Town, the Debtors may, among other things,
assume or reject one or more executory contracts related to the Babylon
Facility, recharacterize Covanta Babylon as a liquidating Debtor, and/or
withdraw Covanta Babylon as a reorganizing Debtor and subsequently file a
separate plan of reorganization for Covanta Babylon. In the event Covanta
Babylon is recharacterized as a liquidating Debtor, creditors of Covanta Babylon
may not receive any recovery on account of their claims. The Debtors are not
able to determine at this time whether a failure to resolve the litigation or
timely consummate a restructuring transaction with respect to Covanta Babylon
would impair the other Debtors' ability to confirm and consummate the Amended
Plans, or the terms of any exit financing available to such other Debtors.
7. Lake County, Florida
In late 2000, Lake County, Florida ("Lake County") commenced a lawsuit in
Florida state court against Covanta Lake, Inc. ("Covanta Lake") relating to the
waste to energy facility operated by Covanta in Lake County, Florida (the "Lake
Facility"). In the lawsuit, the County sought to have its service agreement with
Covanta Lake declared void and in violation of the Florida Constitution. That
lawsuit was stayed by the commencement of the Chapter 11 Cases. Lake County
subsequently filed a proof of claim seeking in excess of $80 million from
Covanta Lake and Covanta. After several months of negotiations that failed to
produce a settlement between Covanta Lake and Lake County, on June, 20, 2003,
Covanta Lake filed a motion with the Bankruptcy Court seeking entry of an order
(i) authorizing Covanta Lake to assume, effective upon confirmation of a plan of
reorganization for Covanta Lake, its service agreement with Lake County, (ii)
finding no cure amounts due under the service agreement, and (iii) seeking a
declaration that the service agreement is valid, enforceable and constitutional,
and remains in full force and effect. Contemporaneously with the filing of the
assumption motion, Covanta Lake filed an adversary complaint asserting that Lake
County is in arrears to Covanta Lake in the amount of more than $8.5 million.
The Debtors and Lake County, however have reached a tentative non-binding
understanding in which the existing service agreement would be terminated and a
new, long-term commercial arrangement between Covanta Lake and Lake County
established that would permit continued operation of the Lake Facility by
Covanta Lake. Settlement negotiations are ongoing, and the parties are drafting
definitive documentation. The tentative settlement is contingent upon, among
other things, receipt of all necessary approvals, refinancing of the bonds
issued to finance the construction of the Lake Facility, as well as a favorable
outcome to the Debtors' pending objection to the proof of claims filed by F.
Browne Gregg, a third-party claiming an interest in the existing service
agreement that would be terminating under tentative settlement. A trial on the
Debtors' objections to F. Browne Gregg's claims commenced on November 3, 2003.
As of November 5, 2003, the Court has not ruled on this matter and has scheduled
briefs on the issues tried to be submitted on December 5, 2003, after the
confirmation hearing on the Amended Plans. In the event the parties are unable
to consensually resolve their differences, and depending upon (among other
things) the timing, nature and outcome of the litigation with Lake County, the
Debtors may determine to, among other things, assume or reject one or more
executory contracts related to the Lake Facility, recharacterize Covanta Lake as
a liquidating Debtor, and/or withdraw Covanta Lake as a reorganizing Debtor and
subsequently file a separate plan of reorganization for Covanta Lake. In the
event that the Debtors reject one or more executory contracts related to the
Lake Facility, recharacterize Covanta Lake as a reorganizing Debtor, or withdraw
Covanta Lake as a reorganizing Debtor and subsequently file a separate plan of
reorganization for Covanta Lake, creditors of Covanta Lake may not receive any
recovery on account of their claims. The Debtors are not able to determine at
this time whether a failure to resolve the litigation or timely consummate a
restructuring transaction with respect to Covanta Lake would impair the other
Debtors' ability to confirm and consummate the Amended Plans, or the terms of
any exit financing available to such other Debtors.
8. Tampa Water Facility
CTC, a subsidiary of the Debtors, is currently completing construction of a 25
million gallon per day desalination-to-drinking water facility (the "Tampa Water
Facility") under a contract with Tampa Bay Water Authority ("Tampa Bay Water" or
"TBW") near Tampa, Florida. Covanta Energy Group, Inc. ("CEG") has guaranteed
CTC's performance under its construction contract with TBW. A separate
subsidiary, CTB has entered into a post-petition contract with TBW to operate
the Tampa Water Facility after construction and testing is completed by CTC.
While construction of the Tampa Water Facility is substantially complete, the
parties have material disputes among them, primarily relating to (i) whether CTC
has satisfied acceptance criteria for the Tampa Water Facility, and (ii) whether
Tampa Bay Water has obtained certain permits necessary for CTC to complete
start-up and testing, and for CTB to subsequently operate the Tampa Water
Facility. In October 2003, TBW issued a default notice to CTC, which CTC is
vigorously contesting, and attempted to commence arbitration proceedings against
CTC. Tampa Bay Water also has suggested that the Debtors bring in a partner to
assist with completion and testing issues, and potentially to assist with
operations after acceptance. The Debtors are discussing potential solutions with
Tampa Bay Water, including but not limited to the addition of a partner
acceptable to Tampa Bay Water. CTC also is continuing efforts to reconcile
differences with Tampa Bay Water.
On October 29, 2003, CTC filed a voluntary petition for relief under Chapter 11
of the Bankruptcy Code in order to, among other things, prevent attempts by TBW
to terminate the construction agreement between CTC and TBW. CTC's case is being
jointly administered with the other Debtors' cases. CTC is not the subject of
the Amended Plans. In addition, the Debtors intend to amend the Amended Plans to
delete CTB as a Reorganizing Debtor, and therefore both CTC and CTB will remain
debtors-in-possession after the Amended Plans are confirmed with respect to the
other Debtors that are the subject of the Amended Plans.
In order to emerge from bankruptcy without uncertainty concerning potential
claims against CEG related to the Tampa Water Facility, CEG will be rejecting
its guarantees of CTB and CTC's obligations relating to the construction,
operation and maintenance of the Tampa Water Facility. The Debtors anticipate
that if a restructuring is consummated, reorganized CEG or Covanta may at that
time issue a new parent guarantee in connection with that restructuring and
emergence from bankruptcy.
In the event the parties are unable to consensually resolve their differences,
and depending upon (among other things) the timing, nature and outcome of any
litigation with TBW, the Debtors may determine to, among other things, assume or
reject one or more executory contracts related to the Tampa Water Facility,
propose liquidating plans for CTB and CTC, and/or file separate plans of
reorganization for CTB and CTC. In any such event, creditors of CTB and CTC may
not receive any recovery on account of their claims. The Debtors do not believe
that a failure to resolve the dispute or timely consummate a restructuring
transaction with respect to CTB and/CTC would impair the other Debtors' ability
to confirm and consummate the Amended Plans, or the terms of any exit financing
available to such other Debtors.
Developments in Plan of Reorganization
On September 8, 2003, the Debtors filed with the Bankruptcy Court (i) the
Reorganization Plan (ii) the Liquidation Plan and (iii) a draft Disclosure
Statement. In addition, on September 24, 2003 the Company filed the First
Amended Heber Reorganization Plan. On September 28, 2003, the Company filed the
Amended Plans and also the Amended Disclosure Statement.
Since the Petition Date, the Debtors have continued their efforts to dispose of
non-core businesses. With approval of the Bankruptcy Court, the Debtors have
sold the remaining aviation fueling assets, their interests in Casino Iguazu and
La Rural Fairgrounds and Exhibition Center in Argentina. As further described
below, they also transferred their interests in the Corel Centre in Ottawa,
Canada and in the Ottawa Senators Hockey Club Corporation (the "Team") and other
miscellaneous assets related to the entertainment business. In addition, in
order to enhance the value of the Company's core business, on September 23,
2002, management announced a reduction in non-plant personnel, closure of
satellite development offices and reduction in all other costs not directly
related to maintaining operations at their current high levels. As part of the
reduction in force, waste-to-energy and domestic independent power headquarters
management were combined and numerous other structural changes were instituted
in order to improve management efficiency.
On January 9, 2003, the Team filed for protection with the Ontario Superior
Court of Justice ("Canadian Court"), and was granted protection under Canada's
Companies' Creditors Arrangement Act ("CCAA"). A monitor was appointed under the
CCAA to supervise the selling of the Team's franchise. On April 25, 2003, the
monitor entered into an asset purchase agreement for the purchase of the Team's
franchise and certain related assets, which the Canadian Court approved on May
9, 2003. On May 27, 2003, the Canadian Court appointed an interim receiver of
the owner of the Corel Centre. On June 4, 2003, the interim receiver entered
into an asset purchase agreement for the purchase of the Corel Centre and
certain related assets, which was approved on June 20, 2003. The transactions to
purchase the team and the Corel Centre were consummated on August 26, 2003. Upon
closing, Covanta received $19.7 million and obtained releases from certain
guarantees provided to lenders of the Team. The Company has recorded charges
totaling $160.4 million related to the Team and Corel Centre, consisting of $140
million at fourth quarter 2001, $6 million at fourth quarter 2002, and $14.4
million at third quarter 2003.
The Company and Ogden Facility Management Corporation of Anaheim ("OFM") have
reached an agreement with the City of Anaheim (the "City") to terminate its
management agreement and return the rights to manage the Arrowhead Pond of
Anaheim (the "Arena") to the City, along with most of the operational contracts.
In exchange, the City will make a payment of $40 million (subject to a working
capital adjustment) to Credit Suisse First Boston ("CSFB") in partial
reimbursement of CSFB's secured claim against the Company. Furthermore, the
Company and OFM shall be released from all obligations relating to management of
the Pond (except for the residual secured reimbursement claim of CSFB against
the Company of approximately $75 million (subject to a working capital
adjustment)), including a lease-in/lease-out transaction and a municipal bond
financing transaction. The transaction was approved by the Anaheim City Council
on November 4, 2003, and closing is contingent upon a number of conditions,
including, but not limited to, approval by the DIP Lenders and the Bankruptcy
Court.
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. The Company
intends, as part of the Amended Plans, to provide the required letter of credit
as part of its assumption of the agreement. The Company has also agreed with the
County that, if it were to fail to maintain such letter of credit in the future
in accordance with the agreement, the County could at that time exercise its
options to receive a service fee reduction or terminate the agreement.
At a hearing on October 3, 2003 the Bankruptcy Court approved the adequacy of
the Amended Disclosure Statement and authorized the Debtors to solicit
acceptances with respect to the Amended Plans from those holders of claims and
interests entitled to vote thereon. The Amended Plans, along with the Amended
Disclosure Statement, were sent to all creditors and equity holders belonging to
impaired classes who are entitled to vote on October 17, 2003. 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
plans or disclosure statement.
The Amended Plans reflect the discussions held over the course of the Chapter 11
Cases among the Company, the Official Committee of Unsecured Creditors appointed
on April 9, 2002 by the United States Trustee for the Southern District of New
York (the "Creditors Committee"), representatives of the Debtors' pre-petition
bank lenders and DIP Lenders and representatives of the holders of the Company's
9.25% debentures. Following the solicitation period, the Bankruptcy Court will
hold hearings, currently scheduled for November 19, 2003 and December 3, 2003,
to consider whether to confirm the Amended Plans 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 entitled to vote 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.
A central element of the Amended Reorganization Plan entails the establishment
of a trust created under an employee stock ownership plan (the "ESOP") to which
the Company will contribute all of its stock. The ESOP is an ERISA qualified
plan under which the trust will hold the shares and provide benefits to
employees upon termination of employment. In the event of the confirmation of
the amended Reorganization Plan, the employees of the Company, as participants
in the ESOP, will receive an equity interest in the Company's common stock. A
consequence of the implementation of the ESOP and the Amended Reorganization
Plan which contemplates the Company electing S corporation status for federal
income tax purposes is a significant increase in available after-tax cash flow
through a substantial reduction in federal income tax liabilities, thereby
permitting the Company and its reorganizing subsidiaries to (i) emerge from
bankruptcy, (ii) pay down a portion of their allowable claims and (iii) provide
benefit to the employees participating in the ESOP. There can be no assurance,
however, that U.S. Trust Company, N.A. (the "Trustee"), which has been appointed
by order of the Bankruptcy Court to act as independent fiduciary with respect to
the proposed ESOP, will determine that the contribution of common stock to the
ESOP as contemplated by the Amended Reorganization Plan is in the best interests
of the ESOP and its prospective participants, or that the terms of any credit
facility negotiated with the Company's secured creditors will be acceptable to
the Trustee. Although the Company believes that the intended tax consequences of
the reorganization will be achieved, there are no assurances that the Internal
Revenue Service (the "IRS") will not challenge the Company's S Corporation
election or seek to disqualify the ESOP structure and that any such challenge
would not be successful. The Company does not intend to seek a ruling from the
IRS (other than with respect to the qualification of the ESOP under Section
481(a) of the Internal Revenue Code) and has not obtained an opinion of counsel
with respect to these matters. Were it necessary to propose changes in the
amended reorganization plan or the credit facilities as a condition to obtaining
the Trustee's acquiescence in accepting the contribution of the common stock or
to resolve regulatory, tax or accounting issues there is no assurance that such
changes would be accepted by the secured creditors. In the event reorganized
Covanta does not qualify as an S corporation, it would incur significant amounts
of tax liabilities that would result in substantial shortfalls in reorganized
Covanta's ability to service its debt and otherwise meet its obligations.
The Debtors have an obligation to seek to maximize recoveries for creditors
generally. To that end, the Debtors will, consistent with their business
judgment, continue to consider alternative transactions that would permit
recoveries to creditors greater than those expected under the Plans. If the
Plans are not confirmed, the Debtors, or, after the expiration of the Debtors'
exclusive period in which to propose and solicit reorganization plans, any
other party in interest in the Chapter 11 Cases, could propose a different plan
or plans. Such plans might involve either a reorganization and continuation of
the Debtors' businesses, or an orderly liquidation of its assets, or a
combination of both.
The following is a summary of certain material provisions of the proposed
Amended Plans. The summary does not purport to be complete and is qualified in
its entirety by reference to all of the provisions of the Amended Plans,
including all exhibits and documents described therein, as filed with the
Bankruptcy Court, and as may be further amended and/or supplemented. The Debtors
have an obligation to maximize recoveries for creditors generally. To that end,
the Debtors will, consistent with their past practices and best business
judgement, continue to consider alternative transactions that would permit
recoveries to creditors greater than those expected under the Amended Plans.
The Debtors anticipate making further amendments to the Amended Plans,
including: (a) redesignating Covanta Equity of Stanislaus, Inc. and Covanta
Equity of Alexandria/Arlington, Inc. from liquidating Debtors to reorganizing
Debtors in order to implement an intercompany sale associated with the Warren
restructuring; (b) redesignating one or more additional Debtors from liquidating
Debtors to reorganizing Debtors in order to implement the CPIH restructuring;
(iii) deleting CTB as a reorganizing Debtor, such that both CTC and CTB will
remain debtors-in-possession after the Amended Plans are confirmed with respect
to the other Debtors that are the subject of the Amended Plans; and (iv)
providing for the rejection by CEG of its guarantees of CTB and CTC's
obligations relating to the construction, operation and maintenance of the Tampa
Water Facility.
A. The Reorganization Plan
The Reorganization Plan provides for, among other things, the following
distributions:
(i) Secured Claims
On account of their allowed secured claims, the bank lenders and the 9.25%
debenture holders would receive, in the aggregate, a distribution consisting of
(i) the cash available for distribution after payment by the Company of exit
costs necessary to confirm the Amended Plans and establishment of required
reserves pursuant to the Amended Plans, (ii) $200 million in principal amount of
new high-yield secured notes accreting to an aggregate principal amount of $225
million, (iii) shares of preferred stock issued by the Company's subsidiary,
Covanta Power International Holdings, Inc. ("CPIH"), with an aggregate
liquidation preference of $30 million, (iv) a term loan obligation of CPIH in
the principal amount of $80 million, and (v) warrants exercisable for forty-nine
and ninety-nine hundreths percent (49.99%) of the Company's common stock. CPIH
will be the owner of the Company's international subsidiaries. The aggregate
distribution to all holders of allowed secured claims would be made on a pro
rata basis between the bank lenders, on the one hand, and the 9.25% debenture
holders, on the other, based on the respective amounts of their allowed secured
claims. The actual form of consideration distributed to each holder of an
allowed secured claim would vary, however, depending upon whether or not such
holder participates as a lender in either the new letter of credit facility or
the new revolving credit facility in connection with the Company's emergence
from bankruptcy.
Under the Reorganization Plan, the distribution among the bank lenders would be
adjusted to reflect the priority rights of certain bank lenders that arose
pursuant to a pre-petition Intercreditor Agreement, entered into in connection
with the Master Credit Facility, as amended.
Additionally, the Reorganization Plan incorporates the terms of a pending
settlement of litigation that had been commenced during the Chapter 11 Cases by
the Creditors Committee challenging the validity of the lien asserted on behalf
of the holders of the 9.25% debentures (the "9.25% Debenture Adversary
Proceeding"). Pursuant to the proposed settlement, holders of general unsecured
claims against the Company would be entitled to receive 12.5% of the value that
would otherwise be distributable to the holders of 9.25% debenture claims that
participate in the settlement. However, each holder of a 9.25% debenture claim
would have the opportunity to opt-out of participation in the settlement, in
which case such holder would not receive a release with respect to the 9.25%
Debenture Adversary Proceeding. In the event that holders of 9.25% debentures
with claims in excess of $10 million opt out of the settlement, such holders
would not receive any distribution under the Reorganization Plan until the 9.25%
Debenture Adversary Proceeding has been resolved.
(ii) Unsecured Claims against Operating Company Subsidiaries
The holders of allowed unsecured claims against any of the Company's operating
subsidiaries would receive new unsecured notes in a principal amount equal to
the amount of their allowed unsecured claims.
(iii) Unsecured Claims against Covanta Energy Corporation and Holding
Company Subsidiaries
The holders of allowed unsecured claims against Covanta Energy Corporation or
certain of its holding company subsidiaries would receive, in the aggregate, a
distribution consisting of (i) warrants exercisable for seven and one half
percent (7.5%) of the Company's common stock, (ii) shares of preferred stock
issued by the Company's subsidiary, CPIH, with an aggregate liquidation
preference of $3 million, (iii) a participation interest equal to 5% of the
first $80 million in proceeds received in connection with the sale or other
disposition of CPIH and its subsidiaries, and (iv) the recoveries, if any, from
avoidance actions brought against unsecured creditors of the Company and its
subsidiaries. Additionally, each holder of an allowed unsecured claim against
the Company or certain of its holding company subsidiaries would be entitled to
receive its pro-rata share of 12.5% of the value that would otherwise be
distributable to the holders of 9.25% debenture claims that participate in the
settlement of the 9.25% Debenture Adversary Proceeding pursuant to the
Reorganization Plan.
(iv) Subordinated Claims of holders of Convertible Subordinated Bonds
The holders of the Company's convertible subordinated bonds would not receive
any distribution or retain any property pursuant to the proposed Reorganization
Plan unless amended. The convertible subordinated bonds would be cancelled on
the effective date of the proposed Reorganization Plan.
(v) Equity interests of common and preferred stockholders
The holders of equity interests of the Company's preferred and common stock
would not receive any distribution or retain any property pursuant to the
Reorganization Plan. The preferred stock and common stock would be cancelled on
the effective date of the proposed Reorganization Plan.
B. The Heber Reorganization Plan
The Heber Reorganization Plan contemplates that the Company would sell its
interests in certain geothermal energy projects in Heber, California (the
"Geothermal Business") either pursuant to section 363 of the Bankruptcy Code or
the Heber Reorganization Plan, as contemplated by that certain Amended and
Restated Ownership Interest Purchase Agreement, by and among Covanta Heber Field
Energy, Inc., Heber Field Energy II, Inc., ERC Energy, Inc., ERC Energy II, Inc.
Heber Loan Partners, Covanta Power Pacific, Inc. and Covanta Energy Americas,
Inc. (collectively, the "Sellers") and Covanta and Caithness Heber Field I, LLC,
Caithness Heber Field II, LLC, Caithness Heber Geothermal I, LLC, Caithness
Heber Geothermal II, LLC, Caithness Mammoth, LLC, Caithness SIGC GP, LLC and
Caithness SIGC LP, LLC (collectively, the "Proposed Buyers") dated as of
September 25, 2003 (as such agreement may be amended, modified or terminated
pursuant to the terms thereof, the "Heber Purchase Agreement"). Pursuant to the
Heber Purchase Agreement, the Sellers, in consultation with the Proposed Buyers,
shall determine whether to accomplish the resolution of the Chapter 11 Cases of
the Heber Debtors through a sale pursuant to section 363 of the Bankruptcy Code
or through the Heber Reorganization Plan. On September 8, 2003 the Debtors filed
a motion (the "Heber Sale Motion"), seeking, among other things, (i) entry of an
Order establishing competitive bidding and auction procedures for the Geothermal
Business; (ii) approval of the sale (without prejudice to the Proposed Buyers'
rights under the Heber Purchase Agreement, the "Geothermal Sale") of the
Geothermal Business to the Proposed Buyers pursuant to the Heber Purchase
Agreement, subject to higher or better offers under the Bankruptcy
Court-approved bidding and auction procedures, pursuant to either the Heber Sale
Motion or the Heber Reorganization Plan (the "Heber Alternative Transaction");
(iii) and the dismissal of the Heber Debtors' Chapter 11 Cases as contemplated
by the Heber Sale Motion or the Heber Alternative Transaction, as applicable
(the "Heber Debtor Dismissal"). On the same day, the Heber Debtors filed their
original proposed plan of reorganization, which was subsequently amended as
provided in the Heber Reorganization Plan. On September 29, 2003, the Bankruptcy
Court entered an order (the "Heber Bidding Procedures Order"), approving the
bidding procedures and establishing November 19, 2003 as the date of the Auction
(as defined in the Heber Bidding Procedures Order) and the hearing to consider
approval of the Geothermal Sale, either pursuant to the Heber Sale Motion or the
Heber Reorganization Plan (the "Approval Hearing"). If the Bankruptcy Court
confirms the Heber Reorganization Plan at the Approval Hearing, the Debtors will
withdraw the request for the Heber Debtor Dismissal as provided in the Heber
Sale Motion.
The Reorganization Plan and the Heber Reorganization Plan are premised on the
consummation of the Geothermal Sale, as the proceeds of the Geothermal Sale will
provide the Company and its affiliates with funds necessary to emerge from their
respective Chapter 11 Cases.
C. The Liquidation Plan
The Liquidation Plan provides for the complete liquidation of those of the
Company's subsidiaries that have been designated as liquidating entities. Apart
from the disposition of the businesses associated with the Arrowhead Pond of
Anaheim arena in Anaheim, California, substantially all of the assets of these
liquidating entities have already been sold. The Liquidation Plan contemplates
that creditors of the liquidating entities would not receive any distribution in
connection with the Amended Liquidation Plan, other than those administrative
creditors with respect to claims against the liquidating entities that have been
incurred in the implementation of the Liquidation Plan.
Reorganization Disclosure
On October 10, 2003, the Company filed a motion with the Bankruptcy Court (the
"Motion") with the support of Bank of America, N.A. and Deutsche Bank, A.G.,
co-agents of the prepetition secured bank lenders and the DIP Lenders and the
Creditors Committee, seeking entry of an order (i) authorizing Covanta to enter
into an agreement (the "Mackin Agreement") between the Company and Scott G.
Mackin, the then President/Chief Executive Officer of Covanta and (ii) approving
the terms of the Mackin Agreement. Pursuant to the Mackin Agreement, Mr. Mackin
resigned as President/CEO of Covanta on November 5, 2003, following the approval
of the Mackin Agreement in its entirety by the Bankruptcy Court and payment of
amounts stated below to Mr. Mackin (such date, the "Resignation Date"). In order
to retain the critical knowledge and insight of the waste-to-energy business
which Mr. Mackin possesses and to further strengthen reorganized Covanta, the
Mackin Agreement provides that Covanta shall engage Mr. Mackin as a consultant
to the Debtors and reorganized Covanta immediately upon the Resignation Date for
a term ending on the second anniversary of the Resignation Date, and Mr. Mackin
shall remain a member of the Board of Directors of Covanta until the effective
date of the Reorganization Plan. Additionally, pursuant to the Mackin Agreement,
Mr. Mackin has agreed to a three-year non-compete with Covanta's waste-to-energy
business and has agreed not to work directly or indirectly for client
communities of Covanta's waste-to-energy business for three years following the
Resignation Date. A hearing was held before the Bankruptcy Court in connection
with this motion on October 30, 2003 and the Bankruptcy Court entered an order
approving the Motion on November 3, 2003. Pursuant to the terms of the Mackin
Agreement, Mr. Mackin received his severance pay and $1.0 million in consulting
fees as of the Resignation Date. Mr. Mackin will receive the remaining $750,000
in consulting fees and approximately $2.3 million in long-term incentive plan
payments in addition to bonuses and vested retirement benefits over the
following two years in accordance with the Mackin Agreement.
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 nine and three month periods ended September 30, 2003
(in thousands of dollars):
For the Nine For the Three
Months Ended Months Ended
Legal and professional fees $ 29,552 $ 10,834
Severance, retention and office closure costs 2,869 634
Bank fees related to DIP Credit Facility 1,419 341
Other 26,886 22,999
--------- ---------
Total $ 60,726 $ 34,808
========= =========
Other includes a $3.3 million accrual for disputes related to royalty payments,
$12.4 million for the restructuring of an energy project and $10.2 million
charge related to workers compensation insurance for the nine months ended
September 30, 2003.
Also in accordance with SOP 90-7, interest expense of $0.2 and $0.7 million for
the three and nine month periods ended September 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 September 30, 2003 (in thousands of dollars):
Debt $110,485
Debt under credit arrangement 144,690
Accounts payable 59,562
Other liabilities 200,684
Obligations related to the Centre and the Team 162,406
Obligations related to Arrowhead Pond 106,269
Convertible Subordinated Debentures 148,650
--------
Total $932,746
========
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 Period
For the Three For the Three For the Nine April 1, 2002
Months Ended Months Ended Months Ended through September
September 30, 2003 September 30, 2002 September 30, 2003 30, 2002
------------------ ------------------ ------------------ -----------------
Total revenues $143,221 $ 142,819 $ 435,391 $ 285,548
Operating costs and expenses 125,159 111,093 344,344 224,455
Cost allocation to from non-Debtor subsidiaries (12,289) 6,309 (12,564) 14,220
Write down of assets held for use - - - 22,195
Obligations related to assets held for sale - - - 40,000
Equity in earnings of non-Debtor
Subsidiaries (net of tax benefit
(expense) of $2,441, ($2,248), $8,721 and
($11,354), respectively (4,051) 19,125 (10,578) (61,880)
-------- --------- --------- ---------
Operating income (loss) 26,300 44,542 93,033 (77,202)
Reorganization items (34,808) (16,837) (60,726) (32,803)
Interest expense, net (8,352) (9,678) (27,650) (18,107)
-------- --------- --------- ---------
Income (loss) before income taxes (excluding
taxes applicable to non-Debtor
subsidiaries), minority interests and
cumulative effect of change in accounting
principle (16,860) 18,027 4,657 (128,112)
Income tax (expense) benefit 7,333 (44) (8,677) 5,780
Minority interests (733) (524) (2,217) (1,776)
Cumulative effect of change in accounting
principle (net of tax benefit of $1,364) - - (2,063) -
-------- --------- --------- ---------
Net income (loss) $(10,260) $ 17,459 $ (8,300) $(124,108)
======== ========= ========= =========
DEBTORS' CONDENSED COMBINED BALANCE SHEETS
(In Thousands of Dollars)
September 30, 2003 December 31, 2002
------------------ -----------------
Assets:
Current assets $ 420,824 $ 414,907
Property, plant and equipment-net 1,095,061 1,173,222
Investments in and advances to investees
and joint ventures 3,815 3,815
Other assets 358,188 358,753
Investments in and advances to non-Debtor
subsidiaries, net 203,445 84,678
----------- -----------
Total Assets $ 2,081,333 $ 2,035,375
=========== ===========
Liabilities:
Current liabilities $ 185,032 $ 161,908
Long-term debt 28,337 34,969
Project debt 828,394 931,568
Deferred income taxes 187,850 136,498
Other liabilities 92,954 49,474
Liabilities subject to compromise 932,746 892,012
Minority interests 3,476 1,259
----------- -----------
Total liabilities 2,258,789 2,207,688
Shareholders' Deficit (177,456) (172,313)
----------- -----------
Total Liabilities and Shareholders' Deficit $ 2,081,333 $ 2,035,375
=========== ===========
DEBTORS' CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
For the Nine Months ended For the Period April 1, 2002
September 30, 2003 through September 30, 2002
------------------ --------------------------
Net cash provided by operating activities $ 88,234 $ 45,080
Net cash used in investing activities (6,566) (8,004)
Net cash used in financing activities (53,717) (19,947)
--------- --------
Net increase in Cash and Cash Equivalents 27,951 17,129
Cash and Cash Equivalents at Beginning of Period 80,813 65,791
--------- --------
Cash and Cash Equivalents at End of Period $ 108,764 $ 82,920
========= ========
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 $(12.6) million to the Debtors and $14.2 million from the Debtors
for the nine month period ended September 30, 2003 and the period from April 1,
2002 through September 30, 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 nine months ended
September 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 expense (15)
Minority interests 213
----------
Loss from discontinued operations $ (17,866)
==========
Earnings (Loss) Per Share:
For the Three Months Ended September 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 $(10,260) $ 17,459
Less: Preferred stock
dividend - -
--------- --------
Income (loss) to common stockholders $(10,260) 49,821 $ (0.21) $ 17,459 49,802 $ 0.35
========= ====== ======== ======== ====== ======
Effect of Dilutive Securities:
Stock options (A) (A)
Restricted stock (A) 26
Convertible preferred stock (A) 198
6% convertible debentures - (A)
53/4% convertible debentures - (A)
------ ---
Diluted Earnings (Loss)
Per Share:
Income (loss) to common stockholders $(10,260) 49,821 $ (0.21) $ 17,459 50,026 $ 0.35
========= ====== ======== ======== ====== ======
For the Nine Months Ended September 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 $ 238 $(157,194)
Less: Preferred stock
dividend - 16
--------- ----------
Income (loss) to common stockholders $ 238 49,818 $ - $(157,210) 49,791 $ (3.16)
====== ======= ========== ====== =======
Loss from discontinued operations $ (17,866) 49,791 $ (0.36)
========== ====== =======
Cumulative effect of change in
accounting principles $ (8,538) 49,818 $(0.17) $ (7,842) 49,791 $ (0.16)
========= ====== ======= ========== ====== =======
Effect of Dilutive Securities:
Stock options (A) (A)
Restricted stock 2 (A)
Convertible preferred stock 66 (A)
6% convertible debentures - (A)
53/4% convertible debentures - (A)
- ---
------
Diluted Earnings (Loss)
Per Share:
Income (loss) to common stockholders $ 238 49,886 $ - $(157,210) 49,791 $ (3.16)
========= ====== ======= ========== ====== ========
Loss from discontinued operations - - - $ (17,866) 49,791 $ (0.36)
========== ====== ========
Cumulative effect of change in
accounting principles $ (8,538) 49,886 $ (0.17) $ (7,842) 49,791 $ (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 on 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 3,132,000 for the three and nine month periods ended September 30,
2003 and 3,653,000 and 3,704,000 for the three and nine months ended September
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 third quarter of
2003 and 1,524,000 in the third quarter of 2002 for the 5 3/4% convertible
debentures; 198,000 and zero in the third quarter of 2003 and the third quarter
of 2002, respectively for convertible preferred stock; and 3,000 and zero in the
third quarter of 2003 and the third quarter of 2002 for unvested restricted
stock issued to employees.
The common stock excluded from the calculation were zero for the nine months
ended September 30, 2003 and 1,211,000 for the nine months ended September
30,2002 for the 6% convertible debentures; zero for the nine months ended
September 30, 2003 and 1,524,000 for the nine months ended September 30, 2002
for the 5 3/4% convertible debentures; 132,000 and 198,000 for the nine months
ended September 30, 2003 and the nine months ended September 30, 2002,
respectively for convertible preferred stock; and 4,000 and 38,000 for the nine
months ended September 30, 2003 and the nine months ended September 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 nine months ended September 30, 2003 (expressed in thousands of dollars):
Balance Balance
Sheet at Charges for Amounts Sheet at
December Continuing Paid In September
31, 2002 Operations 2003 30, 2003
-------------------------------------------------
2003
Severance for approximately
216 New York city employees $ 1,600 $ - $ (325) $ 1,275
Severance for approximately
80 Energy employees 2,500 - (136) 2,364
Severance for approximately
71 Employees terminated post
petition 4,350 - (1,550) 2,800
Key employee retention plan 700 1,800 (1,075) 1,425
Contract termination settlement 400 - - 400
Bank fees 34,000 - - 34,000
Office closure costs 1,200 - (335) 865
------- ------- -------- -------
Total $44,750 $ 1,800 $ (3,421) $43,129
======= ======= ========= =======
Balance Balance
Sheet at Charges for Amounts Sheet at
June Continuing Paid In September
30, 2003 Operations 2003 30, 2003
-------------------------------------------------
2003
Severance for approximately
216 New York city employees $ 1,275 $ - $ - $ 1,275
Severance for approximately
80 Energy employees 2,387 - (23) 2,364
Severance for approximately
71 Employees terminated post
petition 2,907 - (107) 2,800
Key employee retention plan 1,900 600 (1,075) 1,425
Contract termination settlement 400 - - 400
Bank fees 34,000 - - 34,000
Office closure costs 1,200 - (335) 865
------- ------- -------- -------
Total $44,069 $ 600 $ (1,540) $43,129
======= ======= ========= =======
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 nine months ended September 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 loss or
financial position.
The following table summarizes the results of operations, including the effect
of the restatement of the nine months ended September 30, 2002 (In thousands of
dollars, except per-share amounts):
Nine Months Ended September 30, 2002
---------------------------------------------------------------
As
Previously
Reported As Restated
--------- -----------
Total revenues from continuing
operations $ 722,448 $ 694,484
--------- ---------
Loss from continuing operations $(175,060) $(157,194)
--------- ---------
Loss from discontinued operations - (17,866)
Cumulative effect of change
in accounting principle (7,842) (7,842)
--------- ---------
Net loss $(182,902) $(182,902)
========= =========
Basic loss per common share:
Loss from continuing operations $ (3.52) $ (3.16)
Loss from discontinued operations - (0.36)
Cumulative effect of change
in accounting principle (0.16) (0.16)
--------- ---------
Total $ (3.68) $ (3.68)
========= =========
Diluted loss per common share:
Loss from continuing operations $ (3.52) $ (3.16)
Loss from discontinued operations - $ (0.36)
Cumulative effect of change
in accounting principle (0.16) (0.16)
--------- ---------
Total $ (3.68) $ (3.68)
========= =========
Business Segments
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 serves 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 nine
and three month periods ended September 30, 2003 and 2002 (expressed in
thousands of dollars) were as follows:
Nine Months Ended Three Months Ended
September 30, September 30,
2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------
Revenues:
Domestic energy and water $ 545,117 $ 537,881 $ 177,734 $ 182,494
International energy 130,602 140,669 42,008 49,184
Other 3,422 15,934 1,032 3,106
--------- --------- --------- ---------
Total revenue 679,141 694,484 220,774 234,784
--------- --------- --------- ---------
Income (loss) from operations:
Domestic energy and water 117,140 103,476 30,483 30,740
International energy 28,446 26,021 9,657 12,865
Other (16,723) (14,930) (16,150) 13,858
Write down of assets held for use or sale:
Domestic energy and water - (22,195) - -
International energy - (78,452) - -
Other - (40,000) - -
Corporate unallocated income
and expenses-net (26,441) (59,023) 1,939 (6,908)
--------- --------- --------- ---------
Operating income (loss) 102,422 (85,103) 25,929 50,555
Interest expense - net (30,686) (34,752) (9,359) (12,088)
Reorganization items (60,726) (32,803) (34,808) (16,837)
--------- --------- --------- ---------
Income (loss) from continuing operations before income
taxes, minority interests, discontinued operations and
the cumulative effect of change in accounting principle $ 11,010 $(152,658) $ (18,238) $ 21,630
========= ========= ========= ========
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 September 30, 2003:
Revenues $ 49,774 $ 4,456 $ 8,800
Operating income 25,948 1,394 4,947
Net income 16,391 1,404 2,109
Company's share of net income 4,282 702 951
Condensed Statements of Operations
for the three months ended September 30, 2002:
Revenues $ 57,231 $ 4,756 $ 8,754
Operating income 32,169 1,886 4,836
Net income 22,570 1,899 1,672
Company's share of net income 5,896 949 754
Condensed Statements of Operations
for the nine months ended September 30, 2003:
Revenues $ 148,485 $ 12,429 $ 25,453
Operating income 76,784 3,215 14,650
Net income 47,209 1,144 5,761
Company's share of net income 12,333 572 2,598
Condensed Statements of Operations
for the nine months ended September 30, 2002:
Revenues $ 151,491 $ 10,808 $ 25,373
Operating income 74,860 2,258 14,499
Net income 45,968 2,859 4,968
Company's share of net income 12,009 1,430 2,240
Mammoth
Pacific Haripur Barge
Quezon Power Plant Plant
(The Philippines) (United States) (Bangladesh)
----------------- --------------- -------------
Condensed Balance Sheets at September 30, 2003:
Current assets $ 145,782 $ 13,723 $ 24,532
Non-current assets 744,286 89,163 96,684
Total assets 890,068 102,886 121,216
Current liabilities 52,975 653 15,991
Non-current liabilities 538,528 2,931 63,900
Total liabilities 591,503 3,584 79,891
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 Companies share of each of the net assets shown above is less than five
percent of the Company's consolidated assets.
Quezon Power
Manila Electric Company ("Meralco"), the power purchaser for the Company's
Quezon Project (the "Quezon Project"), is engaged in discussions and legal
proceedings with the government of The Philippines relating to Meralco's
financial condition. The Quezon Project is currently in negotiations with
Meralco to amend the Power Purchase Agreement to address concerns about
Meralco's ability to meet its offtake obligations under that Agreement. Lenders
to the Quezon Project have expressed concern about the resolution of those
matters, as well as compliance with the Quezon Project operational parameters
and the Quezon Project's failure to obtain required insurance coverages, as
these matters relate to requirements under the applicable debt documents.
Although Covanta believes that the facility is operated in accordance with
applicable requirements, it has implemented certain operational changes and is
discussing amendments to the Quezon Project documents with the Quezon Project
participants to address those concerns. The Quezon Project is also seeking the
extension of an existing waiver permitting it to continue to forego obtaining
the coverage in question on the grounds that these coverages are not
commercially available.
New Martinsville
The initial term lease under an operating agreement between Covanta New
Martinsville Hydroelectric Corp. and General Electric Capital Corporation to
operate New Martinsville Hydroelectric Project (the "Hydro Project") expired on
October 18, 2003. Covanta Power Plant Operations entered into an interim
operations and maintenance agreement to operate the Hydro Project through
December 31, 2003.
Credit Arrangements
See Note 17 to the Company's Financial Statements included in the Annual Report
on Form 10-K for the year ended December 31, 2002 for a description of the
Company's Credit Arrangements. 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 on September 15, 2003 was extended through
April 1, 2004.
The DIP Credit Facility as of October 31, 2003 is approximately $208.0 million
facility. The DIP Credit Facility comprises two tranches. The Tranche A Facility
provides the Company with a credit line of approximately $9.3 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, and will be reduced by an additional $0.2
million each month, 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. As of October 20, 2003, $7.6 million in letters of credit were
outstanding under Tranche A. The Tranche B Facility consists of approximately
$198.7 million in commitments solely for the extension or issuance of letters of
credit to replace certain letters of credit existing at the time the DIP Credit
Facility was put in place. On October 1, 2003, the Tranche B Facility was
reduced by $22.5 when the beneficiary drew upon two letters of credit under the
Tranche B Facility. The Company repaid the DIP Lenders for the drawn letters of
credit out of working capital on October 1, 2003.
Contingent Liabilities
At September 30, 2003, the Company has surety bonds covering the following
obligations not reflected as a liability in the Condensed Consolidated Balance
Sheet: performance under construction contracts 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, and approximately $7.5 million
related to a lease reserve account at a domestic project for the geothermal
business.
At September 30, 2003, capital commitments for continuing operations amounted to
$11.2 million for normal replacement and growth in energy facilities. Other
capital commitments for Domestic Energy and Water and International Energy as of
September 30, 2002 amounted to approximately $29.8 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.
The Company is party to a number of 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
losses are considered probable and reasonably estimable, records as a loss, an
estimate of the ultimate outcome. If the Company can only estimate the range of
a possible loss, an amount representing the low end of the range of possible
outcomes is recorded. The final consequences of these proceedings are not
presently determinable with certainty. Generally claims and lawsuits against the
Debtors arising from events occurring prior to the Petition Date will be
resolved pursuant to the Company's confirmed Plan of Reorganization.
Subsidiaries of the Company which are intended to be liquidated (see discussion
above in Developments in Plan of Reorganization - C. The Liquidation Plan) are
defendants in two legal proceedings in which the aggregate claims against such
subsidiaries may exceed $85 million. Because the Liquidation Plan does not
contemplate that creditors of liquidating entities will receive any
distribution, these entities do not intend to defend these cases and the
restructured Company should have no further financial responsibility regarding
these matters.
Ogden New York Services, Inc. ("Ogden New York"), is a defendant in two separate
lawsuits brought by United Air Lines, Inc. ("United") and American Airlines,
Inc. ("American"), (collectively, the "Airlines Lawsuits") filed in the Supreme
Court of the State of New York, which have been consolidated for joint trial.
The lawsuits seek a judgment declaring that Ogden New York is responsible for
petroleum contamination at airport terminals formerly or currently leased by
United and American at New York's Kennedy International Airport ("JFK Airport").
United seeks approximately $1.9 million in remediation costs and legal expenses,
as well as certain declaratory relief, against Ogden New York and four airlines,
including American. American seeks approximately$74.5 million in remediation
costs and legal fees from Ogden New York and United. Ogden New York disputes the
allegations and believes that the damages sought are overstated in view of the
airlines' responsibility for the alleged contamination and that Ogden New York
has defenses under its respective leases and Port Authority permits. This
litigation has been stayed as to Ogden New York as a result of its Chapter 11
filing. Ogden New York believes that the claims asserted by United and American
are prepetition unsecured obligations of Ogden New York (a liquidating Debtor)
treated under the amended Liquidation Plan, and that therefore the Company would
have no further financial responsibility regarding those matters.
The Martin County Coal Corporation and others (the "Third Party Plaintiffs")
have joined Ogden Environmental and Energy Services ("OEES"), a liquidating
Debtor subsidiary of Covanta, as a third party defendant to several pending
Kentucky state court litigations arising from an October 2000 failure of a mine
waste impoundment that resulted in the release of approximately 250 million
gallons of coal slurry. Third Party 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. Prior to being joined, OEES had not been a party to the underlying
litigation, some of which had been pending for two years. Plaintiffs in the
underlying action (the "First Party Plantiffs"), have also indicated that they
will seek to join OEES to the litigation. On April 30, 2003, the Bankruptcy
Court entered an agreed-upon order by which Plaintiffs may liquidate their
claims (if any) against OEES, but may not recover or execute judgment against
OEES. To date, First Party Plaintiffs have not sought similar relief from the
Bankruptcy Court and thus the automatic stay continues to bar joinder of OEES as
a direct defendant. Because OEES is a liquidating Debtor and it does not appear
that creditors will receive any recoveries from OEES's estate, the Debtors have
informed counsel to the other parties to this case that it does not intend to
participate in the litigation or defend against claims asserted against OEES.
Because the extent to which OEES is responsible for the impoundment failure will
be a determinate of the amount that other defendants are ultimately responsible
for damages due to injured parties, OEES's liability is likely to be contested
by the other parties to the case, regardless of OEES's non-participation.
Supplemental Disclosure of Cash Flow Information
The Hennepin restructuring was a noncash transaction, which included the Company
recording decreases to property, plant, and equipment-net of $84.2 million and
to project debt of $63.0 million.
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 September 30, 2003 vs. Quarter Ended September 30, 2002
Consolidated Results
Service revenues for the third quarter of 2003 were $125.5 million, an increase
of $0.9 million compared to $124.6 million in the third quarter of 2002. The
increase was primarily due to a $2.8 million increase in Domestic energy and
water segment service revenue mainly related to increased waste tonnage
processed and service fee escalations, partially offset by a $2.0 million
decrease in Other segment service revenues related to the wind-down and sale of
non-energy businesses.
Electricity and steam sales for the third quarter of 2003 were $93.8 million, a
decrease of $4.4 million from the corresponding period in 2002. The decrease was
primarily related to a $6.1 million decrease in International energy segment
electricity and steam sales due to lower dispatch and reduced fuel pass-through
costs.
Construction revenues for the third quarter of 2003 were $1.5 million, a
decrease of $10.3 million, compared to $11.8 million in the third quarter of
2002, primarily due to the Company's substantial completion of construction of
the desalination project in Tampa, Florida. See Notes to Condensed Consolidated
Financial Statements for further discussion.
Other revenues-net for the third quarter of 2003 were comparable to the third
quarter of 2002.
Plant operating expenses for the third quarter of 2003 were comparable to the
third quarter of 2002.
Construction costs for the third quarter of 2003 were $6.3 million, a decrease
of $7.0 million compared to $13.3 million in the third quarter of 2002. The
decrease is primarily due to the Company's substantial completion of
construction of the desalination project in Tampa, Florida. A charge of $4.5
million is included in 2003 consisting of $3.0 million for reserve against
retainage receivables and $1.5 million in additional costs associated with
completion of the desalination project. See Notes to Condensed Consolidated
Financial Statements for further discussion.
Debt service charges for the third quarter of 2003 were $19.3 million, a
decrease of $2.6 million compared to $21.9 million in the third quarter of 2002.
The decrease is primarily the result of a reduction in project debt and a
decline in variable interest rates from the prior year.
Other operating costs and expenses were $2.0 million for the third quarter of
2003, a decrease of $3.2 million compared to $5.2 million in the third quarter
of 2002 primarily due to the wind-down of non-energy businesses.
Selling, administrative and general expenses for the third quarter of 2003 were
$7.8 million, a decrease of $5.0 million compared to $12.8 million for the same
period in 2002 primarily due to a $2.1 million reduction in professional fees
and a $1.0 million reduction in overhead.
Other net expenses for the third quarter of 2003 were $14.3 million, an increase
of $29.4 million from the prior period. The increase results from the $14.4
million increase in provision for arena commitments in 2003 and a $13.4 million
reversal of a pre-petition severance accrual during the third quarter of 2002.
Equity in income of investees and joint ventures for the third quarter of 2003
was $6.3 million, a decrease of $2.3 million compared to $8.6 million for the
same period in 2002, primarily due to a decline in profits from the Quezon
energy facility.
Interest expense-net for the third quarter 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 third quarter of 2003 were comparable to the same
period in 2002.
The effective tax rate in 2003 was (53.6%) compared to 10.6% for the same period
of 2002. This decrease in the effective rate is primarily due to deductions
taken during the current period resulting in a tax benefit compared to pre-tax
earnings in the prior period.
Domestic Energy and Water Segment
Total revenues for the third quarter of 2003 for the domestic energy and water
segment were $177.7 million, a decrease of $4.8 million compared to $182.5
million in the third quarter of 2002, mainly due to a decrease in construction
revenue of $10.2 million attributable to the Company's substantial completion of
construction of the desalination project in Tampa, Florida, offset by a $2.8
million increase in service revenue primarily related to increased waste tonnage
processed and service fee escalations, in addition to a $1.7 million increase in
electric and steam sales primarily related to increased electricity generation
and higher electric and steam rates.
Income from operations for the third quarter of 2003 for the Domestic energy and
water segment was $30.5 million, a decrease of $0.2 million compared to $30.7
million for the third quarter of 2002 primarily due to the decrease in total
costs of $5.4 million offset by the decline in revenue discussed above. The
decrease in total costs and expenses is composed primarily of a $7.0 million
decrease in construction expenses due to the Company's substantial completion of
construction of the desalination project in Tampa, Florida. A charge of $4.5
million is included in 2003 consisting of $3.0 million for reserve against
retainage receivables and $1.5 million in additional costs associated with
completion of the desalination project.
International Energy Segment
Total revenues for the third quarter of 2003 for the International energy
segment were $42.0 million, a decrease of $7.2 million compared to $49.2 million
in the third quarter of 2002, primarily due to a $6.1 million decrease in
electric and steam sales due to lower dispatch and reduced fuel pass-through
costs.
Income from operations for the third quarter of 2003 for the International
segment was $9.7 million, a decrease of $3.2 million compared to $12.9 million
in the third quarter of 2002 primarily due to the decrease in revenue of $7.2
million discussed in the preceding paragraph, partially offset by a decline in
plant operating costs of $4.7 million primarily due to lower dispatch and fuel
costs at the two plants in India.
Other Segment
Total revenues for the third quarter of 2003 for the Other segment were $1.0
million, a decrease of $2.1 million compared to $3.1 million in the third
quarter of 2002. This decrease was due to the wind-down and sale of non-energy
businesses.
Loss from operations for the third quarter of 2003 for the Other segment was
$16.2 million, a decrease of $30.1 million compared to income from operations of
$13.9 million in the third quarter of 2002 primarily due to a $14.4 million
increase in provision for Ottawa commitments and a $13.4 million reversal of a
pre-petition severance accrual during the third quarter of 2002.
Nine Months Ended September 30, 2003 vs. Nine Months Ended September 30, 2002
Consolidated Results
Service revenues for the first nine months of 2003 were $390.3 million, an
increase of $3.3 million compared to $387.0 million in the first nine months of
2002. The increase was due to a $14.3 million increase in Domestic energy and
water segment service revenue primarily related to increased waste tonnage
processed and service fee escalations partially offset by a $12.1 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 nine months of 2003 were
$277.7 million, an increase of $4.8 million compared to $272.9 million in the
first nine months of 2002. The increase was primarily due to higher electricity
generation at several facilities.
Construction revenues for the first nine months of 2003 were $11.2 million, a
decrease of $23.1 million compared to $34.3 million in the first nine months of
2002 primarily due to a $22.4 million decrease in revenue as a result of the
Company's substantial completion of construction of the desalination project in
Tampa, Florida.
Other revenues-net for the first nine months of 2003 were comparable to the
first nine months of 2002.
Plant operating expenses were $411.3 million for the first nine months of 2003,
an increase of $13.3 million compared to $398.0 million in the first nine months
of 2002 primarily due to a $7.3 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 nine
months of 2002 by a $4.4 million adjustment to operating accruals in 2002.
Construction costs for the first nine months of 2003 were $15.4 million, a
decrease of $19.3 million compared to $34.7 million in the first nine months of
2002. The decrease is primarily attributable to the Company's substantial
completion of the desalination project in Tampa, Florida. A charge of $4.5
million is included in 2003 consisting of $3.0 million for reserve against
retainage receivables and $1.5 million in additional costs associated with
completion of the desalination project. See Notes to Consolidated Financial
Statements for further discussion.
Debt service charges for the first nine months of 2003 were $59.9 million, a
decrease of $7.0 million compared to $66.9 million in the first nine 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 nine months of 2003 were comparable
to the same period in 2002.
Other operating costs and expenses were $4.7 million for the first nine months
of 2003, a decrease of $17.1 million compared to $21.8 million in the first nine
months of 2002 primarily due to the wind-down of many non-energy businesses.
Net gain on sale of businesses in the first nine months of 2003 of $1.1 million
was related to additional proceeds received from the sale of businesses sold in
prior years. Net loss on sale of businesses in the first nine months of 2002 of
$6.9 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 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 $27.8 million for the first
nine months of 2003, a decrease of $15.2 million compared to $43.0 million in
the first nine months of 2002 primarily due to a $5.8 million reduction in
professional fees, and reduced costs related to headquarter staff reductions of
$3.9 million, and a $3.0 million reduction in project development expenses in
2003.
Other net expenses for the first nine months of 2003 compared to the same period
in 2002 decreased by $2.9 million primarily due to a reduction in fees related
to the Master Credit Facility of $24.6 million in 2002, offset by an increase in
the provision for arena commitments of $14.4 million in 2003 and a reversal of a
pre-petition severance accrual of $13.4 million during the third quarter of
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 nine months of
2003 were comparable to the same period in 2002.
Interest expense-net for the first nine 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 nine months of 2003 were comparable to the same
period in 2002.
The effective tax rate in 2003 was 37.5% compared to 1.3% 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.
For the nine months ended September 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 the notes to the Financial Statements for
further discussion.
The cumulative effect of a change in accounting principle of $8.5 million in the
first nine months of 2003 was 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 nine 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 principles.
Property, plant and equipment - net decrease of $123.9 million for the first
nine months of 2003 was due mainly to depreciation expense of $58.5 million for
the period and a reduction of $84.2 million for the Hennepin restructuring (See
Notes to the Financial Statements for further discussion) offset by capital
additions of $16.8 million and $3.6 million related to amounts capitalized upon
the adoption of SFAS No. 143.
The Company expects to sell its interest in the geothermal business during the
fourth quarter upon approval of such sale, which may be consummated in
connection with the confirmation of the Heber Plan. Bankruptcy Court (see Notes
to Condensed Consolidated Financial Statements - Developments in Plan of
Reorganization--B. The Heber Reorganization Plan.) The Geothermal Business
contributed approximately $54.4 million in revenues for the nine months ended
September 30, 2003 and $50.7 million in revenues for the nine months ended
September 30, 2002.
Domestic Energy and Water Segment
Total revenues for the first nine months of 2003 for the Domestic energy and
water segment were $545.1 million, an increase of $7.2 million compared to
$537.9 million in the first nine months of 2002, mainly due to a $14.3 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 $14.7 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
$22.8 million primarily attributable to the Company's substantial completion of
construction of the desalination project in Tampa, Florida.
Income from operations for the first nine months of 2003 for the Domestic energy
and water segment was $117.1 million, an increase of $35.8 million compared to
$81.3 million for the first nine months of 2002 primarily due to the $7.2
million increase in revenue discussed above, and a decrease in total costs and
expenses of $28.3 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 $15.3 million decrease
in construction expenses due to the Company's substantial completion of
construction of the desalination project in Tampa, Florida. A charge of $4.5
million is included in 2003 consisting of $3.0 million for reserve against
retainage receivables and $1.5 million in additional costs associated with
completion of the desalination project. These decreases were partially offset by
a $7.3 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 nine months of 2002 by a $4.4
million adjustment to operating accruals in 2002.
International Energy Segment
Total revenues for the first nine months of 2003 for the International energy
segment were $130.6 million, a decrease of $10.1 million compared to $140.7
million in the first nine months of 2002, primarily due to a $7.6 million
decrease in electricity sales at the Company's two plants in India combined with
a reduction in electricity sales of $2.3 million at two of the Company's energy
facilities in The Philippines as a result of rate reductions.
Income from operations for the first nine months of 2003 for the International
energy segment was $28.4 million, an increase of $80.8 million compared to a
loss of $52.4 million in the first nine 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 $10.1 million discussed above was
offset by a similar decrease in plant operating costs. The increase in income
from operations in the first nine 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 nine months of 2002.
Other Segment
Total revenues for the first nine months of 2003 for the Other segment were $3.4
million, a decrease of $12.5 million compared to $15.9 million in the first nine
months of 2002. This decrease was due to the wind-down and sale of non-energy
businesses.
Loss from operations for the first nine months of 2003 for the Other segment was
$16.7 million, a decrease of $38.2 million compared to $54.9 million in the
first nine months of 2002, primarily due to a $40 million pre-tax impairment
charge, taken in the second quarter of 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,) and a decrease in operating costs of
$19.2 million, offset by a $14.4 million increase in provision for Ottawa
commitments in the third quarter of 2003, in addition to the decrease in revenue
discussed above.
Capital Investments and Commitments
At September 30, 2003, capital commitments for continuing operations amounted to
$11.2 million for normal replacement and growth in energy facilities. Other
capital commitments for Domestic energy and water and International energy as of
September 30, 2003 amounted to approximately $29.8 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, these
entities also are involved in legal proceedings in which damages and other
remedies are sought.
In addition, at September 30, 2003, the Company has surety bonds covering the
following obligations not reflected as a liability in the Condensed Consolidated
Balance Sheet: performance under its construction contracts 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. See Liquidity/Cash Flow
below for a discussion of letter of credit obligations.
See "Reorganization" in the Notes to the Financial Statements above for a
discussion of possible commitments related to the Company's reorganization.
The Company also has additional guarantees that include approximately $22.1
million related to international energy projects, and approximately $7.5 million
related to a lease reserve account at a domestic energy project for the
geothermal business. If the geothermal business is disposed of as described
above (see Notes to Financial Statements, Developments in Plan of
Reorganization, B. The Heber Reorganization Plan), this account will become the
obligation of the acquirer of that business.
Liquidity/Cash Flow:
At September 30, 2003, the Company had approximately $138.4 million in cash and
cash equivalents, of which $28.9 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 nine months of 2003 was
$123.8 million compared to net cash provided by operating activities in 2002 of
$90.6 million. The increase of $33.2 million was primarily due to a $17.0
million decrease in other operating costs and expenses and a $15.2 million
decline in selling, administrative and general expenses for the period.
Net cash used in investing activities for the first nine months of 2003 was $5.3
million compared to net cash provided by investing activities of $8.3 million in
2002. This increase of $13.6 million in cash used in investing activities was
primarily due to decreases in proceeds from the sales of businesses and other
assets of $7.3 million and distributions from investees and joint ventures of
$6.2 million.
Net cash used in financing activities for the first nine months of 2003 was
$95.9 million compared to $101.7 million in 2002. This decrease of $5.8 million
in cash used in financing activities was due primarily to a decrease in
restricted funds held in trust combined with an increase in new project
borrowings of $4.5 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 but was not 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 filed voluntary petitions for relief under Chapter 11 of the
Bankruptcy Code that, among other things, act 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 DIP Lenders. On
April 5, 2002, the Bankruptcy Court issued its interim order approving the DIP
Credit Facility and on May 15, 2002, a final order approving the DIP Credit
Facility. On August 2, 2002, the Bankruptcy Court issued an order that overruled
objections by holders of minority interests in two limited partnerships who
disputed the inclusion of the limited partnerships in the DIP Credit Facility.
Although the holders of such interests at one of the limited partnerships have
appealed the order, they have reached an agreement with the Company that in
effect deferred the appeal. The DIP Credit Facility's current terms are
described below.
The DIP Credit Facility is now an approximately $208.0 million facility largely
for the continuation of existing letters of credit and is secured by all of the
Company's domestic assets not subject to liens of others and generally 65% of
the stock of its foreign subsidiaries held by U.S. corporations. Obligations
under the DIP Credit Facility will have senior status to other pre-petition
secured claims, and the DIP Credit Facility is now the operative debt agreement
with the Company's banks. The Master Credit Facility remains in effect to
determine the rights of the lenders who are a party to it with respect to
obligations not continued under the DIP Credit Facility. However, as noted
above, 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 under the Master Credit
Facility for the Company's benefit to secure performance under certain energy
contracts (totaling $203.6 million); to secure obligations relating to the
entertainment businesses (totaling $153.0 million) 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, in connection with the Company's insurance program (totaling
$38.4 million); and for credit support of the Company's adjustable rate revenue
bonds (totaling $127.0 million). Of these letters of credit issued under the
Master Credit Facility, only $240.8 million of the outstanding letters of
credit, principally in connection with energy facilities and the Company's
insurance program, were replaced with letters of credit issued under the DIP
Credit Facility.
Beginning in April 2002 and as a result of 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. In addition, letters of credit in the amounts of $2.1 million, relating
to the entertainment businesses, was drawn in December 2002.
Of the outstanding letters of credit at September 30, 2003, approximately $123.6
million secures indebtedness that is included in the Condensed Consolidated
Balance Sheet and $84.6 million relates to other commitments. Additional letters
of credit of approximately $163.4 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 $9.5 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, and will be reduced by an additional $0.2 million each month, 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. As of October 20,
2003, $7.6 million in letters of credit were outstanding under Tranche A. The
Tranche B Facility consists of approximately $198.7 million in commitments
solely for the extension or issuance of letters of credit to replace certain
letters of credit existing at the time the DIP Credit Facility was put in place.
On October 1, 2003, the Tranche B Facility was reduced by $22.5 when the
beneficiary drew upon two letters of credit under the Tranche B Facility. The
Company repaid the DIP Lenders for the drawn letters of credit out of working
capital on October 1, 2003.
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 .75% 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) incurrence of 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 March 31, 2004.
(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 material compliance with all of the covenants of
the DIP Credit Facility, as amended.
The Company has not made any cash borrowings under its DIP Credit Facility, as
amended, but approximately $4.8 million in new letters of credit have been
issued under Tranche A of the DIP Credit facility as of September 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
on September 15, 2003 was extended through April 1, 2004. 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, provide it sufficient liquidity to continue to operate its
core businesses during the Chapter 11 proceedings. Moreover, the legal
provisions relating to the Chapter 11 proceedings are expected to provide a
legal basis for maintaining the Company's business intact while it is being
reorganized. However, the outcome of the Chapter 11 proceedings is not within
the Company's control and no assurances can be made with respect thereto.
Other:
Haverhill
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 a 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.
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 or is in the process of renewing 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.
Quezon Power
See Notes to the Financial Statements for a discussion of Quezon Power.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Except as discussed in the following paragraphs there have been no significant
changes in the Company's market risk sensitive assets and liabilities for the
quarter ended September 30, 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 decreased $1.5 million from $19.1 million at
December 31, 2002 to $17.6 million at September 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
The Company has carried out an evaluation under the supervision and with the
participation of the Company's management, including the Chief Executive
Officer, who also presently performs the functions of principal financial
officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. There are inherent limitations to the
effectiveness of any system of disclosure controls and procedures, including the
possibility of human error and the circumvention or overriding of the controls
and procedures. Accordingly, even effective disclosure controls and procedures
can only provide reasonable assurance of achieving their control objectives.
Based upon the Company's evaluation, the Chief Executive Officer, who also
presently performs the functions of principal financial officer, has concluded
that, as of September 30, 2003, the disclosure controls and procedures are
effective to provide reasonable assurance that information required to be
disclosed in the reports the Company files and submits under the Exchange Act is
recorded, processed, summarized and reported as and when required.
There has been no change in the Company's internal control over financial
reporting during the Company's quarter ended September 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 relief under the Bankruptcy Code in
the Bankruptcy Court. Since the Petition Date, 32 additional subsidiaries filed
petitions 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 Chapter 11 Cases are being
jointly administered for procedural purposes only. 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
losses are considered probable and reasonably estimable, records as a loss an
estimate of the ultimate outcome. If the Company can only estimate the range of
a possible loss, an amount representing the low end of the range of possible
outcomes is recorded. The final consequences of these proceedings are not
presently determinable with certainty. Generally claims and lawsuits against the
Debtors arising from events occurring prior to the Petition Date and will be
resolved pursuant to the Company's confirmed Reorganization Plan. However, to
the extent that claims are not dischargeable in bankruptcy, claims arising from
events prior to the Petition Date may not be so resolved. For example, persons
who were personally injured prior to the Petition Date but whose injury only
became manifest thereafter will not be resolved pursuant to the Reorganization
Plan.
Environmental Matters
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. Generally such claims arising
prior to the Petition Date will be resolved in and discharged by the Chapter 11
cases.
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, as 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.
Because this indemnity arose after the Petition Date, it is not affected by the
Debtors' discharge in bankruptcy.
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 liabilities of a liquidating
Debtor treated under the amended Liquidating Plan, and that therefore the
Company would have no further financial responsibility regarding these matters.
The Martin County Coal Corporation and others (the "Third Party Plaintiffs")
have joined, Ogden Environmental and Energy Services ("OEES"), a liquidating
Debtor subsidiary of Covanta, as a third party defendant to several pending
Kentucky state court litigations arising from an October 2000 failure of a mine
waste impoundment that resulted in the release of approximately 250 million
gallons of coal slurry. Third Party 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. Prior to being joined, OEES had not been a party to the underlying
litigation, some of which had been pending for two years. Plaintiffs in the
underlying action (the "First Party Plantiffs"), have also indicated that they
will seek to join OEES to the litigation. On April 30, 2003, the Bankruptcy
Court entered an agreed-upon order by which Plaintiffs may liquidate their
claims (if any) against OEES, but may not recover or execute judgment against
OEES. To date, First Party Plaintiffs have not sought similar relief from the
Bankruptcy Court and thus the automatic stay continues to bar joinder of OEES as
a direct defendant. Because OEES is a liquidating Debtor and it does not appear
that creditors will receive any recoveries from OEES's estate, the Debtors have
informed counsel to the other parties to this case that it does not intend to
participate in the litigation or defend against claims asserted against OEES.
Because the extent to which OEES is responsible for the impoundment failure will
be a determinate of the amount that other defendants are ultimately responsible
for damages due to injured parties, OEES's liability is likely to be contested
by the other parties to the case, regardless of OEES's non-participation.
Because the Liquidation Plan does not contemplate that creditors of liquidated
entities will receive any distribution, these entities do not intend to defend
these cases and the restructured Company should have no further financial
responsibility regarding these matters.
Other Environmental Matters
On September 15, 2003, the Environmental Protection Agency (the "EPA") issued a
"General Notice Letter" identifying Covanta as among 41 potentially responsible
parties ("PRPs") with respect to the Diamond Alkali Superfund Site/"Lower
Passaic River Project." The EPA alleges that the PRPs are liable for releases or
potential releases of hazardous substances to a 17 mile segment of the Passaic
River, located in northern New Jersey, and requests the PRPs' participation as
"cooperating parties" with respect to the funding of a five to seven year study
to determine an environmental remedial and restoration program. The EPA
currently estimates the cost of this study at $20 million. The study also will
be used in determining the PRPs' respective shares of liability for costs
associated with implementation of the selected cleanup program, as well as
potential damages for injury to, destruction of, or loss of natural resources.
As a result of uncertainties regarding the source and scope of contamination,
the number of PRPs that ultimately may be named in this matter, and the varying
degrees of responsibility among classes of PRPs, the Company's share of
liability, if any, cannot be determined at this time. Covanta is a Debtor and
consequently its liability, if any, should be discharged in accordance with the
Chapter 11 process. The allegations as to Covanta relate to discontinued,
non-energy operations.
In 1985, Covanta sold its interests in several manufacturing subsidiaries, some
of which allegedly used asbestos in their manufacturing processes, and one of
which was Avondale Shipyards, now a subsidiary of Northrop Grumman Corporation.
Some of these former subsidiaries have been and continue to be parties to
asbestos-related litigation. In 2001, Covanta was named a party, with 45 other
defendants, to one such case. Before the Debtor's bankruptcy filing, Covanta had
filed for its dismissal from the case, which is now stayed directly against
Covanta by the Chapter 11 Cases. Also, eleven proofs of claim seeking
unliquidated amounts have been filed against Covanta in the Chapter 11 Cases
based on what appears to be purported asbestos-related injuries that may relate
to the operations of former Covanta subsidiaries. Covanta believes that these
claims lack merit and plans to object vigorously to such claims.
The potential costs related to all of the following 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.
(i) On June 8, 2001, the EPA named Ogden Martin Systems of
Haverhill, Inc., now known as Covanta Haverhill, Inc., as one of
2,000 PRPs at the Beede Waste Oil Superfund Site, Plaistow, New
Hampshire (the "Site") in connection with alleged waste disposal
by PRPs on the Site. The EPA alleges that the costs of response
actions completed or underway at the Site total about $17
million and estimates that the total cost of cleanup of the Site
will be about $65 million. Covanta is participating in PRP group
discussions towards settlement of the EPA's claims. Covanta's
share of liability, if any, cannot be determined at this time 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. Covanta
Haverhill, Inc. is not a Debtor.
(ii) On April 9, 2001, Ogden Ground Services, Inc. ("Ogden Ground")
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 the Miami Dade
International Airport. The County alleges that it has expended
over $200 million in response and investigation costs and
expects to spend an additional $250 million to complete
necessary response actions. The lawsuit is currently subject to
a tolling agreement between PRPs and the County. Covanta's share
of liability, if any, cannot be determined at this time because
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 PRPs. Covanta's
liability, if any, arises from its agreement to indemnify
various transferees of its divested airport operations with
respect to certain known and potential liabilities that may
arise out of such operations, and in certain instances to remain
liable for certain potential liabilities that were not assumed
by the transferee. Ogden Ground has been sold, and the
transferee of its businesses is subject to Covanta's
indemnification agreement. The Debtors believe that the
indemnity of Ogden Ground's transferee, as well as any other
such indemnity, are pre-petition unsecured obligations. Ogden
Aviation, Inc. is a liquidating Debtor and the above matter is
expected to have no impact on the reorganized Company.
(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 Covanta's
subsidiaries owns 50%. The order is in connection with Chinese
Station's neighboring property owner's use of ash generated by
Chinese Station's Jamestown, California power plant. Chinese
Station completed the cleanup in mid-2001 and submitted its
Clean Closure Report to the Board on November 2, 2001. The Board
and other state agencies continue to investigate alleged civil
and criminal violations associated with the management of the
material. Chinese Station believes it has valid defenses, and a
petition for review of the order is pending. Settlement
discussions in this matter are underway. Based on penalties
proposed by the Board, the Company believes that this matter can
be resolved in amounts that will not be material to the Company
taken as a whole. Chinese Station and Covanta's subsidiary that
owns a partnership interest in Chinese station are not Debtors.
(iv) On January 4, 2000 and January 21, 2000, United Air Lines, Inc.
("United") and American Airlines, Inc. ("American"),
respectively, named Ogden New York Services, Inc. ("Ogden New
York"), in two separate lawsuits (collectively, the "Airlines
Lawsuits") filed in the Supreme Court of the State of New York,
which have been consolidated for joint trial. The lawsuits seek
a judgment declaring that Ogden New York is responsible for
petroleum contamination at airport terminals formerly or
currently leased by United and American at New York's Kennedy
International Airport ("JFK Airport"). United seeks
approximately $1.9 million in remediation costs and legal
expenses, as well as certain declaratory relief, against Ogden
New York and four airlines, including American. American seeks
approximately $74.5 million in remediation costs and legal fees
from Ogden New York and United. Ogden New York has filed
counter-claims and cross-claims against United and American for
contribution. American has filed a proof of claim against Ogden
New York in its chapter 11 case, alleging an unsecured claim of
approximately $74 million. Ogden New York disputes the
allegations and believes that the damages sought are overstated
in view of the airlines' responsibility for the alleged
contamination and that Ogden New York has defenses under its
respective leases and Port Authority permits. This litigation
has been stayed as to Ogden New York as a result of its Chapter
11 filing. Ogden New York believes that the claims asserted by
United and American are prepetition unsecured obligations of
Ogden New York (a liquidating Debtor) treated under the amended
Liquidation Plan, and that therefore the Company would have no
further financial responsibility regarding those matters.
In connection with the Airlines Lawsuits, prior to the Petition
Date, Ogden New York commenced an action against Zurich
Insurance Company ("Zurich") seeking, among other things, a
declaratory judgment that Zurich was obligated to defend and
indemnify Ogden New York against the Airlines Lawsuits under
certain environmental impairment liability policies. Ogden New
York successfully obtained partial summary judgment that Zurich
owed a duty to defend Ogden New York against the Airlines
Lawsuits and pay its defense fees, costs and expenses. Zurich
appealed the decision. In April 2003, in order to avoid the
uncertainty and continued costs of the litigation, Ogden New
York and Zurich reached a settlement whereby Zurich agreed to
pay to Ogden New York $1.8 million (the "Insurance Proceeds") in
full and final settlement of all claims for defense and
indemnity made to date by Ogden New York for environmental
impairments allegedly resulting from the Ogden New York's
fueling operations at JFK Airport (the "Zurich Settlement").
American maintains it is entitled to a portion of the insurance
proceeds and in connection with obtaining Bankruptcy Court
approval of the Zurich Settlement, American and Ogden New York
agreed that the Bankruptcy Court's approval would provide that
(i) Ogden New York preserved its rights to argue that American
was not entitled to any amount of the Insurance Proceeds, (ii)
American preserved its rights to assert a claim for the
Insurance Proceeds, and (iii) Ogden New York agreed not to
distribute the Insurance Proceeds to any other party interest on
account of any purported interests in such proceeds without
prior Bankruptcy Court order and without prior notice to
American's counsel. Although American has asserted its rights to
the Insurance Proceeds in its objections to the Zurich
Settlement and to approval of the Amended Disclosure Statement,
it has not to date filed an adversary proceeding in Ogden New
York's bankruptcy case or taken any other action seeking a
determination of its rights to the Insurance Proceeds. Under the
Liquidation Plan, the Insurance Proceeds, as Designated DIP
Collateral (as defined in the Liquidation Plan) will be
transferred to the reorganized Company pursuant to the DIP
Lender Direction (as defined in the Liquidation Plan) and will
not be available for distribution to any of Ogden New York's
unsecured creditors, including American.
(v) On December 23, 1999, an aviation subsidiary of Covanta was
named as a third-party defendant in an action filed in the
Superior Court of the State of New Jersey alleging that the
aviation subsidiary generated hazardous substances at a
reclamation facility known as the Swope Oil and Chemical Company
Site. Third-party plaintiffs seek contribution and
indemnification from the aviation subsidiary and over 90 other
third parties, as PRPs, for costs incurred and to be incurred in
the cleanup. This action was stayed pending the outcome of
first- and second-party claims. The aviation subsidiary's share
of liability, if any, cannot be determined at this time because
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. This matter is
expected to have no impact on the reorganized Company.
(b) Other Matters
(i) Covanta Heber Field Energy, Inc. and Heber Field Energy II, Inc.
own partnership interests in Heber Field Company (the "HFC
Project Company"). HFC Project Company is the lessee under more
than 200 leases with landowners in Imperial County, California,
pursuant to which the HFC Project Company leases the right to
extract geothermal fluids used to run two power plants owned or
leased by the HGC Project Company and the SIGC Project Company.
The HFC Project Company also enjoys easement, access and other
rights with respect to the leased property. Approximately 100
lessors have formed a group and filed proofs of claim in the
Debtors' bankruptcy proceedings seeking more than $68 million
from the HFC Project Company, Heber Geothermal Company (in which
Heber Loan Partners, ERC Energy, Inc. and ERC Energy II, Inc.
own partnership interests) and/or Second Imperial Geothermal
Company, L.P. (in which Covanta Energy Americas, Inc. owns all
of the partnership interests) for alleged underpayment of
royalties owed to them under their leases, easement violations
and violations of "most favored nations" clauses, and also an
increase in the prospective royalty rates used to pay them. In
July 2003 the Debtors and the lessor group reached an agreement
in principle, subject to Bankruptcy Court approval, under which
the Debtors have agreed to pay members of the lessor group
approximately $3.4 million (including attorneys' fees) upon
emergence from bankruptcy (or under certain other circumstances,
including sale of the projects). Under that settlement,
prospective royalty rates would remain the same as the royalty
rates historically paid to the lessors, and any disputes
relating to individual easement or most favored nation clause
violations would be resolved on a case-by-case basis. The
Debtors filed a motion with the Bankruptcy Court seeking
approval of the compromise with the lessor group, and on October
8, 2003 the Bankruptcy Court granted the motion. The Bankruptcy
Court also granted the Debtors permission to enter into
individual settlement agreements on substantially similar terms
with lessors that are not members of the lessor group, and to
settle any disputes relating to individual easement or most
favored nation clause violations on a case-by-case basis, not to
exceed $50,000.00 per settlement without further court approval.
(ii) As discussed above in "Developments in Project Restructurings"
in the Notes to the Financial Statements, prior to the Petition
Date, Covanta Onondaga commenced litigation challenging an
effort by OCRRA to terminate its service agreement with Covanta
Onondaga. Subsequent to the Petition Date, Covanta Onondaga
sought to remove that litigation from New York state court to
the Bankruptcy Court. On August 13, 2002 the U.S. District Court
(NDNY) granted OCRRA's motion to remand the matter to state
court and denied Covanta Onondaga's motion to transfer the
matter to the Bankruptcy Court. After Covanta Onondaga sought a
ruling from the Bankruptcy Court that the automatic stay applied
to the state court litigation, OCRRA obtained another order from
the U.S. District Court (NDNY) enjoining Covanta Onondaga and
the Bankruptcy Court from ruling on Covanta Onondaga's request
(which order Covanta Onondaga appealed), and then sought in late
2002 a ruling from the state court declaring that its
termination of the service agreement had been effective. The
U.S. Court of Appeals for the Second Circuit eventually enjoined
OCRRA from proceeding with the state court litigation pending
disposition of Covanta Onondaga's appeal, and reversed the
District Court's injunction in January 2003. The Bankruptcy
Court thereafter ruled that OCRRA's efforts in state court
violated the automatic stay, and enjoined OCRRA from proceeding
further with such efforts. OCRRA filed requests with the
Bankruptcy Court asking that the automatic stay be lifted to
permit the state court action to proceed, which requests were
twice denied. OCRRA has appealed all of these Bankruptcy Court
orders, and those appeals are now pending. All of this
litigation, including the above mentioned appeals, has been
resolved pursuant to the settlement between OCRRA and the
Debtors, and will be dismissed following the Effective Date of
the Amended Plans.
(iii) The Town of Babylon, New York (the "Town") filed a proof of
claim against Covanta Babylon, Inc. ("Covanta Babylon") for
approximately $13.4 million in pre-petition damages and $5.5
million in post-petition damages, alleging that Covanta Babylon
has accepted less waste than required under the service
agreement between the Town and Covanta Babylon and that its
filing under Chapter 11 imposed on the town additional costs for
which the Company should be responsible. The Company has filed
an objection to the Town's claim. The parties have agreed that
disputes between the parties shall be resolved before the
Bankruptcy Court. The Company believes that it is in full
compliance with the express requirements of the contract and was
entitled to adjust the amount of waste it is required to accept
to reflect the energy content of the waste delivered. It also
asserts that the costs arising from its Chapter 11 proceeding
are not recoverable from it by the Town. It therefore believes
it has valid defenses to the Town's claim. In the event the
parties are unable to consensually resolve their differences,
and depending upon the outcome and timing of the litigation with
the Town, the Debtors may, among other things, assume or reject
one or more executory contracts related to the Babylon Facility,
recharacterize Covanta Babylon as a liquidating Debtor, and/or
withdraw Covanta Babylon as a reorganizing Debtor and
subsequently file a separate plan of reorganization for Covanta
Babylon. In the event Covanta Babylon is recharacterized as a
liquidating Debtor, creditors of Covanta Babylon may not receive
any recovery on account of their claims. The Debtors are not
able to determine at this time whether a failure to resolve the
litigation or timely consummate a restructuring transaction with
respect to Covanta Babylon would impair the other Debtors'
ability to confirm and consummate the Amended Plans, or the
terms of any exit financing available to such other Debtors.
(iv) In late 2000, Lake County, Florida ("Lake County") commenced a
lawsuit in Florida state court against Covanta Lake, Inc.
("Covanta Lake") relating to the waste to energy facility
operated by Covanta in Lake County, Florida (the "Lake
Facility"). In the lawsuit, the County sought to have its
service agreement with Covanta Lake declared void and in
violation of the Florida Constitution. That lawsuit was stayed
by the commencement of the Chapter 11 Cases. Lake County
subsequently filed a proof of claim seeking in excess of $80
million from Covanta Lake and Covanta. After several months of
negotiations that failed to produce a settlement between Covanta
Lake and Lake County, on June, 20, 2003, Covanta Lake filed a
motion with the Bankruptcy Court seeking entry of an order (i)
authorizing Covanta Lake to assume, effective upon confirmation
of a plan of reorganization for Covanta Lake, its service
agreement with Lake County, (ii) finding no cure amounts due
under the service agreement, and (iii) seeking a declaration
that the service agreement is valid, enforceable and
constitutional, and remains in full force and effect.
Contemporaneously with the filing of the assumption motion,
Covanta Lake filed an adversary complaint asserting that Lake
County is in arrears to Covanta Lake in the amount of more than
$8.5 million. The Debtors and Lake County, however have reached
a tentative non-binding understanding in which the existing
service agreement would be terminated and a new, long-term
commercial arrangement between Covanta Lake and Lake County
established that would permit continued operation of the Lake
Facility by Covanta Lake. Settlement negotiations are ongoing,
and the parties are drafting definitive documentation. The
tentative settlement is contingent upon, among other things,
receipt of all necessary approvals, refinancing of the bonds
issued to finance the construction of the Lake Facility, as well
as a favorable outcome to the Debtors' pending objection to the
proof of claims filed by F. Browne Gregg, a third-party claiming
an interest in the existing service agreement that would be
terminating under tentative settlement. A trial on the Debtors'
objections to F. Browne Gregg's claims commenced on November 3,
2003. As of November 5, 2003, the Court has not ruled on this
matter and has scheduled briefs on the issues tried to be
submitted on December 5, 2003, after the confirmation hearing on
the Amended Plans. In the event the parties are unable to
consensually resolve their differences, and depending upon
(among other things) the timing, nature and outcome of the
litigation with Lake County, the Debtors may determine to, among
other things, assume or reject one or more executory contracts
related to the Lake Facility, recharacterize Covanta Lake as a
liquidating Debtor, and/or withdraw Covanta Lake as a
reorganizing Debtor and subsequently file a separate plan of
reorganization for Covanta Lake. In the event that the Debtors
reject one or more executory contracts related to the Lake
Facility, recharacterize Covanta Lake as a reorganizing Debtor,
or withdraw Covanta Lake as a reorganizing Debtor and
subsequently file a separate plan of reorganization for Covanta
Lake, creditors of Covanta Lake may not receive any recovery on
account of their claims. The Debtors are not able to determine
at this time whether a failure to resolve the litigation or
timely consummate a restructuring transaction with respect to
Covanta Lake would impair the other Debtors' ability to confirm
and consummate the Amended Plans, or the terms of any exit
financing available to such other Debtors.
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 $19.3 million in interest, as of
($100 million principal) of interest due March 1, 2002 September 30, 2003
6% Convertible Debentures Bankruptcy filing; non-payment $5.1 million in interest, $85
($85 million principal) of principal and interest due million in principal, as of
June 1, 2002 September 30, 2003
5.75% Convertible Debentures Bankruptcy filing; non-payment $3.6 million in interest, $63.6
($63.6 million principal) of principal and interest due million in principal, as of
October 20, 2002 September 30, 2003
Master Credit Facility Bankruptcy filing; non-payment Approximately $259.3 million
of principal and interest due principal, $29.2 million in
June 1, 2002; expiration of interest, as of September 30,
Master Credit Facility without 2003; plus $378.3 million of
cash collateralizing outstanding unfunded cash collateral
letters of credit obligations with respect to
letters of credit
The Company continues to pay on a timely basis principal and interest on
indebtedness relating to its waste-to-energy facilities and classified on its
Balance Sheet as project debt. The project debt associated with the financing of
waste-to-energy facilities is generally arranged by municipalities through the
issuance by governmental entities of tax-exempt and taxable revenue bonds.
Payment obligations for the project debt associated with waste-to-energy
facilities are limited recourse to the revenues and property, plant and
equipment of the operating subsidiary and non-recourse to the Company, subject
to operating performance guarantees and commitments by the Company. The
automatic stay provided under the Bankruptcy Code and orders entered into by the
Bankruptcy Court would prevent the obligees from exercising remedies under any
of the project debt that might otherwise be deemed to be in default by reason of
the Chapter 11 filing.
In respect to the City of Anaheim, California $126,500,000 Certificates
of Participation (1993 Arena Financing Project), the City of Anaheim sent a
notice of default under the Management Agreement for the Arrowhead Pond of
Anaheim which could constitute a default under a letter of credit reimbursement
agreement with Credit Suisse First Boston. The outstanding principal amount of
the named securities is $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 19 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 Bankruptcy 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
The following exhibits are filed as a part of this report:
2.1 Debtors' First Amended Joint Plan of Reorganization under
Chapter 11 of the Bankruptcy Code (previously filed as
Exhibit 2.1 to Covanta's Current Report on Form 8-K, dated
October 22, 2003 and incorporated herein by reference).
2.2 Debtors' First Amended Joint Plan of Liquidation under
Chapter 11 of the Bankruptcy Code (previously filed as
Exhibit 2.2 to Covanta's Current Report on Form 8-K, dated
October 22, 2003 and incorporated herein by reference).
2.3 Heber Debtors' Second Amended Joint Plan of Reorganization
under Chapter 11 of the Bankruptcy Code (previously filed as
Exhibit 2.3 to Covanta's Current Report on Form 8-K, dated
October 22, 2003 and incorporated herein by reference).
2.4 Disclosure Statement with Respect to Reorganizing Debtors'
Joint Plan of Reorganization, Heber Debtors' Joint Plan of
Reorganization and Liquidating Debtors Joint Plan of
Liquidation under Chapter 11 of the Bankruptcy Code
(previously filed as Exhibit 2.4 to Covanta's Current Report
on Form 8-K, dated October 22, 2003 and incorporated herein
by reference).
2.5 Short-Form Disclosure Statement with Respect to Reorganizing
Debtors' Joint Plan of Reorganization, Heber Debtors' Joint
Plan of Reorganization and Liquidating Debtors Joint Plan of
Liquidation under Chapter 11 of the Bankruptcy Code
(previously filed as Exhibit 2.5 to Covanta's Current Report
on Form 8-K, dated October 22, 2003 and incorporated herein
by reference).
10.1 Eighth Amendment to the Debtor-in-Possession Credit
Agreement and Limited Consent, dated as of August 22, 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.
10.2 Ninth Amendment to the Debtor-in-Possession Credit Agreement
and Limited Consent dated as of September 15, 2003 and
entered into by and among the Company, the Subsidiaries of
the Company listed on the signature pages thereof as
Borrowers, the Subsidiaries of the Company listed on the
signature pages thereof as Subsidiary Guarantors, the
Lenders party thereto, Bank of America, N.A. as
Administrative Agent for the Lenders, and Deutsche Bank AG,
New York Branch, as Documentation Agent for the Lenders.
31 Rule 13a-14(a)/15d-14(a) Certifications.
32 Section 1350 Certifications
Reports on Form 8-K:
On September 9, 2003, the Company filed a Current Report on Form
8-K announcing that the Debtors filed a draft Joint Plan of
Reorganization, a draft Joint Plan of Liquidation and a related
draft Disclosure Statement with the United States Bankruptcy Court
for the Southern District of New York. The Company also announced
that it had entered into an agreement to sell its interests in
Heber Geothermal Company, Heber Field Company, Second Imperial
Geothermal Co., Mammoth-Pacific L.P. and certain related holding
companies to affiliates of ArcLight Energy Partners Fund I, L.P.
and Caithness Energy, L.L.C. for a purchase price of $170,000,000,
subject to adjustments.
On October 23, 2003, the Company filed a Current Report on Form
8-K announcing that on October 17, 2003 the Debtors mailed
solicitation packages to claimholders and other parties in
interest which included the Debtors' First Amended Joint Plan of
Reorganization, the Debtors' First Amended Joint Plan of
Liquidation, the Heber Debtors' Second Amended Joint Plan of
Reorganization under Chapter 11 of the Bankruptcy Code and a
related Disclosure Statement and a Short-Form Disclosure
Statement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 14, 2003 COVANTA ENERGY CORPORATION
(Registrant)
By: /s/ Anthony J. Orlando
--------------------------------
Anthony J. Orlando
President, Chief Executive
Officer and Principal Financial
Officer
By: /s/ William J. Keneally
--------------------------------
William J. Keneally
Senior Vice President
and Chief Accounting Officer