Back to GetFilings.com
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 March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from______________to ______________
Commission file number 1-3122
Covanta Energy Corporation
---------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-5549268
- --------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
40 Lane Road, Fairfield, NJ 07004
---------------------------------
(Address of Principal Executive Office) (Zip code)
(973) 882-9000
---------------
(Registrant's telephone number including area code)
Not Applicable
-----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by checkmark whether the registrant has filed all reports required to
be filed by Section 12, 13 and 15 (d) of the Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan of reorganization
confirmed by a court.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of the registrant's Common Stock outstanding as of May 6,
2004 was 200 shares.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COVANTA ENERGY CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
SUCCESSOR PREDECESSOR
----------------- -----------------
FOR THE PERIOD FOR THE PERIOD
MARCH 11, 2004 JANUARY 1, 2004
THROUGH MARCH 31, THROUGH MARCH 10,
2004 2004
----------------- -----------------
(In Thousands of Dollars, Except Per Share Amounts)
Service revenues $ 25,453 $ 89,858
Electricity and steam sales 13,521 53,307
Construction revenues - 58
Other revenues-net 2 9
----------------- -----------------
Total revenues 38,976 143,232
----------------- -----------------
Plant operating expenses 27,322 100,774
Construction costs - 73
Depreciation and amortization 3,495 13,426
Debt service charges-net 2,237 13,241
Other operating costs and expenses 12 (209)
Net loss on sale of businesses and equity investments - (175)
Selling, general and administrative expenses 1,596 7,597
Other expense-net (198) (1,924)
----------------- -----------------
Total costs and expenses 34,464 132,803
----------------- -----------------
Equity in income from unconsolidated investments 932 4,817
----------------- -----------------
Operating income 5,444 15,246
Interest expense (net of interest income of $1,147, $935 and $664, respectively,
and excluding post-petition contractual interest of $243 and $243 for the period
January 1, 2004 through March 10, 2004 and the three months ended
March 31, 2003, respectively) (2,649) (5,374)
Reorganization items - (58,282)
Gain on cancellation of pre-petition debt - 510,680
Fresh start adjustments - (214,927)
----------------- -----------------
Income (loss) from continuing operations before income taxes, minority interests,
discontinued operations and the cumulative effect of changes in accounting principles 2,795 247,343
Income tax benefit (expense) (1,257) (215,269)
Minority interests (557) (2,511)
----------------- -----------------
Income (loss) from continuing operations before discontinued
operations and change in accounting principles 981 29,563
Gain from discontinued operations (net of income tax expense of $1,439 in 2003) - -
Cumulative effect of change in accounting principles (net of
income tax benefit of $5,532 in 2003) - -
----------------- -----------------
Net income (loss) 981 29,563
----------------- -----------------
Other comprehensive income (loss), net of income tax:
Foreign currency translation adjustments (54) -
----------------- -----------------
Other comprehensive income (loss) (54) -
----------------- -----------------
Comprehensive income (loss) $ 927 $ 29,563
================= =================
Basic income (loss) per share:
Income (loss) from continuing operations $ 0.59
Income (loss) from discontinued operations -
Cumulative effect of change in accounting principle -
-----------------
Net income (loss) $ 0.59
=================
Diluted income (loss) per share:
Income (loss) from continuing operations $ 0.59
Income (loss) from discontinued operations -
Cumulative effect of change in accounting principle -
-----------------
Net income (loss) $ 0.59
=================
FOR THE THREE
MONTHS ENDED
MARCH 31,
2003
-------------
(In Thousands of Dollars, Except Per Share Amounts)
Service revenues $ 120,492
Electricity and steam sales 69,912
Construction revenues 6,007
Other revenues-net -
-------------
Total revenues 196,411
-------------
Plant operating expenses 126,045
Construction costs 5,566
Depreciation and amortization 18,674
Debt service charges-net 19,970
Other operating costs and expenses 136
Net loss on sale of businesses and equity investments (417)
Selling, general and administrative expenses 9,651
Other expense-net (574)
-------------
Total costs and expenses 179,051
-------------
Equity in income from unconsolidated investments 4,441
-------------
Operating income 21,801
Interest expense (net of interest income of $1,147, $935 and $664, respectively,
and excluding post-petition contractual interest of $243 and $243 for the period
January 1, 2004 through March 10, 2004 and the three months ended
March 31, 2003, respectively) (10,010)
Reorganization items (12,194)
Gain on cancellation of pre-petition debt -
Fresh start adjustments -
-------------
Income (loss) from continuing operations before income taxes, minority interests,
discontinued operations and the cumulative effect of changes in accounting principles (403)
Income tax benefit (expense) 186
Minority interests (2,564)
-------------
Income (loss) from continuing operations before discontinued
operations and change in accounting principles (2,781)
Gain from discontinued operations (net of income tax expense of $1,439 in 2003) 1,789
Cumulative effect of change in accounting principles (net of
income tax benefit of $5,532 in 2003) (8,538)
-------------
Net income (loss) (9,530)
-------------
Other comprehensive income (loss), net of income tax: -
Foreign currency translation adjustments 807
-------------
Other comprehensive income (loss) 807
-------------
Comprehensive income (loss) $ (8,723)
=============
Basic income (loss) per share:
Income (loss) from continuing operations $ (0.06)
Income from discontinued operations 0.04
Cumulative effect of change in accounting principles (0.17)
-------------
Net income (loss) $ (0.19)
=============
Diluted income (loss) per share:
Income (loss) from continuing operations $ (0.06)
Income from discontinued operations 0.04
Cumulative effect of change in accounting principles (0.17)
-------------
Net income (loss) $ (0.19)
=============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2
COVANTA ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SUCCESSOR PREDECESSOR
MARCH 31, 2004 DECEMBER 31, 2003
-------------- -----------------
(In Thousands of Dollars, Except Share and Per Share Amounts)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 91,953 $ 289,424
Restricted funds held in trust 162,370 79,404
Receivables (less allowances of $45 and $27,893, respectively) 178,596 230,093
Deferred income taxes 6,538 9,763
Prepaid expenses and other current assets (less allowances of zero
and $5,000, respectively) 70,511 82,115
-------------- -----------------
TOTAL CURRENT ASSETS 509,968 690,799
Property, plant and equipment-net 1,033,584 1,453,354
Restricted funds held in trust 109,415 119,480
Unbilled service and other receivables (less allowances of zero
and $5,026 respectively) 113,944 125,363
Service and energy contracts (net of accumulated amortization of $1,407) 316,707 -
Unamortized contract acquisition costs-net - 27,073
Goodwill 24,470 -
Other intangible assets-net - 7,073
Investments in and advances to investees and joint ventures 68,885 137,374
Other assets 38,276 53,064
-------------- -----------------
TOTAL ASSETS $ 2,215,249 $ 2,613,580
============== =================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
LIABILITIES:
CURRENT LIABILITIES:
Current portion of long-term debt $ 9,631 $ 9,492
Current portion of project debt 94,134 99,216
Accounts payable 23,186 23,584
Federal income tax payable 1,301 -
Accrued expenses 184,635 208,342
Deferred revenue 35,040 37,431
-------------- -----------------
TOTAL CURRENT LIABILITIES 347,927 378,065
Long-term debt 337,775 2,150
Project debt 847,003 933,185
Deferred income taxes 311,034 195,059
Deferred revenue 127,177 129,304
Other liabilities 124,349 78,358
Liabilities subject to compromise - 956,095
-------------- -----------------
TOTAL LIABILITIES 2,095,265 2,672,216
-------------- -----------------
MINORITY INTERESTS 71,532 69,398
-------------- -----------------
SHAREHOLDERS' EQUITY (DEFICIT):
Successor common stock, par value $0.01 per share authorized, 200 shares,
200 shares issued and outstanding as of March 31, 2004 - -
Predecessor serial cumulative convertible preferred stock, par value $1.00
per share, authorized, 4,000,000 shares; shares outstanding: 33,049 net
of treasury shares of 29,820 - 33
Predecessor common stock, par value $.50 per share; authorized, 80,000,000
shares; outstanding: 49,824,251 net of treasury shares of 4,125,350 - 24,912
Capital surplus 47,525 188,156
Notes receivable from key employees for common stock issuance - (451)
Retained earnings (deficit) 981 (340,661)
Accumulated other comprehensive loss (54) (23)
-------------- -----------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 48,452 (128,034)
-------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 2,215,249 $ 2,613,580
============== =================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
COVANTA ENERGY CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
SUCCESSOR PREDECESSOR
---------------- ---------------------------------
FOR THE PERIOD FOR THE PERIOD FOR THREE MONTHS
MARCH 10, 2004 JANUARY 1, 2004 MONTHS ENDED
THROUGH MARCH 31, THROUGH MARCH 10, MARCH 31,
2004 2004 2003
---------------- ----------------- ----------------
(In Thousands of Dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 981 $ 29,563 $ (9,530)
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by Operating Activities of Continuing Operations:
Gain on cancellation of pre-petition debt - (510,680) -
Fresh start adjustments - 214,927 -
Fresh start tax adjustments - 214,756 -
Loss (gain) from discontinued operations - - (1,789)
Reorganization items - 58,282 12,154
Payment of reorganization items - (49,782) (2,356)
Depreciation and amortization 3,495 13,426 18,674
Deferred income taxes - (7) 228
Provision for doubtful accounts 46 852 1,071
Equity in income from unconsolidated investments (932) (4,817) (4,441)
Cumulative effect of change in accounting principles, net of income taxes - - 8,538
Other (754) 2,268 942
Management of Operating Assets and Liabilities:
Decrease (Increase) in Assets:
Receivables 7,959 5,406 10,580
Other assets 5,336 (17,705) 939
Increase (Decrease) in Liabilities:
Accounts payable (385) 3,853 2,133
Accrued expenses (23,248) 17,730 (10,740)
Deferred income (167) 229 (237)
Other liabilities (2,880) 1,437 (8,373)
---------------- ----------------- ----------------
Net cash provided by operating activities
of continuing operations (10,549) (20,262) 17,793
---------------- ----------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of businesses - - 417
Proceeds from sale of property, plant, and equipment - 86 286
Proceeds from sale of investment - - 267
Proceeds from sale of marketable securities - 87 -
Investments in facilities (1,224) (4,192) (5,600)
Other capital expenditures - - (28)
Distributions from investees and joint ventures 632 6,401 -
Increase in investments in and advances to investees and joint ventures - (279) -
---------------- ----------------- ----------------
Net cash provided by (used in) investing activities of continuing
operations (592) 2,103 (4,658)
---------------- ----------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings for facilities - - 3,584
New borrowings - - 3,990
Decrease (increase) in restricted funds held in trust 8,210 (96,677) (11,303)
Payment of debt (175) (28,089) (33,849)
Distributions to secured lenders and 9.25% holders - (80,507) -
Proceeds from issuance of stock - 29,825 -
Distribution to minority partners (428) (530) -
Proceeds from sale of minority interests - 175 -
Proceeds from issuance of equity interest 25 - -
---------------- ----------------- ----------------
Net cash used in financing activities of continuing operations 7,632 (175,803) (37,578)
---------------- ----------------- ----------------
Net cash provided by discontinued operations - - 8,925
---------------- ----------------- ----------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,509) (193,962) (15,518)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 95,462 289,424 115,815
---------------- ----------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 91,953 $ 95,462 $ 100,297
================ ================= ================
SUPPLEMENTAL INFORMATION
Cash paid for interest $ 804 $ 12,647 $ 18,257
================ ================= ================
Cash paid for taxes $ 1,696 $ 1,518 $ 1,747
================ ================= ================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
COVANTA ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The accompanying unaudited Condensed Consolidated Financial Statements
("Financial Statements") include the accounts of Covanta Energy Corporation and
its subsidiaries (together, "Covanta" or the "Company"). The financial
statements presented reflect the reorganization under which Covanta became a
wholly-owned subsidiary of Danielson Holding Corporation ("Danielson") as of
March 10, 2004.
Accordingly, the Financial Statements for the first quarter of 2004 reflect both
fresh start accounting in accordance with American Institute of Certified Public
Accountants Statement of Position 90-7 "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" ("SOP 90-7") and business combination
accounting in accordance with Statement of Financial Accounting Standards No.
141 "Business Combinations" and Statement of Financial Accounting Standards No.
109 "Accounting for Income Taxes". References in these Financial Statements to
the "Predecessor" refer to the Company prior to March 10, 2004. References to
the "Successor" refer to the Company on and after March 10, 2004 after giving
effect to the application of fresh start reporting. Separate statements of
consolidated operations and cash flows are presented for the Predecessor company
for the period January 1, 2004 to March 10, 2004 (the date of Reorganization)
and for the Successor company for the period from March 11, 2004 through March
31, 2004.
The accompanying unaudited 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 fairly present the accompanying financial
statements. 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 estimated useful lives of long-lived
assets, allowances for doubtful accounts receivable, and liabilities for workers
compensation, severance, and certain litigation.
Covanta is engaged in developing, constructing, owning and operating for others,
key infrastructure for the conversion of waste-to-energy, independent power
production and the treatment of water and wastewater in the United States and
abroad. 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. Six of the Company's
subsidiaries have not reorganized or filed a liquidation plan under Chapter 11
of the United States Bankruptcy Code. While Covanta exercises significant
influence over the operating and financial policies of those subsidiaries, those
six subsidiaries will continue to operate as debtors in possession in the
Chapter 11 Cases. Because any plan of reorganization or liquidation relating to
these debtors would have to be approved by the Bankruptcy Court, and possibly
their respective creditors, the Company does not control these debtors or the
ultimate outcome of their respective Chapter 11 Cases. Accordingly, effective
with the reorganization applicable accounting rules require that Covanta no
longer include those six subsidiaries as consolidated subsidiaries in its
financial statements. Covanta's investment in these six subsidiaries are
recorded using the equity method effective as of March 10, 2004.
All intercompany transactions and balances among consolidated entities have been
eliminated.
2. REORGANIZATION:
On March 10, 2004 ("the Effective Date"), the Company consummated a plan of
reorganization and, emerged from its reorganization proceeding under Chapter 11
of the United States Bankruptcy Code (the "Bankruptcy Code"). As a result of the
consummation of the plan, Covanta is a wholly-owned subsidiary of Danielson
Holding Corporation, a Delaware corporation ("Danielson"). The Chapter 11
proceedings commenced on April 1, 2002 (the "First Petition Date"), when Covanta
and most of its domestic subsidiaries filed voluntary petitions for relief under
Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the
Southern District of New York (the "Bankruptcy Court"). All of the bankruptcy
cases (the "Chapter 11 Cases") were jointly administered. During the Chapter 11
Cases, Covanta and its subsidiaries which were part of the Chapter 11 Cases (the
"Debtors") operated their business as debtors-
5
in-possession pursuant to the Bankruptcy Code. International operations and
certain other subsidiaries and joint venture partnerships were not included in
the bankruptcy filings.
The Financial Statements of the Predecessor through March 10, 2004 (the "Stub
Period") were prepared in accordance with SOP 90-7. Accordingly, all
pre-petition liabilities believed to be subject to compromise were segregated in
the Condensed Consolidated Balance Sheet and classified as Liabilities subject
to compromise, at the estimated amount of allowable claims. Liabilities not
believed to be subject to compromise were separately classified as current and
non-current, as appropriate. Revenues, expenses (including professional fees
relating to the bankruptcy proceeding), realized gains and losses, and
provisions for losses resulting from the reorganization were reported separately
as Reorganization items. Also, interest expense was accrued during the Chapter
11 Cases only to the extent that it was to be paid. Cash used for reorganization
items is disclosed separately in the Condensed Consolidated Statements of Cash
Flows.
Prior to the Effective Date of the Company's Reorganization Plan, the Debtors
acted as debtors-in-possession and were authorized to continue to operate as an
ongoing business, but could not engage in transactions outside the ordinary
course of business without the approval of the Bankruptcy Court. The Debtors
obtained numerous 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 authorized: (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, and (vii) the obtaining of post-petition
financing.
Pursuant to the Bankruptcy Code, pre-petition obligations of the Debtors,
including obligations under debt instruments, generally could not be enforced
against the Debtors, and any actions to collect pre-petition indebtedness were
automatically stayed, unless the stay was lifted by the Bankruptcy Court. The
obligations of, and the ultimate payments by, the Debtors under pre-petition
commitments were substantially altered in the course of the Chapter 11 cases.
This resulted in claims being satisfied in the Chapter 11 Cases at less than
their face value or being paid other than in cash. However, as authorized by the
Bankruptcy Court, debt service continued to be paid on the Company's project
debt throughout the Chapter 11 Case.
With respect to post-petition financing, the Debtors entered into a
debtor-in-possession credit facility (the "DIP Facility") as of April 1, 2002,
which was approved by final order of the Bankruptcy Court on May 15, 2002. The
DIP Facility was replaced with new credit and letter of credit facilities as of
March 10, 2004 and is no longer in effect.
Over the course of the Chapter 11 Cases, the Company held discussions with the
Official Committee of Unsecured Creditors (the "Creditors Committee"),
representatives of certain of the Company's pre-petition bank lenders and other
lenders (the "DIP Lenders" and together with the Company's pre-petition bank
lenders, the "Secured Bank Lenders") under the DIP Facility and the holders of
the 9.25% Debentures with respect to possible capital and debt structures for
the Debtors and the formulation of a plan of reorganization.
On December 2, 2003, Covanta and Danielson entered into an Investment and
Purchase Agreement (as amended, the "DHC Agreement"). The DHC Agreement provided
for:
- - Danielson to purchase 100% of the equity in Covanta for approximately $30
million as part of a plan of reorganization (the "DHC Transaction");
- - agreement as to new revolving credit and letter of credit facilities for
the Company's domestic and international operations, provided by certain
of the Secured Bank Lenders and a group of additional lenders organized by
Danielson; and
- - execution and consummation of the Tax Sharing Agreement between Danielson
and Covanta (the "Tax Sharing Agreement"), pursuant to which (a) Covanta
(exclusive of its international holding company), will file a consolidated
tax return with Danielson, and (b) Danielson will make a portion of its
net operating loss tax carry-forwards ("NOLs") available to Covanta for
purposes of Covanta's calculation for its portion of the consolidated tax
liability it pays to Danielson.
On March 5, 2004, the Bankruptcy Court entered an order confirming the Company's
plan of reorganization premised on the DHC Transaction (the "Reorganization
Plan") and liquidation for certain of those Debtors involved in non-core
6
businesses (the "Liquidation Plan"). On March 10, 2004 both plans were effected
upon the consummation of the DHC Transaction (the plans of reorganization and
liquidation collectively, the "Reorganization Plan"). The following is a summary
of material provisions of the Reorganization Plan. The Debtors owning or
operating the Company's Warren County, New Jersey, Lake County, Florida, and
Tampa Bay, Florida projects remain debtors-in-possession (the "Remaining
Debtors"), and are not the subject of either plan.
The Reorganization Plan provided for, among other things, the following
distributions:
(i) Secured Lender and 9.25% Debenture Holder Claims
On account of their allowed secured claims, the Secured Lenders and the 9.25%
Debenture holders received, in the aggregate, a distribution consisting of:
- - the cash available for distribution after payment by the Company of exit
costs necessary to confirm the Plans and establishment of required
reserves pursuant to the Reorganization Plans,
- - new high-yield secured notes issued by Covanta and guaranteed by its
subsidiaries (other than Covanta Power International Holdings, Inc.
("CPIH") and its subsidiaries) which are not contractually prohibited from
incurring or guaranteeing additional debt (Covanta and such subsidiaries,
the "Domestic Borrowers") with a stated maturity of seven years (the "High
Yield Notes"), and
- - a term loan of CPIH with a stated maturity of 3 years.
(ii) Unsecured Claims against Operating Company Subsidiaries
The holders of allowed unsecured claims against any of the Company's operating
subsidiaries received or will receive unsecured notes bearing interest at 7.5%
in a principal amount equal to the amount of their allowed unsecured claims with
a stated maturity of 8 years (the "Unsecured Notes").
(iii) Unsecured Claims against Covanta and Holding Company
Subsidiaries
The holders of allowed unsecured claims against Covanta or certain of its
holding company subsidiaries will receive, in the aggregate, its pro rata share
of a distribution consisting of (i) $4 million in principal amount of the 7.5%,
8 year Unsecured Notes, (ii) a participation interest equal to 5% of the first
$80 million in net proceeds received in connection with the sale or other
disposition of CPIH and its subsidiaries, and (iii) the recoveries, if any, from
avoidance actions not waived under the Reorganization Plan that might be brought
on behalf of the Debtors' estates. In addition, the holders of such claims are
entitled to receive a distribution equal to 12.5% of the value of distributions
otherwise payable to the 9.25% Debenture Holders.
(iv) Subordinated Claims of Holders of Convertible Subordinated
Debentures
The holders of Covanta's Convertible Subordinated Debentures did not receive any
distribution or retain any property pursuant to the proposed Reorganization
Plan. The Convertible Subordinated Debentures were cancelled as of March 10,
2004, the Effective Date of the Reorganization Plan.
(v) Equity Interests of Common and Preferred Stockholders
The holders of Covanta's preferred and common stock outstanding immediately
before consummation of the DHC Transaction did not receive any distribution or
retain any property pursuant to the Reorganization Plan. The preferred stock and
common stock was cancelled as of March 10, 2004, the effective date of the
Reorganization Plan.
The Reorganization Plan provides for the complete liquidation of those of the
Company's subsidiaries that have been designated as liquidating entities.
Substantially all of the assets of these liquidating entities have already been
sold. Under the Reorganization Plan the creditors of the liquidating entities
will not receive any distribution other than those administrative creditors with
respect to claims against the liquidating entities that have been incurred in
the implementation of the Reorganization Plan and priority claims required to be
paid under the Bankruptcy Code.
Covanta had the right during the Chapter 11 Cases, subject to Bankruptcy Court
approval and certain other limitations, to assume or reject executory contracts
and unexpired leases. As a condition to assuming a contract, the Company was
required to cure all existing defaults (including payment defaults). The Company
has paid approximately $9 million in cure amounts associated with assumed
executory contracts and unexpired leases. Several counterparties
7
have indicated that they believe that actual cure amounts are greater than the
amounts specified in the Company's notices, and there can be no assurance that
the cure amounts ultimately associated with assumed executory contracts and
unexpired leases will not be materially higher than the amounts estimated by the
Company.
The Company is in the process of reconciling recorded pre-petition liabilities
with proofs of claim filed by creditors with the Bankruptcy Court. The Company
expects this process to conclude during 2004. In total, approximately 4,700
proofs of claim in aggregate amount of approximately $13.3 billion have been
filed. The Company believes that many of the proofs of claim are invalid,
duplicative, untimely, inaccurate or otherwise objectionable. The Company
intends to contest claims to the extent they materially exceed the amounts the
Company believes may be due. The Company believes the claims resolution process
will not result in material liabilities in excess of those recorded in its
consolidated financial statements.
DEVELOPMENTS IN PROJECT RESTRUCTURINGS
During the course of the Chapter 11 Cases, the Debtors and certain contract
parties reached agreement with respect to material restructuring of their mutual
obligations in connection with several waste-to-energy projects. The Debtors
were also involved in material disputes and/or litigation with respect to the
Warren County, New Jersey and Lake County, Florida waste-to-energy projects and
the Tampa Bay water project, which matters remain unresolved. As a result,
Covanta's subsidiaries involved in these projects remain in Chapter 11 and are
not consolidated in the Company's consolidated financial statements. The Warren
County matter is described below; the Lake County and Tampa Bay matters are
described in Note 16. The Company expects that the outcome of the issues
described below and in Note 16 relating to these projects will not negatively
affect its ability to implement its business plan.
Warren County, New Jersey
The Covanta subsidiary ("Covanta Warren") which operates the Company's
waste-to-energy facility in Warren County, New Jersey (the "Warren Facility")
and the Pollution Control Financing Authority of Warren County ("Warren
Authority") have been engaged in negotiations for an extended time concerning a
potential restructuring of the parties' rights and obligations under various
agreements related to Covanta Warren's operation of the Warren Facility. Those
negotiations were in part precipitated by a 1997 federal court of appeals
decision invalidating certain of the State of New Jersey's waste-flow laws,
which resulted in significantly reduced revenues for the Warren Facility. Since
1999, the State of 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 an agreement with the Warren Authority which modifies the existing
Service Agreement.
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.
In order to emerge from bankruptcy without uncertainty concerning potential
claims against Covanta related to the Warren Facility, Covanta rejected its
guarantees of Covanta Warren's obligations relating to the operation and
maintenance of the Warren Facility. The Company anticipates 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. In such an event, creditors of Covanta Warren may receive little
or no recovery on account of their claims.
8
REORGANIZATION ITEMS
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 for the Period January 1, 2004 through March 10, 2004 and the
three months ended March 31, 2003, (in Thousands of Dollars):
For the period
January 1, 2004 For the three
through months ended
March 10, 2004 March 31, 2003
--------------- --------------
Legal and professional fees $ 27,562 $ 10,240
Severance 7,097 1,114
Bank fees related to DIP Credit Facility 1,163 840
Bankruptcy exit costs 22,460 -
---------- ------------
Total $ 58,282 $ 12,194
========== ============
Legal and professional fees consist of fees related to professionals for work
associated with the bankruptcy of the Company.
Bankruptcy exit costs consist primarily of trustee costs, directors and officers
liability insurance (covering the period prior to emergence) and administrative
expenses.
Pursuant to SOP 90-7, the Company had segregated and classified certain
pre-petition obligations as liabilities subject to compromise. Liabilities
subject to compromise were recorded at the likely allowed claim amount. The
following table sets forth the estimated liabilities of the Company subject to
compromise as of December 31, 2003, (in Thousands of Dollars):
December 31, 2003
-----------------
Debt $ 110,485
Debt under credit arrangement 125,091
Accounts payable 66,117
Other liabilities 232,691
Obligations related to the Centre and the Team 182,517
Obligations related to Arrowhead Pond 90,544
Convertible Subordinated Debentures 148,650
-----------------
Total $ 956,095
=================
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fresh-Start accounting requires the selection of appropriate accounting policies
for the reorganized Company. The significant accounting policies previously used
by the Company will continue to be used by the reorganized Company except for
the following:
PROPERTY, PLANT AND EQUIPMENT: As of March 10, 2004, property, plant, and
equipment were recorded at its estimated fair market values based upon
discounted cash flows using currently available information. For financial
reporting purposes, depreciation is calculated by the straight-line method over
the estimated remaining useful lives of the assets, which range generally from
three years for computer equipment to 41 years for waste-to-energy facilities.
SERVICE AND ENERGY CONTRACTS: As of March 10, 2004, service and energy contracts
were recorded at their estimated fair market values based upon discounted cash
flows from the service contracts and the "above market" portion of the energy
contracts using currently available information. Amortization is calculated by
the straight-line method over the estimated life of the agreements. Estimated
amortization over the next five years is as follows (in thousands):
2004 $21,346
2005 $28,900
2006 $28,900
2007 $28,900
2008 $26,425
9
GOODWILL: Goodwill represents the amount by which the Company's fair value of
its tangible assets and identified intangible assets less its liabilities
exceeds its reorganization value. Pursuant to the provisions of Statement of
Accounting Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS No.
142"), goodwill is not amortized, but is subject to annual impairment testing or
when indicators of impairment exist.
CONTRACT ACQUISITION COSTS: As of March 10, 2004 contract acquisition costs were
recorded at their fair value of zero.
BOND ISSUANCE COSTS: As of March 10, 2004, bond issuance costs were recorded at
their fair value of zero. Costs incurred in connection with the issuance of
bonds are amortized using the effective interest rate method over the terms of
the respective debt issues. Unamortized bond issuance costs are included in
Other assets on the Consolidated Balance Sheets.
STOCK OPTIONS
On March 10, 2004, the Company had three stock-based employee compensation plans
that were terminated upon emergence from bankruptcy and all outstanding options
and restricted stock were cancelled. The Company had accounted 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 the 2004 and 2003 net
income (loss), as all options granted under those plans had an exercise price
equal to the market value of the underlying common stock on the date of grant.
No options were granted in 2004 or 2003. Awards under the Company's plans vest
over periods ranging from three to five years. Therefore, the cost related to
stock-based employee compensation included in the determination of net income
(loss) for 2004 and 2003 is less than that which would have been recognized if
the fair value based method had been applied to all awards since the original
effective date of SFAS No. 123.
The following table summarizes the pro forma impact on net income (loss) and
income (loss) per common share for the period January 1, 2004 through March 10,
2004 and for the three months ended March 31, 2003 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 PERIOD FOR THE THREE
JANUARY 1, 2004 THROUGH MONTHS ENDED
MARCH 10, 2004 MARCH 31, 2003
----------------------- --------------
Net income (loss), as reported $ 29,563 $ (9,530)
Deduct:
SFAS No. 123 total stock based employee
compensation expense determined under the fair value
method for all awards, net of related tax effects (435) (744)
----------------------- --------------
Pro forma net income (loss) $ 29,128 $ (10,274)
======================= ==============
Basic income (loss), per share:
Basic - as reported $ 0.59 $ (0.19)
======================= ==============
Basic - pro forma $ 0.58 $ (0.21)
======================= ==============
Diluted income (loss), per share:
Diluted - as reported $ 0.59 $ (0.19)
======================= ==============
Diluted - pro forma $ 0.58 $ (0.21)
======================= ==============
NEW ACCOUNTING PRONOUNCEMENTS:
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 was revised in December 2003 and is applicable for the
Company on January 1, 2004 for interests acquired in variable interest entities
prior to February 1, 2003. The Company adopted the provisions of FIN No. 46
without impact on its financial position or results of operations.
10
RECLASSIFICATION:
Certain prior period amounts, including various revenues and expenses, have been
reclassified in the Financial Statements to conform with the current period
presentation.
4. FRESH START AND PURCHASE ACCOUNTING ADJUSTMENTS
The Company's emergence from Chapter 11 proceedings on March 10, 2004 resulted
in a new reporting entity and adoption of fresh start accounting as of that
date, in accordance with SOP 90-7. The consolidated financial statements as of
March 10, 2004, reflect a preliminary allocation of value to the assets and
liabilities of the Company in proportion to their relative fair values in
conformity with SFAS No. 141. Accordingly, the Company valued its assets and
liabilities at fair value. The equity value was based on the purchase price that
was paid by DHC. Preliminary fair value determinations of the tangible and
intangible assets have been determined by management based on anticipated cash
flows using currently available information. The excess of the reorganization
value over tangible assets and identifiable intangible assets has been reflected
as Goodwill on the Condensed Consolidated Balance Sheet. Management's estimate
of the fair value of long term debt was based on the new principal amounts of
recourse debt that was part of the reorganized capital structure of the Company
upon emergence. The Company has engaged valuation consultants to review its
valuation methodology and their work is ongoing.
In accordance with SFAS No. 141, the preliminary allocation of the fresh start
values is subject to additional adjustment within one year after emergence from
bankruptcy when additional information on asset and liability valuations becomes
available. The Company expects that adjustment to recorded fair values may
include those relating to:
o property, plant, and equipment, intangibles, debt, and equity
investments, all of which may change based on our consideration of
additional analysis by the Company and its valuation consultants;
o accrued expenses which may change based on identification of final fees
and costs associated with emergence from bankruptcy, resolution of
disputed claims, and completion of Chapter 11 Cases relating to six
debtors remaining in bankruptcy;
o the final principal amount of the Unsecured Notes (recorded as an
estimated principal amount of $36.5 million), which will adjust based
upon the resolution of claims of creditors entitled to such notes as
distributions; and
o tax liabilities, which may adjust based upon additional information to
be received from taxing authorities.
The following financial information reflects the implementation of the
Reorganization Plan and the preliminary adjustments recorded to the Company's
assets and liabilities to reflect the discharge of debt and the adoption of
fresh start reporting in accordance with SOP 90-7.
Estimated fresh start adjustments and purchase accounting in the Pro Forma
Balance Sheet result primarily from the:
(i) reduction of property, plant and equipment carrying values;
(ii) increase in the carrying value of the Company's various
operation and maintenance agreements and power purchase
agreements;
(iii) forgiveness of the Company's pre-petition debt;
(iv) issuance of new common stock and other items in equity and
notes pursuant to the Plan;
(v) payment of various administrative and other claims associated
with the Company's emergence from Chapter 11;
(vi) distribution of cash of $235.5 million to the Company's
pre-petition secured lenders and for the payment of exit costs
and funding of reserves;
(vii) deferred tax assets principally related to net operating loss
carry-forwards from Danielson's NOLs; and
(viii) direct costs and expenses related to Danielson's acquisition
of Covanta.
These adjustments were based upon the preliminary work of the Company and its
valuation consultants, as well as other valuation estimates to determine the
relative fair values of the Company's assets and liabilities. The table below
reflects preliminary reorganization adjustments for the discharge of
indebtedness, issuance of new common stock, issuance of notes, and the fresh
start adjustments and the resulting fresh start consolidated balance sheet.
11
LIQUIDATING ENTITIES PURCHASE
MARCH 10, AND DECONSOLIDATION DISCHARGE OF ACCOUNTING
2004 OF ENTITIES (A) INDEBTEDNESS ADJUSTMENTS
---------- -------------------- ----------------- ------------
(In Thousands of Dollars)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 149,528 $ 877 $ (81,204) (b) $ 29,825 (f)
Restricted funds held in trust 177,737 (4,845) - -
Receivables 223,835 (22,772) - -
Deferred income taxes 9,763 - - -
Prepaid expenses and other current assets 81,894 (5,121) - -
---------- -------------------- ------------ --------
TOTAL CURRENT ASSETS 642,757 (31,861) (81,204) 29,825
Property, plant and equipment-net 1,444,838 (97,101) - -
Restricted funds held in trust 117,824 (8,196) - -
Unbilled service and other receivables 130,168 (15,035) - -
Other intangible assets-net 33,381 (3,561) - -
Service and energy contracts - - - -
Investments in and advances to investees and
joint ventures 134,656 56,870 - -
Other assets and other intangibles 63,946 (276) - -
Goodwill - - - (73,995)
---------- -------------------- ------------ --------
TOTAL ASSETS $2,567,570 $ (99,159) $ (81,204) $(44,170)
========== ==================== ============ ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
LIABILITIES:
CURRENT LIABILITIES:
Current portion of long-term debt 9,625 - - -
Current portion of project debt 104,076 (10,070) - -
Accounts payable 27,437 (3,235) - -
Accrued expenses 234,121 (5,296) - -
Deferred income 37,660 (2,453) - -
---------- -------------------- ------------ --------
TOTAL CURRENT LIABILITIES $ 412,919 $ (21,054) $ - $ -
Long-term debt 1,261 - 336,500 (c) -
Project debt 902,442 (71,905) - -
Deferred income taxes 195,164 - - (91,695) (g)
Deferred income 127,925 - - -
Other liabilities 99,650 - - -
Liabilities subject to compromise 934,752 (6,368) (928,384) (d) -
---------- -------------------- ------------ --------
TOTAL LIABILITIES $2,674,113 $ (99,327) $ (591,884) $(91,695)
---------- -------------------- ------------ --------
MINORITY INTERESTS $ 71,372 $ - $ - $ -
---------- -------------------- ------------ --------
SHAREHOLDERS' DEFICIT:
Serial cumulative convertible
preferred stock $ 33 $ - $ - $ -
Common stock 24,912 - - -
Capital surplus 188,156 - - 47,525 (h)
Deficit (392,095) 46 510,680 (e) -
Accumulated other comprehensive income
(loss) 1,079 122 - -
---------- -------------------- ------------ --------
TOTAL SHAREHOLDERS' DEFICIT $ (177,915) $ 168 $ 510,680 $ 47,525
---------- -------------------- ------------ --------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $2,567,570 $ (99,159) $ (81,204) $(44,170)
========== ==================== ============ ========
FRESH START MARCH 10,
ADJUSTMENTS 2004
---------------- -----------
(In Thousands of Dollars)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ (3,564) (i) $ 95,462
Restricted funds held in trust 39 172,931
Receivables (14,463) (j) 186,600
Deferred income taxes (8,475) (k) 1,288
Prepaid expenses and other current assets (3,131) (i) 73,642
----------- ------------
TOTAL CURRENT ASSETS (29,594) 529,923
Property, plant and equipment-net (312,958) (l) 1,034,779
Restricted funds held in trust (2,564) (i) 107,064
Unbilled service and other receivables - 115,133
Other intangible assets-net (29,820) (l) -
Service and energy contracts 318,114 (l) 318,114
Investments in and advances to investees and
joint ventures (122,679) (l) 68,847
Other assets and other intangibles (24,971) (m) 38,699
Goodwill 98,465 24,470
----------- -----------
TOTAL ASSETS $(106,008) $ 2,237,029
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
LIABILITIES:
CURRENT LIABILITIES:
Current portion of long-term debt - 9,625
Current portion of project debt 25 (n) 94,031
Accounts payable (631) 23,571
Accrued expenses (19,641) (o) 209,184
Deferred income - 35,207
----------- -----------
TOTAL CURRENT LIABILITIES $ (20,247) $ 371,618
Long-term debt - 337,761
Project debt 17,114 (p) 847,651
Deferred income taxes 202,315 (q) 305,784
Deferred income - 127,925
Other liabilities 27,743 (r) 127,393
Liabilities subject to compromise - -
----------- -----------
TOTAL LIABILITIES $ 226,925 $ 2,118,132
----------- -----------
MINORITY INTERESTS $ - $ 71,372
----------- -----------
SHAREHOLDERS' DEFICIT:
Serial cumulative convertible
preferred stock $ (33) (s) $ -
Common stock (24,912) (s) -
Capital surplus (188,156) (s) 47,525
Deficit (118,631) (s) -
Accumulated other comprehensive income
(loss) (1,201) (s) -
----------- -----------
TOTAL SHAREHOLDERS' DEFICIT $ (332,933) $ 47,525
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ (106,008) $ 2,237,029
=========== ===========
Footnotes to Pro forma Condensed Consolidated Balance Sheet
(a) Pro Forma Balance Sheet excludes Covanta entities which are part of the
Liquidating Plan and Covanta entities which remain in Chapter 11 and have
been deconsolidated.
(b) Reflects cash payments to secured creditors paid upon emergence.
(c) Reflects the issuance by Covanta of $205.0 million principal amount of new
high yield secured notes, $36.5 million of estimated principal amount of
new reorganization plan unsecured notes, and $95.0 million in new CPIH
funded debt.
(d) Reflects the discharge of pre-petition indebtedness, except for those
related to Warren, Lake and Tampa Bay facilities which remain in
bankruptcy and are deconsolidated in the financial statements. These three
facilities are part of the emerging entity purchased by Danielson.
(e) Reflects the gain on the extinguishment of the liabilities subject to
compromise.
(f) Reflects cash portion of the purchase price paid by Danielson.
(g) Represents the reduction in net deferred income tax liabilities resulting
from recording the income tax benefits arising from the estimated future
utilization of Danielson's NOLs.
(h) Danielson's purchase price includes $29.8 million in cash, $6.4 million in
expenses and $11.3 million for the estimated fair value of stock purchase
rights to be issued to certain of Covanta's pre-petition creditors. Such
creditors are expected to purchase up to an additional 3.0 million shares
of Danielson common stock at $1.53 per share based upon levels of public
participation in the rights offering.
(i) Reflects the write down of the MCI facility assets and liabilities to a
fair value of $0.
(j) Reflects a tax receivable of $11.3 million that was fair valued at $0 and
the MCI facility receivable of $3.1 million was valued at $0.
(k) Reflects adjustment to fair value of deferred taxes related to allowance
for doubtful accounts.
(l) Reflects fresh start adjustments of Covanta's property, plant and
equipment, intangibles and investments in joint ventures to an estimated
fair value.
(m) Includes $23.5 million write down of pre-paid bond costs to a fair value
of $0.
(n) Includes a $10.2 million write down of the current portion of the MCI
facility project debt to a fair value of $0 and an increase of $10.5
million for the current portion on the fair market value premium on
waste-to-energy project debt.
(o) Includes a write down of $11.0 million in the MCI facility accrued
expenses to a fair value of $0, a reduction of $6.0 million to reclassify
pension liabilities to long-term liabilities, a back tax liability of $1.3
million and various other adjustments reducing accrued expenses by an
additional $1.3 million.
(p) Reflects an $18.3 million write down of the long-term portion of the MCI
facility project debt to a fair value of $0 and an increase of $36.1
million for the long-term portion of the fair market value premium on
waste-to-energy project debt.
(q) Reflects the change in deferred taxes resulting from the fair valuation of
property, plant and equipment and intangibles.
(r) Reflects increase of $15.6 million to true up tax reserves to $22.6
million at emergence, increase of $6.0 million for the reclassification of
pension liabilities from current liabilities and an increase of $18.4
million for additional pension liabilities.
(s) Reflects the zeroing out of old equity accounts.
5. CREDIT ARRANGEMENTS
The Company entered into the Master Credit Facility as of March 14, 2001. The
Master Credit Facility was 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 Facility") discussed
below. This, as well as the non-compliance with required financial ratios and
possible other items, caused the Company to be in default under its Master
Credit Facility. However, as previously discussed, the filing of bankruptcy
petitions by the Debtors acted as a stay of enforcement of any remedies under
the Master Credit Facility against any Debtor. The Master Credit Facility was
discharged upon the effectiveness of the Reorganization Plan (see Note 2).
13
In connection with the bankruptcy petition, Covanta and most of its subsidiaries
entered into the DIP Facility with the DIP Lenders. The DIP Facility was largely
for the continuation of existing letters of credit and was 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 domestic subsidiaries. Obligations
under the DIP Facility were senior in status to other pre-petition secured
claims, and the DIP Facility was the operative debt agreement with the Company's
banks. All claims relating to the DIP Facility were discharged upon the
effectiveness of the Reorganization Plan (see Note 2).
In connection with the effectiveness of the Reorganization Plan and the
consummation of the DHC Transaction, the Company emerged from bankruptcy with a
new debt structure. Domestic Borrowers have two credit facilities; the First
Lien Facility and the Second Lien Facility.
- - The First Lien Facility provides commitments for the issuance of letters
of credit contractually required in connection with the Detroit
waste-to-energy facility. These letters of credit are currently required
in the aggregate amount of approximately $138.2 million as of March 31,
2004, and the contractually required amount decreases semi-annually. The
First Lien Facility has a term of five years, and requires cash collateral
to be posted for issued letters of credit in the event Covanta has cash in
excess of specified amounts. Covanta paid a 1% upfront fee (approximately
$1.38 million) upon entering into the First Lien Facility, and will pay
with respect to each issued letter of credit (i) a fronting fee equal to
the greater of $500 or 0.25% per annum of the daily amount available to be
drawn under such letter of credit, (ii) a letter of credit fee equal to
2.5% per annum of the daily amount available to be drawn under such letter
of credit, and (iii) an annual fee of $1,500.
- - The Second Lien Facility provides commitments in the aggregate amount of
$118 million, up to $10 million of which shall also be available for cash
borrowings on a revolving basis and the balance for letters of credit
supporting the Company's domestic and international businesses. This
second lien credit facility has a term of five years. The Second Lien
Credit facility requires cash collateral to be posted for issued letters
of credit in the event Covanta has cash in excess of specified amounts.
The revolving loan component of the second lien credit facility bears
interest at either (i) 4.5% over a base rate with reference to either the
Federal Funds rate of the Federal Reserve System or Bank One's prime rate,
or (ii) 6.5% over a formula Eurodollar rate, the applicable rate to be
determined by Covanta (increasing by 2% over the then applicable rate in
specified default situations). Covanta also paid an upfront fee of $2.36
million upon entering into the second lien credit agreement, and will pay
(i) a commitment fee equal to 0.5% per annum of the daily calculation of
available credit, (ii) an annual agency fee of $30,000, and (iii) with
respect to each issued letter of credit an amount equal to 6.5% per annum
of the daily amount available to be drawn under such letter of credit. As
of March 31, 2004, letters of credit in the approximate aggregate amount
of $85.9 million had been issued under the Second Lien Facility, which
amount was reduced to $70.9 million as of April 2, 2004, and the Company
had not sought to make draws against the $10 million liquidity facility of
the Second Lien Facility.
Total fees of $11.6 million paid on March 10, 2004 have been capitalized and are
being amortized using the interest method over the life of the credit facilities
on a straight line basis to the extent no borrowings exist. Both facilities are
secured by the assets of the Domestic Borrowers not otherwise pledged. The lien
of the Second Lien Facility is junior to that of the First Lien Facility.
Also, CPIH and each of its domestic subsidiaries, which hold all of the assets
and operations of the Company's international businesses (the "CPIH Borrowers")
entered into a secured credit facility:
- - The CPIH Revolving Credit Facility is secured by a first priority lien on
the CPIH stock and substantially all of the CPIH Borrowers' assets not
otherwise pledged, and consists of commitments for cash borrowings of up
to $10 million for purposes of supporting the international businesses.
The CPIH revolving credit facility has a maturity date of three years and
to the extent drawn upon bears interest at the rate of either (i) 7% over
a base rate with reference to either the Federal Funds rate, of the
Federal Reserve System or Deutsche Bank's prime rate, or (ii) 8% over a
formula Eurodollar rate, the applicable rate to be determined by CPIH
(increasing by 2% over the then applicable rate in specified default
situations). CPIH also paid a 2% upfront fee of $0.2 million, and will pay
(i) a commitment fee equal to 0.5% per annum of the average daily
calculation of available credit, and (ii) an annual agency fee of $30,000.
As of March 31, 2004, CPIH had not sought to make draws on this facility.
The debt of the CPIH Borrowers is non-recourse to Covanta and its other domestic
subsidiaries.
14
6. OTHER LONG-TERM DEBT
Long-term debt (expressed in thousands of dollars) consisted of the following:
SUCCESSOR PREDECESSOR
MARCH 31, 2004 DECEMBER 31, 2003
-------------- -----------------
High yield notes $ 205,190 $ -
CPIH term loan facility 94,825 -
Unsecured notes 36,500 -
9.25% debentures due 2022 - 100,000
Other long-term debt 10,891 22,127
-------------- -----------------
Total 347,406 122,127
Less amounts subject to compromise - (110,485)
Less current portion of long term debt (9,631) (9,492)
-------------- -----------------
Total $ 337,775 $ 2,150
============== =================
The Domestic Borrowers also issued the High Yield Notes and issued or will issue
the Unsecured Notes.
- The High Yield Notes are secured by a third priority lien in the
same collateral securing the First Lien Facility and the Second Lien
Facility. The High Yield Notes were issued in the initial principal
amount of $205 million, which will accrete to $230 million at
maturity in seven years. Interest is payable at a rate of 8.25%
semi-annually on the basis of the principal at final maturity; no
principal is due prior to maturity of the High Yield Notes.
- Unsecured Notes in a principal amount of $4 million were issued on
the effective date of the Reorganization Plan, and the Company
expects to issue additional Unsecured Notes in a principal amount of
between $30 and $35 million including additional Unsecured Notes
that may be issued to holders of allowed claims against the
Remaining Debtors if and when they emerge from bankruptcy. The final
principal amount of all Unsecured Notes will be equal to the amount
of allowed unsecured claims against the Company's operating
subsidiaries which were reorganizing Debtors, and such amount will
be determined when such claims are resolved through settlement or
further proceedings in the Bankruptcy Court. The principal amount of
unsecured notes indicated in the table above represents the expected
liability upon completion of the claims process. Notwithstanding the
date on which Unsecured Notes are issued, interest on the Unsecured
Notes accrues from March 10, 2004. Interest is payable semi-annually
on the Unsecured Notes at a rate of 7.5%; principal is paid annually
beginning in March, 2006. The Unsecured Notes mature in eight years.
Also, the CPIH Borrowers entered into the following secured credit facility:
- The CPIH Term Loan Facility of up to $95 million, secured by a
second priority lien on the same collateral as the CPIH Revolving
Credit Facility, and bears interest at 10.5% per annum, 6.0% of such
interest to be paid in cash and the remaining 4.5% to be paid in
cash to the extent available and otherwise payable by adding it to
the outstanding principal balance. The interest rate increases to
12.5% per annum in specified default situations. The CPIH Term Loan
Facility matures in three years.
The debt of the CPIH Borrowers is non-recourse to Covanta and its other domestic
subsidiaries.
Covanta may issue tax notes in an aggregate principal amount equal to the
aggregate amount of allowed priority tax claims with a maturity six years after
the date of assessment. Interest will be payable semi-annually at the rate of
four percent. Under the Reorganization Plan, the Company may pay the amount of
such claims in cash. The Company does not expect the amount of such allowed
priority tax claims to negatively affect its ability to implement its business
plan.
The maturities on long-term debt including capital lease obligations, (expressed
in thousands of dollars) at March 31, 2004 were as follows:
2004 $ 9,631
2005 25
2006 1,235
2007 94,825
Later years 241,690
---------
15
Total 347,406
Less current portion (9,631)
---------
Total long-term debt $ 337,775
=========
7. PROJECT DEBT
Project debt (expressed in thousands of dollars) consisted of the following:
SUCCESSOR PREDECESSOR
MARCH 31, DECEMBER 31,
2004 2003
--------- ------------
Revenue Bonds Issued by and Prime Responsibility of
Municipalities:
3.625-6.75% serial revenue bonds due 2005 through 2011 $ 306,843 $ 287,320
5.0-7.0% term revenue bonds due 2005 through 2015 165,961 221,644
Adjustable-rate revenue bonds due 2006 through 2013 120,967 126,665
--------- ------------
Total 593,771 635,629
--------- ------------
Revenue Bonds Issued by Municipal Agencies with Sufficient
Service Revenues Guaranteed by Third Parties:
5.25-8.9% serial revenue bonds due 2005 through 2008 24,006 47,260
--------- ------------
Other Revenue Bonds:
4.7-5.5% serial revenue bonds due 2005 through 2015 72,515 71,820
5.5-6.7% term revenue bonds due 2014 through 2019 69,515 68,020
--------- ------------
Total 142,030 139,840
--------- ------------
Other project debt 87,196 110,456
--------- ------------
Total long-term project debt $ 847,003 $ 933,185
========= ============
Project debt associated with the financing of waste-to-energy facilities is
generally arranged by municipalities through the issuance of tax-exempt and
taxable revenue bonds. The category, "Revenue Bonds Issued by and Prime
Responsibility of Municipalities," includes bonds issued with respect to
projects owned by the Company for which debt service is an explicit component of
the client community's obligation under the related service agreement. In the
event that a municipality is unable to satisfy its payment obligations, the
bondholders' recourse with respect to the Company is limited to the
waste-to-energy facilities and restricted funds pledged to secure such
obligations.
The category "Revenue Bonds Issued by Municipal Agencies with Sufficient Service
Revenues Guaranteed by Third Parties" includes municipal bonds issued to finance
two facilities for which contractual obligations of third parties to deliver
waste ensure sufficient revenues to pay debt service, although such debt service
is not an explicit component of the third parties' service fee obligations.
The category "Other Revenue Bonds" includes bonds issued to finance one facility
for which current contractual obligations of third parties to deliver waste
provide sufficient revenues to pay debt service related to that facility through
2011, although such debt service is not an explicit component of the third
parties' service fee obligations. The Company anticipates renewing such
contracts prior to 2011.
Payment obligations for the project debt associated with facilities owned by the
Company are limited recourse to the operating subsidiary and non-recourse to the
Company, subject to construction and operating performance guarantees and
commitments. These obligations are secured by the revenues pledged under various
indentures and are collateralized principally by a mortgage lien and a security
interest in each of the respective facilities and related assets.
The maturities on long-term project debt (expressed in thousands of dollars) at
March 31, 2004 were as follows:
2004 $ 64,525
2005 93,696
2006 99,904
2007 98,183
2008 98,048
16
Later years 486,781
---------
Total $ 941,137
Less current portion (94,134)
---------
Total long-term project debt $ 847,003
=========
8. INCOME TAXES
PREDECESSOR COMPANY
The provision for income taxes of $215.3 million for the period January 1, 2004
through March 10, 2004 consists of an income tax provision of $229.3 million
related to the increase in carrying value of certain assets to fair value
recorded in connection with the Company's adoption of fresh start accounting,
and the gain on cancellation of pre-petition debt.
The effective tax rate for the period January 1, 2004 through March 10, 2004
differs from the federal statutory rate as the Company has established a
valuation allowance against certain foreign net operating loss carry-forwards
and certain other fresh start adjustments to reduce them to the amounts that
will more likely than not be realized.
SUCCESSOR COMPANY
Included in the net deferred tax liability of the Successor Company is a
deferred tax asset of $91.7 million related to Danielson Holdings Corporation
NOLs that will be available to offset Covanta's taxable income.
Danielson reported in its Form 10-K for the fiscal year ended December 31, 2003
filed with the SEC, that it expected to have NOLs estimated to be approximately
$652 million for federal income tax purposes as of the end of 2003. Under a Tax
Sharing Agreement between Covanta and Danielson, certain of Danielson's NOLs
will be made available to offset the income tax liability of Covanta and its
domestic subsidiaries (other than CPIH and its domestic subsidiaries, which are
not consolidated for tax purposes). The NOLs will expire in various amounts
beginning on December 31, 2004 through December 31, 2023, if not used. The
amount of NOLs available to Covanta will be reduced by any taxable income
generated by current members of Danielson's tax consolidated group. The Internal
Revenue Service ("IRS") has not audited any of Danielson's tax returns.
If Danielson were to undergo an "ownership change" as such term is used in
Section 382 of the Internal Revenue Code, the use of its NOLs would be limited.
Danielson will be treated as having had an "ownership change" if there is a more
than 50% increase in stock ownership during a 3-year "testing period" by "5%
stockholders". Danielson's Certificate of Incorporation contains stock transfer
restrictions that were designed to help preserve Danielson's NOLs by avoiding an
ownership change. The transfer restrictions were implemented in 1990, and
Danielson expects that they will remain in-force as long as Danielson has NOLs.
Danielson cannot be certain, however, that these restrictions will prevent an
ownership change.
BANKRUPTCY EFFECT
In connection with the Debtors' emergence from bankruptcy, the Company realized
a gain on the extinguishment of debt of $510.7 million. This gain will not be
taxable since the gain resulted from the Company's reorganization under the
Bankruptcy Code. However, for U.S. income tax reporting purposes, as of the
beginning of its short taxable period ending December 31, 2004, the Company will
be required to reduce certain tax attributes, including (a) net operating loss
carry-forwards and (b) certain tax credit carry-forwards, equal to the gain on
the extinguishment of debt. The reorganization of the company on the Effective
Date constituted an ownership change under Section 382 of the Code, and the use
of any of the Company's net operating loss carry-forwards and tax credit
carry-forwards generated prior to the ownership change that are not reduced
pursuant to these provisions will be subject to an overall annual limitation.
The actual amount of reduction in tax attributes for U.S. income tax reporting
purposes will not be determined until 2005 and is therefore not reflected in
this note to the consolidated condensed financial statements.
9. PENSION AND POST RETIREMENT BENEFITS
Net periodic defined benefit pension and post-retirement expense we as follows
(in thousands of Dollars):
17
Pension Benefits Other Benefits
For the period For the period For the period For the period
March 11,2004 January 1,2004 March 11,2004 January 1,2004
Through Through Through Through
March 31,2004 March 10,2004 March 31,2004 March 10,2004
-------------- -------------- -------------- ---------------
Service cost $ 484 $ 1,431 $ - $ -
Interest cost 200 650 39 257
Expected Return on Assets (137) (450) - -
Amortization
Prior Services cost - (35) - -
(Gain)/Loss - 127 - 128
---------- ---------- ---------- ----------
Net periodic benefit cost $ 547 $ 1,723 $ 39 $ 385
The Company has recorded a pension plan liability equal to the amount that the
present value of projected benefit obligations (using a discount rate of 5.75%)
exceeded the fair value of pension plan assets at March 10, 2004 in accordance
with the provisions of Statement of Financial Accounting Standards No. 141
"Business Combinations". The Company made contributions of $0.97 million to the
plan in the three months ended March 31, 2004.
10. BUSINESS SEGMENTS
The Company's reportable segments are: Domestic energy and water and
International energy. The segment information for the prior year has been
restated to conform with the current segments.
Covanta's two segments develop, operate and in some cases own, energy generating
facilities that utilize a variety of fuels, as well as water and wastewater
facilities that serves communities on a long-term basis.
Revenues and income (loss) from continuing operations by segment for the periods
from March 11, 2004 through March 31, 2004, January 1, 2004 through March 10,
2004 and the three months ended March 31, 2003 (expressed in thousands of
dollars) were as follows:
For the period For the period
March 11, 2004 January 1, 2004 Three Months Ended
Through March 31, Through March 10, March 31,
2004 2004 2003
- ---------------------------------------------------------------------------------------------------------------------------
Revenues:
Domestic energy and water $ 29,798 $ 107,696 $ 152,640
International energy 9,178 35,536 43,771
-------- --------- ---------
Total revenue 38,976 143,232 196,411
-------- --------- ---------
Income (loss) from operations:
Domestic energy and water 4,736 5,828 24,353
International energy 3,184 8,299 10,531
Corporate unallocated income
and expenses-net (2,476) 1,119 (13,083)
-------- --------- ---------
Operating income 5,444 15,246 21,801
Interest expense - net (2,649) (5,374) (10,010)
Reorganization items -- (58,282) (12,194)
Gain on cancellation of pre-petition debt -- 510,680 --
Fresh start adjustments -- (214,927) --
-------- --------- ---------
Income (loss) from continuing operations before income
taxes, minority interests, discontinued operations and the
cumulative effect of change in accounting principle $ 2,795 $ 247,343 $ (403)
======== ========= =========
11. 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):
HARIPUR BARGE
QUEZON POWER PLANT
(THE PHILIPPINES) (BANGLADESH)
----------------- ------------
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2004:
Revenues $ 51,128 $ 8,442
Operating income 23,328 4,950
Net income 13,679 2,113
Company's share of net income 4,259 953
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2003:
Revenues $ 45,657 $ 8,009
Operating income 22,085 4,968
Net income 12,172 1,788
Company's share of net income 3,180 807
HARIPUR BARGE
QUEZON POWER PLANT
(THE PHILIPPINES) (BANGLADESH)
----------------- -------------
CONDENSED BALANCE SHEETS AT MARCH 31, 2004:
Current assets $ 144,790 $ 26,046
Non-current assets 736,605 94,178
Total assets 881,395 120,224
Current liabilities 61,487 14,672
Non-current liabilities 496,823 60,200
Total liabilities 558,310 74,872
CONDENSED BALANCE SHEETS AT DECEMBER 31, 2003:
Current assets $ 143,725 $ 29,974
Non-current assets 741,169 95,429
Total assets 884,894 125,403
Current liabilities 56,912 18,185
Non-current liabilities 496,700 63,900
Total liabilities 553,612 82,085
The Companies share of each of the net assets shown above is less than five
percent of the Company's consolidated assets.
Investment in Unconsolidated Subsidiaries
The following table summarizes the results of operations for Covanta's six
unconsolidated entities still in bankruptcy for the period March 10, 2004
through March 31, 2004 (in thousands).
CONDENSED STATEMENTS OF OPERATIONS
Revenues $ 2,439
Operating income (241)
Net income (241)
12. EARNINGS (LOSS) PER SHARE:
19
For the period January 1, 2004 through
March 10, 2004 For the Three Months Ended March 31, 2003
------------------------------------------------------------------------------------
(In thousands of dollars except Income (Loss) Shares Per share Income (Loss) Shares Per share
for per share amounts) (Numerator) (Denominator) Amount (Numerator) (Denominator) AMOUNT
------------- ------------- --------- ------------- ------------- ---------
BASIC EARNINGS (LOSS)
PER SHARE:
Earnings (loss) to common stockholders $ 29,563 49,821 $ 0.59 $ (2,781) 49,824 $ (0.06)
============= ============= ========= ============= ============= =========
Earnings (loss) from discontinued
operations $ - 49,821 $ - $ 1,789 49,824 $ 0.04
============= ============= ========= ============= ============= =========
Cumulative effect of change in accounting
principles $ - 49,821 $ - $ (8,538) 49,824 $ (0.17)
============= ============= ========= ============= ============= =========
Net income (loss) $ 29,563 49,821 $ 0.59 $ (9,530) 49,824 $ (0.19)
============= ============= ========= ============= ============= =========
Effect of Dilutive Securities:
Stock options (A) (A)
Restricted stock 3 (A)
Convertible preferred stock 198 (A)
---
DILUTED LOSS
PER SHARE:
Earnings (loss) to common stockholders $ 29,563 50,022 $ 0.59 $ (2,781) 49,824 $ (0.06)
============= ============= ========= ============= ============= =========
Earnings (loss) from discontinued
operations $ - 50,022 $ - $ 1,789 49,824 $ 0.04
============= ============= ========= ============= ============= =========
Cumulative effect of change in accounting
principles $ - 50,022 $ - $ (8,538) 49,824 $ (0.17)
============= ============= ========= ============= ============= =========
Net income (loss) $ 29,563 50,022 $ 0.59 $ (9,530) 49,824 $ (0.19)
============= ============= ========= ============= ============= =========
(A) Antidilutive
Basic earnings per common share was computed by dividing net loss, reduced by
preferred stock dividends, by the weighted average of the number of shares of
common stock outstanding during each period.
Diluted earnings per common share was computed on the assumption that all
convertible debentures, convertible preferred stock, restricted stock and stock
options converted or exercised during each period, or outstanding at the end of
each period were converted at the beginning of each period or the date of
issuance or grant, if dilutive. This computation provides for the elimination of
related convertible debenture interest and preferred dividends. Outstanding
stock options to purchase common stock with an exercise price greater than the
average market price of common stock were not included in the computation of
diluted earnings per share. The balance of such options were 3,310,002 and
3,310,002 for the periods ended March 10, 2004 and March 31, 2003, 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 as to
do so would have been antidilutive.
The common stock so excluded from the calculation was 2,175,000 for the period
January 1, 2004 through March 10, 2004 and in the first quarter of 2003 for the
6% convertible debentures; 1,524,000 for the period January 1, 2004 through
March 10, 2004 and the first quarter of 2003 for the 5 3/4% convertible
debentures; 0 for the period January 1, 2004 through March 10, 2004 and the
first quarter of 2003 for stock options, 198,000 and 198,000 for the period
January 1, 2004 through March 10, 2004 and the first quarter of 2003,
respectively, for convertible preferred stock; and 22,000 and 22,000 for the
period January 1, 2004 through March 10, 2004 and the first quarter of 2003,
respectively, for unvested restricted stock issued to employees.
All shares of common stock, and options with respect to common stock, were
cancelled in connection with the Company's emergence from bankruptcy.
13. SPECIAL CHARGES
As a result of the decisions discussed below, the Company has incurred various
expenses, described as special charges, which have been recognized in its
continuing and discontinued operations. The following is a summary of the
principal special charges (both cash and non-cash charges) recognized in the
stub period ended March 10, 2004 and the periods ended March 31, 2004 and 2003
(expressed in thousands of dollars):
Transferred to
Balance at Amounts Liabilities Balance at
March 10, Charges for Paid In subject to March 31,
2004 Operations 2004 compromise 2004
------------ ----------- ------- -------------- ----------
2004
Severance for approximately
216 New York city employees $ 988 $ - $ (220) $ - $ 768
Severance for approximately
60 Employees terminated post petition 34 - (6) - 28
Key employee retention plan 985 - (985) - -
Office closure costs - - - - -
------------ ----------- ------- -------------- ----------
Total $ 2,007 $ - $(1,211) $ - $ 796
============ =========== ======= ============== ==========
Transferred to
Balance at Amounts Liabilities Balance at
December 31, Charges for Paid In subject to March 10,
2003 Operations 2004 compromise 2004
------------ ----------- ------- -------------- ----------
2004
Severance for approximately
216 New York city employees $ 1,470 $ (312)(A) $ ( 170) $ - $ 988
Severance for approximately
60 Employees terminated post petition 277 (239)(A) (4) - 34
Key employee retention plan 1,425 (440)(A) - - 985
Office closure costs 518 - (48) (470) -
------------ --------- ------- -------------- ----------
Total $ 3,690 $ (991) $ (222) $ (470) $ 2,007
============ ========= ======= ============== ==========
Transferred to
Balance at Amounts Liabilities Balance at
December 31, Charges for Paid In subject to March 31,
2002 Operations 2003 compromise 2003
------------ ----------- ------- -------------- ----------
2003
Severance for approximately
216 New York city employees $ 1,600 $ - $ (15) $ - $ 1,585
Severance for approximately
80 energy employees 2,500 - (48) (2,452) -
Severance for approximately
60 Employees terminated post petition 4,350 - (1,037) - 3,313
Key employee retention plan 700 600 - - 1,300
Contract termination settlement 400 - - - 400
Office closure costs 1,200 - - - 1,200
------------ ----------- ------- -------------- ----------
Total $ 10,750 $ 600 $(1,100) $ (2,452) $ 7,798
============ =========== ======= ============== ==========
(A) Reflects adjustments to reconcile to Bankruptcy Court approved amount at
March 10, 2004.
14. COMMITMENTS AND CONTINGENT LIABILITIES
At March 31, 2004, capital commitments amounted to $11.2 million for normal
maintenance and replacement in Domestic energy and water. Other capital
commitments for Domestic energy and water and International energy as of March
31, 2004 amounted to approximately $11.9 million. This amount includes a
commitment to pay $10.6 million in 2009 for a service contract extension at an
energy facility. In addition, this amount includes a commitment to contribute
$1.3 million in capital to an investment in a waste-to-energy facility in Italy,
which is expected to be contributed in late 2004.
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 facilities.
The surety bonds relate to performance under its waste water treatment operating
contracts ($8.5 million), possible closure costs for various energy projects
when such projects cease operating ($10.8 million) and to energy businesses that
have been sold and related surety bonds ($1.2 million) are expected to be
cancelled in 2004.
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 emerging from bankruptcy upon
consummation of the DHC Transaction arising from events occurring prior to their
respective Petition Dates have been resolved pursuant to the Reorganization
Plan, and have been discharged pursuant to the March 5, 2004 order of the
Bankruptcy Court which confirmed the Reorganization Plan. However, to the extent
that claims are not dischargeable in bankruptcy, such claims may not be
discharged. For example, the claims of certain persons who were personally
injured prior to the Petition Date but whose injury only became manifest
thereafter may not be discharged pursuant to the Reorganization Plan.
Environmental Matters
The Company's operations are subject to the environmental regulatory laws and
the environmental remediation laws. 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 were resolved in and discharged by the Chapter 11
Cases.
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 Company has
informed the EPA that it was a Debtor, the EPA did not file a proof of claim,
and the Company believes that its liability, if any, was discharged under the
Reorganization Plan. On March 5, 2004, one PRP did file a motion in the
Bankruptcy Court for leave to file a late proof of claim, but subsequently
withdrew that motion. No other proofs of claim have been filed relating to this
matter. 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 First Petition Date, Covanta had filed
for its dismissal from the case. 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 has filed objections to them, and plans to object
vigorously to such claims if necessary to resolve them.
The potential costs related to 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.
1. On June 8, 2001, the EPA named the Company's wholly-owned
subsidiary, 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 in connection with alleged
waste disposal by PRPs on this site. On January 9, 2004, the EPA
signed its Record of Decision with respect to the cleanup of the
site. According to the EPA, the costs of response actions incurred
as of January 2004 by the EPA and the State of New Hampshire total
approximately $19 million, and the estimated cost to implement the
remedial alternative selected in the Record of Decision is an
additional $48 million. Covanta Haverhill, Inc. is participating in
PRP group discussions towards settlement of the EPA's claims and
will continue to seek a negotiated resolution of this matter.
Although Covanta Haverhill, Inc.'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, the Company believes that based on the amount of materials
Covanta Haverhill, Inc. sent to the site, any liability will not be
material. Covanta Haverhill, Inc. was not a Debtor.
2. On May 25, 2000 the California Regional Water Quality Control Board,
Central Valley Region, 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% and
which owns and operates an independent power project
22
in Jamestown, California which uses waste wood as a fuel. The order
is in connection with the partnership's neighboring property owner's
use of ash generated by Chinese Station's plant. Chinese Station
completed the cleanup in mid-2001 and submitted its Clean Closure
Report to the Water Quality Control 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. The partnership 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 were not Debtors.
Other Matters
1. In late 2000, Lake County, Florida commenced a lawsuit in Florida
state court against Covanta Lake, Inc. (now merged with Covanta Lake
II, Inc., ("Covanta Lake")) which also refers to its merged
successor, as defined below) relating to the waste-to-energy
facility operated by Covanta in Lake County, Florida (the "Lake
Facility"). In the lawsuit, Lake 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 $70 million from Covanta Lake and
Covanta.
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.
Shortly before trial commenced in these matters, the Company and
Lake County reached a tentative settlement calling for a new
agreement specifying the parties' obligations and restructuring of
the project. That tentative settlement and the proposed
restructuring will involve, among other things, termination of the
existing Service Agreement and the execution of a new waste disposal
agreement which shall provide for a put-or-pay obligation on Lake
County's part to deliver 163,000 tons per year of acceptable waste
to the Lake Facility and a different fee structure; a replacement
guarantee from Covanta in a reduced amount; the payment by Lake
County of all amounts due as "pass through" costs with respect to
Covanta Lake's payment of property taxes; the payment by Lake County
of a specified amount in each of 2004, 2005 and 2006 in
reimbursement of certain capital costs; the settlement of all
pending litigation; and a refinancing of the existing bonds.
The Lake settlement is contingent upon, among other things, receipt
of all necessary approvals, as well as a favorable outcome to the
Company's 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 terminated under the proposed
settlement. On November 3-5, 2003, the Bankruptcy Court conducted a
trial on Mr. Gregg's proofs of claim. At issue in the trial was
whether Mr. Gregg is entitled to damages as a result of Covanta
Lake's proposed termination of the existing Service Agreement and
entry into a waste disposal agreement with Lake County. As of May 1,
2004, the Bankruptcy Court had not ruled on the Company's claims
objections. Based on the foregoing, the Company determined not to
propose a plan of reorganization or plan of liquidation for Covanta
Lake, and instead that Covanta Lake should remain a
debtor-in-possession after the effective date of the Reorganization
Plan.
To emerge from bankruptcy without uncertainty concerning potential
claims against Covanta related to the Lake Facility, Covanta has
rejected its guarantees of Covanta's obligations relating to the
operation and maintenance of the Lake Facility. The Company
anticipates that if a restructuring is consummated, Covanta may at
that time issue new parent guarantees in connection with that
restructuring and emergence from bankruptcy.
Depending upon the ultimate resolution of these matters with Mr.
Gregg and the County, Covanta Lake may determine to assume or reject
one or more executory contracts related to the Lake Facility,
terminate the Service Agreement with Lake County for its breaches
and default and pursue litigation against Lake County and/or Mr.
Gregg. Based on this determination, the Company may reorganize or
liquidate Covanta Lake. Depending on how Covanta Lake determines to
proceed, creditors of Covanta Lake may receive little or no recovery
on account of their claims.
23
2. During 2003 Covanta Tampa Construction, Inc. ("CTC") completed
construction of a 25 million gallon per day desalination-to-drinking
water facility under a contract with Tampa Bay Water ("TBW") near
Tampa, Florida. Covanta Energy Group, Inc., guaranteed CTC's
performance under its construction contract with TBW. A separate
subsidiary, Covanta Tampa Bay, Inc entered into a contract with TBW
to operate the Tampa Water Facility after construction and testing
is completed by CTC.
As construction of the Tampa Water Facility neared completion, the
parties had material disputes between them, primarily relating to
(i) whether CTC has satisfied acceptance criteria for the Tampa
Water Facility; (ii) whether TBW has obtained certain permits
necessary for CTC to complete start-up and testing, and for Covanta
Tampa Bay ("CTB") to subsequently operate the Tampa Water Facility;
(iii) whether influent water provided by TBW for the Tampa Water
Facility is of sufficient quality to permit CTC to complete start-up
and testing, or to permit CTB to operate the Tampa Water Facility as
contemplated and (iv) if and to the extent that the Tampa Water
Facility cannot be optimally operated, whether such shortcomings
constitute defaults under CTC's agreements with TBW.
In October 2003, TBW issued a default notice to CTC, indicated that
it intended to commence arbitration proceedings against CTC, and
further indicated that it intended to terminate CTC's construction
agreement. As a result, 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. On November 14, 2003,
TBW commenced an adversary proceeding against CTC and filed a motion
seeking a temporary restraining order and preliminary injunction
directing that possession of the Tampa Water Facility be turned over
to TBW. On November 25, 2003, the Bankruptcy Court denied the motion
for a temporary restraining order and preliminary injunction and
ordered, among other things, that the parties attempt to resolve
their disputes in a non-binding mediation.
In February 2004 the Company and TBW reached a tentative compromise
of their disputes which has been approved by the Bankruptcy Court,
subject to definitive documentation, and confirmation of an
acceptable plan of reorganization for CTC and CTB, which were not
included in the Reorganization Plan. Under that tentative
compromise, all contractual relationships between the Company and
TBW will be terminated, CTC will operate the facility in "hot
stand-by" for a limited period of time, and the responsibility for
optimization and operation of the Tampa Water Facility will be
transitioned to a new, non-affiliated operator. In addition, TBW
will pay $4.95 million to or for the benefit of CTC, of which up to
$550,000 is earmarked for the payment of claims under the
subcontracts previously assigned by the Company to TBW. The
settlement funds ultimately would be distributed to creditors and
equity holders of CTC and CTB pursuant to a plan of reorganization
for CTC. As a result of the foregoing, the Company determined not to
include CTC and CTB in the Reorganization Plan or Liquidation Plan,
and instead that CTC and CTB should remain debtor-in-possessions
after the effective date of the Reorganization Plan, and that
separate plans of reorganization subsequently would be proposed for
CTC and CTB. In April, 2004, CTC and CTB filed a plan of
reorganization as contemplated by the settlement. It is anticipated
that the Bankruptcy Court will schedule a hearing in July, 2004 at
which the Court will consider confirmation of such plan of
reorganization.
If the parties are unable to resolve their differences consensually,
and depending upon, among other things, whether the parties are able
to successfully effect the settlement described above, CTC and CTB
may, among other things, commence additional litigation against TBW,
attempt to assume or reject one or more executory contracts related
to the Tampa Water Facility, or propose different liquidating plans
and/or plans of reorganization for CTB and/or CTC. In such an event,
creditors of CTC and CTB may receive little or no recovery on
account of their claims.
15. RELATED PARTIES
1. In order to finance its acquisition of Covanta, Danielson entered
into a note purchase agreement with SZ Investments, LLC, Third
Avenue Trust (on behalf of Third Avenue Value Fund Series), and D.E.
Shaw Laminar Portfolios, LLC (together, the "Bridge Lenders"). Under
the note purchase agreement, the Bridge Lenders agreed to arrange
for the Second Lien Facility described above in Note 5. Covanta paid
a fee shared by the Bridge Lenders, among others, to the agent bank
for the Second Lien Facility.
24
2. Danielson and Covanta have entered into a corporate services
agreement, pursuant to which Danielson provides, at Covanta's
expense, certain administrative and professional services.
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
This report may contain forward looking statements relating to future events and
future performance of the Company within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934
including, without limitation, statements regarding the Company's expectations,
beliefs, intentions or future strategies that are signified by the words
"expects," "anticipates," "intends," "believes" or similar language. Actual
results could differ materially from those anticipated in such forward looking
statements. All forward looking statements included in this document are based
on information available to the Company on the date hereof, and the Company
assumes no obligation to update any forward looking statements. The Company
cautions investors that its business and financial performance are subject to
very substantial risks and uncertainties. The factors that could cause actual
results to differ materially from those suggested by any such statements
include, but are not limited to, those discussed or identified from time to time
in the Company's public filings with the SEC including Covanta's and CPIH's
ability to pay their respective debt, Covanta's potential liability for certain
unsecured claims, Covanta's and CPIH's ability to refinance their respective
debt, the availability of Danielson's NOLs, potential operating and construction
liabilities not covered by insurance, performance failures, Covanta's ability to
renew its contracts, concentration of suppliers and customers, exposure to
economic and political factors, foreign currency fluctuations and fuel price
fluctuations, competition, compliance with environmental and federal energy
regulations, failure to obtain necessary regulatory approvals, and changes in
laws.
ADDITIONAL INFORMATION
The following discussion addresses the financial condition of the Company as of
March 31, 2004, compared with December 31, 2003, and its results of operations
for the quarter ended March 31, 2004, compared with the same period last year.
It should be read in conjunction with the Company's Unaudited Consolidated
Financial Statements and Notes thereto for the periods ended March 31, 2004 and
2003 also contained in this report. It should also be read in conjunction with
Company's Audited Consolidated Financial Statements and Notes thereto for the
period ended December 31, 2003 and Management's Discussion and Analysis included
in the Company's 2003 Annual Report on Form 10-K, to which the reader is
directed for additional information.
The preparation of interim financial statements necessarily relies heavily on
estimates. This and certain other factors, such as the seasonal nature of
portions of the Company's business as well as competitive and other market
conditions, call for caution in estimating full year results based on interim
results of operations. The preparation of financial statements requires
management to make estimates and assumptions that affect the reported amounts
and classification of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ materially from those estimates. As described in Note 4 to its
consolidated financial statements, the Company anticipates additional valuation
adjustments to assets and liabilities during the year following its emergence
from bankruptcy.
As used in this Item 2, the term "Covanta" refers to Covanta Energy
Corporation;" "Company" refers to Covanta and its consolidated subsidiaries;
"Domestic Covanta" refers to Covanta and its subsidiaries engaged in the waste
to energy, water and independent power businesses in the United States; and
"CPIH" refers to Covanta's subsidiary, Covanta Power International Holdings, Inc
and its subsidiaries engaged in the independent power business outside the
United States.
On March 10, 2004, Covanta and most of its subsidiaries engaged in waste to
energy, water and independent power in the United States consummated their
Reorganization Plan and emerged from their reorganization proceedings under
Chapter 11 of the Bankruptcy Code. As a result of the consummation of the
Reorganization Plan, Covanta is a wholly owned subsidiary of Danielson. The
subsidiaries of Covanta that own and operate the Warren County, New Jersey, and
Lake County, Florida, waste to energy facilities and which were engaged in the
Tampa Bay desalination facility (together the "Remaining Debtors") remain in
Chapter 11 proceeding. Consequently, Covanta no longer includes these entities
as consolidated subsidiaries in its financial statements. Covanta's investment
in these entities is recorded using the equity method as of March 10, 2004. The
results of operations and financial condition of Domestic Covanta and CPIH are
consolidated for financial reporting purposes.
EXECUTIVE SUMMARY
The Company's Business Segments. The Company has two business segments: (a)
Domestic energy and water and (b)
26
International energy. Domestic energy and water designs, constructs, and
operates key infrastructure for municipalities and others in waste to energy,
independent power production and water. Its principal business is the operation
and, in some cases, ownership of waste to energy facilities. Waste to energy
facilities combust municipal solid waste as a means of environmentally sound
disposal and produce energy that is sold as electricity or steam to utilities
and other purchasers. The Company's independent power projects generate
electricity by combusting coal, natural gas, landfill gas, or heavy fuel oil, or
by utilizing hydroelectric resources. The generated power is sold to private
utilities, governmental agencies distributing power or other power users. The
water business treats waste water prior to its discharge under contracts with
municipalities and private entities and produces potable water which is
distributed by municipal authorities. The International energy segment has
ownership interests in, and/or operates, independent power production facilities
in The Philippines, China, Bangladesh, India, Spain, and Costa Rica, and one
waste to energy facility in Italy.
In 2003, the Company also had an "Other" segment which consisted of the
Company's remaining operations in the aviation and entertainment businesses
which have been disposed of or which are being liquidated in bankruptcy.
Emergence from Chapter 11. The Company filed its petition for relief under
Chapter 11 of the Bankruptcy Code on April 1, 2002. During the proceedings the
Company disposed of businesses (including its geothermal power generating
facilities) that were not in the Domestic energy and water and International
energy segments. On March 10, 2004, the Company consummated its court approved
Reorganization Plan pursuant to which Danielson acquired 100% of Covanta for a
purchase price of approximately $30 million.
Optimizing Cash. As further explained below, Domestic Covanta and CPIH emerged
from the Chapter 11 proceeding as highly leveraged entities, with several series
of new debt issued under the Reorganization Plan. The creditors under the new
debt and credit facilities of Domestic Covanta do not have recourse to CPIH, and
the creditors under the new debt and credit facilities of CPIH do not have
recourse to Domestic Covanta. Cash distributions from CPIH are not available for
use by Domestic Covanta until the CPIH debt and credit facilities are paid in
full. Therefore, the assets and cash flow of CPIH are not available to repay the
Domestic Covanta's facilities or satisfy other of its obligations.
In addition, most of the Company's subsidiaries that own projects had previously
incurred indebtedness to fund the development and construction of their
respective facilities, and this indebtedness was unaffected by the bankruptcy.
Generally, the holders of project debt have recourse only to the assets of the
specific project funded with that debt. The components of Domestic Covanta's and
CPIH's debt are discussed in further detail below.
Management's primary objective is to provide reliable service to its clients
while generating sufficient cash to meet its liquidity needs. Maintaining
historic facility production and optimizing cash receipts is necessary to assure
that the Company has sufficient cash to fund operations, make appropriate and
permitted capital expenditures and meet scheduled debt service payments.
The Company believes that Domestic Covanta's operations should generate
sufficient cash to meet operational needs, capital expenditures and debt service
due prior to maturity on both the corporate and project level. Therefore in
order to achieve its objective of optimizing cash flows, management believes it
must seek to continue to operate and maintain Domestic Covanta's facilities
consistent with historical performance levels and avoid increases in overhead
and operating expenses in view of the largely fixed nature of the Domestic
Covanta's revenues. Management will also seek to maintain or enhance Domestic
Covanta's cash flow from renewals or replacement of existing contracts (which
begin to expire in October, 2007), and from new contracts to expand existing
facilities or operate additional facilities. Domestic Covanta's ability to grow
cash flows by investing in new projects will be limited by debt covenants in its
principal financing agreements, and by the absence of opportunities for new
waste to energy facilities.
Management believes that demonstrating Domestic Covanta's ability to maintain
consistent and substantial cash flows will enable it to attract alternative
sources of credit. Refinancing Domestic Covanta's credit facilities may enable
it to reduce the costs of its indebtedness and letters of credit, remove or
relax restrictive debt covenants and provide Domestic Covanta with the
additional flexibility to exploit appropriate growth opportunities in the
future. In addition, Domestic Covanta is not required to pay a premium with
respect to prepayment of its High Yield Notes within two years of emergence. In
addition, Domestic Covanta has two letter of credit facilities under which it
obtained letters of credit required under agreements with customers. These
facilities are of shorter duration than the related obligation of Domestic
Covanta to provide letters of credit. Domestic Covanta will have to renew or
replace these facilities in order to meet such obligations. The Company also
believes that operating cash flows will not be sufficient to repay Domestic
Covanta's High Yield Notes at maturity in 2011. Accordingly, the Company will
have to derive such funds from refinancing, asset sales, or other sources.
27
Domestic Covanta's cash flow will be enhanced under a Tax Sharing Agreement with
Danielson. This agreement provides that certain of the NOLs will be available to
offset the tax liability of Domestic Covanta. Consequently, Domestic Covanta's
federal income tax obligations will be substantially reduced.
The NOLs will expire in varying amounts from December 31, 2004 through December
31, 2023, if not used. The IRS has not audited Danielson's tax returns. There
can be no assurance that Danielson would prevail if the IRS were to challenge
the use of the NOLs.
Additionally, a separate subsidiary of Danielson, American Commercial Lines
Holdings, LLC ("ACL") filed a petition to reorganize under Chapter 11 of the
Bankruptcy Code. It is possible that in connection with ACL's emergence from
bankruptcy, taxable income could result from ACL debt forgiveness and asset
sales, which could reduce the NOLs available to offset Covanta future income.
If the NOLs were not available to offset the federal income tax liability of
Domestic Covanta, Domestic Covanta would not have sufficient cash flow available
to pay debt service on the Domestic Covanta corporate credit facilities. Because
CPIH is not included as a member of Danielson's consolidated taxpayer group, the
Tax Sharing Agreement will not benefit it.
The Company believes that CPIH's operations should also generate sufficient cash
to pay their respective debt service obligations prior to maturity. However, the
Company does not believe that operations will provide sufficient funding to pay
CPIH's term debt when it matures. Accordingly the Company believes that it will
have to derive such funds from refinancing, asset sales or other sources.
Management believes that it must continue to operate and maintain CPIH's
facilities consistent with historical performance levels to enable its
subsidiaries to comply with respective debt covenants and make equity
distributions to CPIH. It will also seek to refinance or sell existing projects
in an amount sufficient to repay CPIH indebtedness at or prior to its maturity
in three years. In those jurisdictions where its subsidiaries' energy purchasers
may experience difficulty in paying the full contractual tariffs on a timely
basis, CPIH must seek arrangements which permit the subsidiary to meet all of
its obligations. CPIH's ability to grow by investing in new projects will be
limited by debt covenants in its principal financing agreements.
Earnings. The Company's emergence from bankruptcy did not affect the operating
performance of the Company's facilities or their ability to generate cash.
However, as a result of the application of fresh start and purchase accounting
adjustments required upon the Company's emergence from bankruptcy, the carrying
value of the Company's assets was adjusted to reflect their current estimated
fair market value based on discounted anticipated cash flows and estimates of
management. These adjustments will result in future changes in non-cash items
such as depreciation and amortization which will not be consistent with the
amounts of such items for prior periods. Such future changes for post-emergence
periods may affect earnings as compared to pre-emergence periods.
In addition, the Company's consolidated financial statements have been further
adjusted to deconsolidate the Remaining Debtors from the consolidated group.
Although management has endeavored to use its best efforts to make appropriate
estimates of value, the estimation process is subject to inherent limitations
and is based upon the preliminary work of the Company and its financial
consultants. Moreover, under applicable accounting principles such preliminary
estimates may be adjusted during the year following emergence from Chapter 11 to
reflect additional information obtained by management. The adjusted values
assigned to depreciable and amortizable assets may affect the Company's GAAP
earnings. See Note 4 to the Consolidated Financial Statements for additional
information on the impact of fresh start adjustments on the Company's financial
statements.
In addition, Domestic Covanta owns 9 waste to energy facilities for which the
debt service on project debt is expressly included as a component of the service
fee paid by the municipal client. In accordance with GAAP regardless of the
actual amounts paid by the municipal client with respect to this component, the
Company records service revenues with respect thereto based on levelized debt
service payments during the contract term. Accordingly the amount of revenues
recorded does not equal the actual payment of this component by the municipal
client in any given contract year.
OPERATING RESULTS.
28
The following table summarizes the historical consolidated results of operations
of the Company for the three months ended March 31, 2003 ("First Quarter 2003"),
the period January 1, 2004 through March 10, 2004 (the "Stub Period") and for
the period March 11, 2004 through March 31, 2004 (in thousands of dollars):
Combined results For the period For the period
for the Three Months March 11, 2004 January 1, 2004 Three Months Ended
Ended March 31, Through March 31, Through March 10, March 31,
2004 2004 2004 2003
-------------------- ----------------- ----------------- ------------------
Service revenues $ 115,311 $ 25,453 $ 89,858 $ 120,492
Electricity and steam sales 66,828 13,521 53,307 69,912
Construction revenues 58 - 58 6,007
Other revenues 11 2 9 -
Plant operating expenses 128,096 27,322 100,774 126,045
Construction costs 73 - 73 5,566
Depreciation and amortization 16,921 3,495 13,426 18,674
Debt service charges-net 15,478 2,237 13,241 19,970
Other operating costs (197) 12 (209) 136
Net loss on sale of business (175) - (175) (417)
Selling, general, and
administrative expenses 9,193 1,596 7,597 9,651
Other expenses-net (2,122) (198) (1,924) (574)
Equity in income of
unconsolidated investments 5,749 932 4,817 4,441
Interest expense 8,023 2,649 5,374 10,010
Reorganization items (58,282) - (58,282) (12,194)
Gain on cancellation of
pre-petition debt 510,680 - 510,680 -
Fresh start adjustments (214,927) - (214,927) -
Net Income(Loss) 30,544 981 29,563 (9,530)
Results of operations for first quarter 2004 are set forth under the heading
"Combined" in the above table. References in the discussion below refer to such
combined results.
The following discussion should be read in conjunction with the above table, the
condensed consolidated financial statements and the notes to those statements
and other financial information appearing and referred to elsewhere in this
report.
CONSOLIDATED RESULTS
Service revenues for the first quarter of 2004 decreased $5.2 million compared
to the first quarter of 2003. The decrease was primarily due to $4.8 million
decrease resulting from domestic restructured contracts at two facilities
(including the elimination of project debt at one facility), and a $1.6 million
reduction of service revenues at the Lake and Warren projects due to
deconsolidation offset by an increase of $1.7 million related to an increase in
tip fee pricing and incentive payments at the domestic facilities.
Electricity and steam sales for the first quarter of 2004 decreased $3.1 million
compared to the first quarter of 2003. The decrease was primarily due to a $4.1
million decrease resulting from the expiration of a contract at one domestic
facility, offset by a $1.1 million increase in international sales primarily
resulting from increased fuel pass through costs.
Construction Revenue for the first quarter of 2004 decreased $5.9 million
compared to the first quarter of 2003. The decrease was primarily due to the
Company's substantial completion of the Tampa Bay desalination facility.
Plant operating cost for the first quarter of 2004 increased $2.1 million
compared to the first quarter of 2003. The increase was primarily due to
increased fuel costs at international facilities and additional scheduled
maintenance work conducted at domestic facilities during the first quarter in
2004 compared to the first quarter in 2003 at domestic facilities, offset by a
decrease resulting from the deconsolidation of the Lake and Warren facilities.
29
Construction costs for the first quarter of 2004 decreased $5.5 million compared
to the first quarter of 2003. The decrease was primarily attributable to the
Company's substantial completion of the Tampa Bay desalination facility.
Depreciation and amortization for the first quarter of 2004 decreased $1.8
million compared to the first quarter of 2003. On March 10, 2004 property,
plant, and equipment were recorded at its estimated fair market values resulting
in revised depreciation. On the same date, assets related to service and energy
contracts were recorded at estimated fair values which are amortized over the
life of the contracts.
Debt Service costs for the first quarter of 2004 decreased $4.5 million compared
to the first quarter of 2003. The decrease was primarily the result of a
reduction in project debt and the restructuring of debt at two domestic
facilities in the last six months of 2003.
Equity in income from unconsolidated investments for the first quarter of 2004
increased $1.3 million compared to the first quarter of 2003. The increase
resulted primarily from an international energy project.
Interest expense -- net for the first quarter of 2004 decreased $2.0 million
compared to the first quarter of 2003. The increase was primarily the result of
a decline in interest expense of $1.5 million and an increase in interest income
of $0.5 million.
Reorganization items for the first quarter of 2004 increased $46.1 million
compared to the first quarter of 2003. The increase was primarily the result of
bankruptcy exit costs of $22.5 million, an increase of $17.3 million in legal
and professional fees related to the emergence from bankruptcy, and an increase
in severance costs of $6.0 million.
Gain on cancellation of pre-petition debt was $510.7 million for the first
quarter of 2004. Gain on cancellation of pre-petition debt results from the
cancellation of the Company's pre-petition debt and other liabilities subject to
compromise net of the fair value of cash and securities distributed to petition
creditors.
Fresh start adjustments were $214.9 million for the first quarter of 2004. Fresh
start adjustments represent adjustments to the carrying amount of the Company's
assets and liabilities to fair value in accordance with the provisions of SOP
90-7. See Note 4 to the condensed consolidated financial statements.
The effective tax rate for the first quarter of 2004 was 86.6% compared to 46.2%
for the first quarter of 2003. The increase relates to write-downs included in
fresh start adjustments which have no tax benefit provided.
DOMESTIC ENERGY AND WATER SEGMENT
The following table summarizes the historical results of operations of the
Domestic energy and water segment for the three months ended March 31, 2003
("First Quarter 2003"), the period January 1, 2004 through March 10, 2004 (the
"Stub Period") and for the period March 10, 2004 through March 31, 2004 (in
thousands of dollars):
Combined results For the period For the period
for the Three Months March 11, 2004 January 1, 2004 Three Months Ended
Ended March 31, Through March 31, Through March 10, March 31,
2004 2004 2004 2003
-------------------- ----------------- ----------------- -------------------
Revenues $ 137,494 $ 29,798 $ 107,696 $ 152,640
Income from operations 10,564 4,736 5,828 24,353
Total revenues for the Domestic energy and water segment for the first quarter
of 2004 decreased $15.1 million compared to the first quarter of 2003. The
decrease resulted from a decline of $5.0 million in service revenues primarily
from contract restructuring at two waste-to-energy projects and the
deconsolidation of Lake and Warren, a decline in construction revenue of $5.9
million resulting primarily from the completion of the desalination project in
Tampa Bay, and a decrease in electric and steam sales of $4.2 million primarily
due to the expiration of a contract at one facility.
Income from operations for the Domestic energy and water segment for the first
quarter of 2004 decreased $14 million. The decrease was primarily due to the
decrease in service revenues and electric and steam sales as discussed above
plus an increase of $3.9 million in operating expense due to timing of
maintenance work performed in the first quarter of 2004.
30
INTERNATIONAL ENERGY SEGMENT
The following table summarizes the historical results of operations of the
International energy segment for the three months ended March 31, 2003 ("First
Quarter 2003"), the period January 1, 2004 through March 10, 2004 (the "Stub
Period") and for the period March 10, 2004 through March 31, 2004 (in
thousands):
Combined results For the period For the period
for the Three Months March 11, 2004 January 1, 2004 Three Months Ended
Ended March 31, Through March 31, Through March 10, March 31,
2004 2004 2004 2003
-------------------- ----------------- ----------------- -------------------
Revenues $ 44,714 $ 9,178 $ 35,536 $ 43,771
Income from operations 11,483 3,184 8,299 10,531
Total revenues for the International energy segment for the first quarter of
2004 increased $0.9 million compared to the first quarter of 2003 primarily as a
result of increased fuel pass through costs at two facilities.
Income from operations for the International energy segment for the first
quarter of 2004 was comparable to the first quarter of 2003. The revenue
increase of $0.9 million discussed above and the $2.1 million increase in equity
in income from unconsolidated investments from the Quezon facility was offset by
a $1.4 million increase in expenses primarily resulting from increased fuel
expenses.
CAPITAL RESOURCES AND COMMITMENTS
The Company's debt structure changed substantially on March 10, 2004 as a result
of its reorganization. Substantially all of the debt instruments (other than
project debt) existing prior to that date were discharged, and Covanta and CPIH
entered into new debt instruments. The following table summarizes Covanta's and
CPIH's gross contractual obligations for new corporate debt of Covanta and CPIH,
and project debt revalued as a result of adjustments required upon the Company's
emergence from bankruptcy. (Amounts expressed in thousands of dollars.) See
Covanta's 2003 Report on Form 10-K for a presentation of the Company's other
material contractual commitments.
CONTRACTUAL COMMITMENTS
Payments Due by Period
----------------------
Less than After
Total one year 1 to 3 years 4 to 5 years 5 years
------------ ------------ ------------ ------------ ------------
Domestic Covanta project debt $ 839,504 $ 79,697 $ 168,245 $ 162,091 $ 429,471
CPIH project debt 101,633 14,437 28,875 28,875 29,446
----------- ----------- ----------- ----------- -----------
Total Project Debt (Note 7) 941,137 94,134 197,120 190,966 458,917
High yield notes 205,190 - - - 205,190
Unsecured notes 36,500 - - - 36,500
CPIH term loan 94,825 - 94,825 - -
Other Long-term debt 10,891 9,631 1,260 - -
----------- ----------- ----------- ----------- -----------
Total Other Long-term debt (Note 6) 347,406 9,631 96,085 - 241,690
Total Debt Obligations of the Company 1,288,543 103,765 293,205 190,966 700,607
Less:
Non-recourse Project Debt (Note 7) (941,137) (94,134) (197,120) (190,966) (458,917)
----------- ----------- ----------- ----------- -----------
Net Debt Obligations of Covanta $ 347,406 $ 9,631 $ 96,085 $ - $ 241,690
=========== =========== =========== =========== ===========
Total debt includes both the Company's project debt and corporate debt.
Domestic Project Debt. Financing for Domestic Covanta's waste to energy projects
is generally accomplished through tax-exempt and taxable revenue bonds issued by
or on behalf of the municipal client. For most facilities owned by a Domestic
Covanta subsidiary, the municipal client loans the bond proceeds to the
subsidiary to pay for facility construction and pays to the subsidiary amounts
necessary to pay debt service. For such facilities, project-related debt is
31
included as "project debt (short-and long-term)" in the Company's consolidated
financial statements. Generally, such project debt, is secured by the revenues
generated by the project and other project assets. The only recourse to Covanta
relates to operating performance guarantees. Such project debt of Domestic
Covanta subsidiaries are described in the table above as non-recourse to Covanta
("Non-recourse").
With respect to such facilities, debt service is an explicit component of the
service fee paid by the municipal client. The fees are paid by the municipal
client to the trustee for the applicable project debt and held by it until
applied as required by the project debt documentation. While these funds are
held by the trustee they are reported as Restricted cash of the Company on its
consolidated balance sheet, but they are not generally available to the Company.
International Project Debt. Financing for CPIH's projects is generally
accomplished through commercial loans from local lenders or financing arranged
through multilateral lending institutions based in the United States. Such debt
is generally secured by the revenues generated by the project and other project
assets and is without recourse to CPIH or Domestic Covanta. Project debt
relating to two CPIH projects in India, is included as "project debt (short-and
long-term)" in the Company's consolidated financial statements. In most
projects, the instruments defining the rights of debt holders generally provide
that the project subsidiary may not make distributions to its parent until debt
service obligations are satisfied and other financial covenants complied with.
Corporate Debt. Covanta's and CPIH's corporate debt obligations arise from its
Chapter 11 proceeding and are outlined on the following table:
COVANTA DEBT
Designation Principal Amount Interest Principal Payments Security
----------- ---------------- -------- ------------------ --------
High Yield Notes $205 million Payable Due on maturity on Third priority lien in
accreting to an semi-annually in March 2011 substantially all of the assets of
aggregate principal arrears at 8.25% per the Domestic Borrowers not subject
amount of $230 million annum to prior liens. Guaranteed by
Domestic Borrowers
Unsecured Notes Expected amount $34 Payable Annual Unsecured and subordinated in right
to $39 million, based semi-annually in amortization of payment to all senior
on determination of arrears at 7.5% per payments of $3.9 indebtedness of Covanta including,
allowed pre-petition annum million with the the First Lien Facility and the
unsecured obligations remaining balance Second Lien Facility, the High
(recorded at $36.5 due at maturity Yield Notes; will otherwise rank
million) on March 2012 equal with, or be senior to, all
other indebtedness of Covanta
CPIH DEBT
Designation Principal Amount Interest Principal Payments Security
----------- ---------------- -------- ------------------ --------
Term Loan $95 million Payable monthly in Due on maturity on Second priority lien on
Facility arrears at 10.5% March 2007 substantially all of the CPIH
per annum, 6.0% of Borrowers' assets not otherwise
such interest to be pledged
paid in cash and
the remaining 4.5%
to be paid in cash
to the extent
available and
otherwise payable
as increase to the
principal amount of
the loan
The Company's other commitments as of March 31, 2004 are as follows (expressed
in thousands of dollars).
Commitments Expiring by Period
-------------------------------
Less than More than
Total one year one year
-------- --------- ---------
Letters of Credit (Note 5) $226,772 $ 33,524 $ 193,248
Surety Bonds 20,544 1,150 19,394
-------- --------- ---------
Total Other Commitments - net $247,316 $ 34,674 $ 212,642
======== ========= =========
32
The letters of credit were issued pursuant to the facilities described below
under "Liquidity" to secure the Company's performance under various contractual
undertakings related to its domestic and international projects, or to secure
obligations under its insurance program. Each letter of credit relating to a
project is required to be maintained in effect for the period specified in
related project contracts, and generally may be drawn if it is not renewed prior
to expiration of that period.
One of these letters of credit relates to a waste to energy project and is
provided under the First Lien Facility (described below). This facility
currently provides for letters of credit in the amount of approximately $138
million and reduces semi-annually until 2009, when it is no longer contractually
required to be maintained.
The other letters of credit are provided under the Second Lien Facility
(described below) in support of Domestic Covanta's businesses and to continue
existing letters of credit required by CPIH's businesses. One of these letters
of credit related to a domestic waste to energy project, currently in the amount
of $17 million, will be reduced annually beginning in 2010 through 2016. In
addition, one contract for a domestic waste to energy facility required a new
$50 million letter of credit at emergence from bankruptcy and was reduced to $35
million on April 2, 2004, which will similarly secure performance under
applicable project contracts and reduces periodically until 2015, at expiration
of the initial term of the contract. This letter credit must be maintained as
long as Covanta does not have an investment grade rating. Several letters of
credit issued under the Second Lien Facility, in the approximate aggregate
amount of $12.5 million, have been issued to satisfy contractual requirements
related to CPIH facilities. The Company believes that it will be able to fully
perform on its contracts and that it is unlikely that letters of credit would be
drawn upon because of its performance.
The First Lien Facility and the Second Lien Facility, each of which is secured,
provide commitments for all letters of credit required to be provided by the
Company, except one letter of credit related to an international project, in the
amount of approximately $2.6 million. Such letter of credit is issued pursuant
to a separate, unsecured, arrangement. Were any of the Company's letters of
credit to be drawn, under the Company's debt facilities, the amount drawn would
be immediately repayable to the issuing bank.
The surety bonds relate to performance under its waste water treatment operating
contracts ($8.5 million), possible closure costs for various energy projects
when such projects cease operating ($10.8 million), and energy projects sold but
related surety bonds are expected to be cancelled in 2004 ($1.2 million). Were
these bonds to be drawn upon, the Company would ordinarily have a contractual
obligation to indemnify the surety company. However, as these indemnity
obligations arose prior to the Company's bankruptcy filing, the surety
companies' indemnity claims would entitle them to share only in a limited
distribution along with other unsecured creditors under the Reorganization Plan.
Because such claims share in a fixed distribution under the Reorganization Plan,
the Company expects that any such distribution will not affect the obligations
of Domestic Covanta or CPIH.
Covanta and certain of its subsidiaries have issued or are party to performance
guarantees and related contractual obligations undertaken mainly pursuant to
agreements to construct and operate certain energy and water facilities. With
respect to its domestic businesses, Covanta has issued guarantees to municipal
clients and other parties that Covanta's operating subsidiaries will perform in
accordance with contractual terms, including, where required, the payment of
damages. Such contractual damages could be material, and in circumstances where
one or more subsidiary's contract has been terminated for its default, such
damages could include amounts sufficient to repay project debt. For facilities
owned by municipal clients and operated by the Company, Covanta's potential
maximum liability as of March 31, 2004 associated with the repayment of the
municipalities' debt on such facilities, amounts in aggregate to approximately
$1.3 billion. This amount is not recorded as a liability in the Company's
Consolidated Balance Sheet as of March 31, 2004 as Covanta believes that it had
not incurred such liability at the date of the financial statements.
Additionally, damages payable under such guarantees on Company-owned waste to
energy facilities could expose Covanta to recourse liability on project debt
shown on the foregoing table. Covanta also believes that it has not incurred
such damages at the date of the financial statements. If Covanta is asked to
perform under one or more of such guarantees, its liability for damages upon
contract termination would be reduced by funds held in trust and proceeds from
sales of the facilities securing the project debt, which is presently not
estimable.
With respect to its international businesses, Covanta has issued guarantees of
certain of its operating subsidiaries contractual obligations to operate power
projects. The potential damages owed under such arrangements for international
projects may be material. Depending upon the circumstances giving rise to such
domestic and international damages, the contractual terms of the applicable
contracts, and the contract counterparty's choice of remedy at the time a claim
against a guarantee is made, the amounts owed pursuant to one or more of such
guarantees could be greater than the Company's then-available sources of funds.
To date, the Company has not incurred material liabilities under its guarantees,
either on domestic or international projects.
33
LIQUIDITY
The Company's resources to meet these obligations include its cash holdings,
cash from operations, asset sales and its liquidity facilities. Resources to
meet obligations relating to the payment of project debt also include Restricted
cash.
At March 31, 2004, Domestic Covanta had approximately $45 million in cash,
reflecting the proceeds from Danielson's investment in Covanta, the excess of
cash on hand at emergence over the balance required to be paid to creditors
under the Company's Reorganization Plan, and net change in cash for Domestic
Covanta since March 10, 2004. At closing the Company had approximately $258
million in cash, of which approximately $214 million was applied to pay
creditors, expenses of emergence, and to establish reserves to pay for
additional emergence expenses that are estimated to be incurred after emergence.
Amounts in such restricted cash accounts are not available for general corporate
purposes.
At March 31, 2004, CPIH had approximately $6 million in its domestic accounts.
CPIH also had $40.4 million related to cash held in foreign bank accounts that
could be difficult to transfer to the U.S. due to the requirements of the
relevant project financing documents.
The cash and cash equivalents discussed above does not include approximately
$162.4 million reflected on the Company's balance sheet as Restricted Cash. This
amount largely reflects payments from municipal clients under Service Agreements
as the part of the service fee due reflecting debt service and the funds
restricted for payment of reorganization related costs as discussed above. These
payments are made directly to the trustee for the related project debt and are
held by it until paid to project debt holders. The Company does not have access
to these funds.
In addition, in connection with the Company's emergence from Chapter 11, it
entered into the following credit facilities:
DESIGNATION PURPOSE TERM SECURITY
----------- ------- ---- --------
LIQUIDITY FACILITIES OF COVANTA
First Lien To provide Expires March 2009 First priority lien in substantially all
Facility for letter of the assets of the Domestic Borrowers
of credit not subject to prior liens. Guaranteed by
required for Domestic Borrowers. Also, to the extent
a Covanta that no amounts have been funded under the
waste to revolving loan or letters of credit,
energy Covanta is obligated to apply excess cash
facility to collateralize its reimbursement
obligations with respect to outstanding
letters of credit, until such time as such
collateral equals 105% of the maximum amount
that may at any time be drawn under
outstanding letters of credit.
Second Lien To provide Expires March 2009 Second priority lien in substantially all
Facility for certain of the assets of the Domestic Borrowers
existing and not subject to prior liens. Guaranteed by
new letters Domestic Borrowers. Also, to the extent
of credit that no amounts have been funded under the
and up to revolving loan or letters of credit,
$10 million Covanta is obligated to apply excess cash
in revolving to collateralize its reimbursement
credit for obligations with respect to outstanding
general letters of credit, until such time as such
corporate collateral equals 105% of the maximum
purposes amount that may at any time be drawn under
outstanding letters of credit.
LIQUIDITY FACILITY OF CPIH
Revolving Loan Up to $10 Expires March 2007 First priority lien on the stock of CPIH
Facility million and substantially all of the CPIH
Borrowers' assets not otherwise pledged
See Note 5 to the consolidated financial statements.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially could result in
materially different results under different conditions. The Company's critical
accounting policies include liabilities subject to compromise, revenue
recognition, management's estimated useful lives of long-lived assets, actuarial
assumptions with respect to pension plans, litigation and other claims against
the Company, and the estimated fair value of the Company's assets and
liabilities, including guarantees. (See Note 3 to the Consolidated Financial
Statements).
34
Prior to its emergence from bankruptcy, the Company's Consolidated Financial
Statements were prepared in accordance with SOP 90-7, "Financial Reporting by
Entities in Reorganization under the Bankruptcy Code." Accordingly, all
pre-petition liabilities believed to be subject to compromise were segregated in
the Consolidated Balance Sheet and classified as Liabilities subject to
compromise, at the estimated amount of allowable claims. Revenues, expenses,
including professional fees, realized gains and losses, and provisions for
losses resulting from the reorganization were reported separately as
Reorganization Items. The amount of allowable claims may differ significantly
from the amounts for which these claims may be settled and settlement or
resolution of disputed claims are expected to occur during 2004.
SERVICE REVENUES: The Company's revenues are generally earned under contractual
arrangements. Service revenues include:
1) Fees earned under contract to operate and maintain waste to energy,
independent power and water facilities;
2) Fees earned to service Project debt (principal and interest) where such
fees are expressly included as a component of the service fee paid by the
municipal client pursuant to applicable waste to energy Service
Agreements. Regardless of the timing of amounts paid by the municipal
client relating to Project debt principal, the Company records service
revenue with respect to this principal component on a levelized basis over
the term of the Service Agreement. Long-term unbilled service receivables
related to waste to energy operations are discounted in recognizing the
present value for services performed currently in order to service the
principal component of the Project debt;
3) Fees earned for processing waste in excess of Service Agreement
requirements;
4) Tipping fees earned under waste disposal agreements;
5) Other miscellaneous fees such as revenue for scrap metal recovered and
sold.
ELECTRICITY AND STEAM SALES: Revenues from the sale of electricity and steam are
earned at energy facilities and are recorded based upon output delivered and
capacity provided at rates specified under contract terms or prevailing market
rates net of amounts due to municipal clients under applicable Service
Agreements.
CONSTRUCTION REVENUES: Revenues under fixed-price contracts, including
construction, are recognized on the basis of the estimated percentage of
completion of services rendered. Anticipated losses are recognized as soon as
they become known.
A significant change in these revenue recognition policies, or a change in
accounting principles generally accepted in the United States could have an
impact on the Company's recorded operating results and financial condition.
ESTIMATED LIFE OF LONG-LIVED ASSETS: The Company evaluates long-lived assets
based on its projection of undiscounted cash flows whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable. The
projection of future undiscounted cash flows used to test recoverability of
long-lived assets is based on expected cash flows from the use and eventual
disposition of those long-lived assets. If the carrying value of such assets is
greater than the future undiscounted cash flows of those assets, the Company
would measure the impairment amount as the difference between the carrying value
of the assets and the discounted present value of the cash flows to be generated
by those assets. Long-lived assets to be disposed of are evaluated in relation
to the estimated fair value of such assets less costs to sell. A significant
reduction in actual cash flows and estimated cash flows could have a material
adverse effect on the carrying value of those assets and on the Company's
operating results and financial condition.
Property, plant and equipment was recorded at estimated fair value based on
discounted cash flows as of March 10, 2004 and is depreciated over its estimated
useful life. The estimated useful life of the Company's energy generation
facilities is up to 50 years. A significant decrease in the estimated useful
life of any individual facility or group of facilities could have a material
adverse impact on the Company's operating results in the period in which the
estimated useful life is revised and subsequent periods.
Service and energy contracts are recorded at estimated fair market value based
upon discounted cash flows from the service contracts and the "above market"
portion of the energy contracts. Amortization is calculated by the straight-line
method over the useful life of the agreements.
35
PENSION AND POSTRETIREMENT PLANS: The Company has pension and post-retirement
obligations and costs that are developed from actuarial valuations. Inherent in
these valuations are key assumptions including discount rates, expected return
on plan assets and medical trend rates. Changes in these assumptions can result
in different expense and liability amounts, and future actual experience can
differ from the assumptions. Changes are primarily influenced by factors outside
the Company's control and can have a significant effect on the amounts reported
in the financial statements.
LITIGATION: 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
businesses. The Company assesses the likelihood of potential losses on an
ongoing basis and when they are considered probable and reasonably estimable,
records an estimate of the ultimate outcome. If there is no single point
estimate of loss that is considered more likely than others, an amount
representing the low end of the range of possible outcomes is recorded.
See Note 3 to the Consolidated Financial Statements for a summary of new
accounting policies and new accounting pronouncements.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following is a summary discussion of the changes in market risk inherent in
Covanta's business to the extent such risks have changed since December 31,
2003. Additional quantitative market risk disclosures for Covanta are included
in Covanta's Annual Report on Form 10-K for the year ended December 31, 2003.
Interest Rate Risk
In emerging from bankruptcy all but $2.1 million of Covanta's long-term debt
(other than Project debt) was cancelled and $336.5 million of new fixed rate
debt was issued. Covanta's long-term debt is subject to an adverse change in
fair value if interest rates were to rise on fixed rate debt. For fixed rate
debt, the potential increase in fair value from a 20 percent hypothetical
increase in the underlying March 31, 2004 market interest rates would be
approximately $25.8 million.
Covanta has Project debt outstanding bearing interest at floating rates that
could subject it to the risk of increased interest expense due to rising market
interest rates, or an adverse change in fair value due to declining interest
rates on fixed rate debt. Depending upon the contractual structure, interest
rate risk on Project debt may be borne by Client Communities because debt
service is passed through to those clients.
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 March 31, 2004, 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 March 31, 2004 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
See Note 14 to the consolidated financial statements.
ITEM 2. - CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
On March 10, 2004, Covanta issued 200 shares of its common stock par value $.01
per share (the "Common Stock") to Danielson Holding Corporation pursuant to the
Company's Reorganization Plan.
36
The Common Stock was issued in consideration of an aggregate offering price of
$30 million in cash. No underwriters were involved in the issuance of such
securities.
Pursuant to Section 1145 of the United States Bankruptcy Code (11 U.S.C. 1145),
the issuance of the Common Stock was exempt from registration requirements under
the Securities Act of 1933.
ITEM 3. - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
31.1 Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002 by
Chief Executive Officer.
31.2 Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002 by
Chief Financial Officer.
32 Certification of periodic financial report pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.
b. Reports on Form 8-K.
1. Covanta filed a Current Report on Form 8-K on March 8, 2004, to report
that on March 5, 2004 the Bankruptcy Court issued its order confirming the
Company's Reorganization Plan and Liquidation Plan.
2. Covanta filed a Current Report on Form 8-K on March 11, 2004, to report
that on March 10, 2004 it closed on its acquisitions by Danielson Holding
Corporation and consummated its Reorganization Plan.
3. Covanta filed a Current Report on Form 8-K on March 30, 2004 to report
that following its acquisition by Danielson Holding Corporation it had
determined to replace its independent auditor, Deloitte & Touche LLP, and
to engage the services of Ernst & Young LLP as its independent auditors.
4. Covanta filed a Current Report on Form 8-K/A on April 1, 2004 to amend
it's Current Report on Form 8-K filed on March 30, 2004 to clarify the
nature of the previously reported change in independent auditors.
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 7, 2004 COVANTA ENERGY CORPORATION
(Registrant)
By: /s/ ANTHONY J. ORLANDO
--------------------------------
Anthony J. Orlando
President, Chief Executive
Officer and Principal Financial
Officer
38