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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
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
(formerly named Ogden Corporation)
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(Exact name of registrant as specified in its charter)
DELAWARE 13-5549268
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(State or Other Jurisdiction (I.R.S. Employee Identification No.)
of Incorporation or Organization)
40 Lane Road, Fairfield, N.J. 07004
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code - (973) 882-9000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of each class Which Registered
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Common Stock, par value
$.50 per share New York Stock Exchange
$1.875 Cumulative Convertible
Preferred Stock (Series A) New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. |X|
The aggregate market value of registrant's voting stock, held by non-affiliates
based on the New York Stock Exchange closing price as reported in the
consolidated transaction reporting system as of the close of business on March
15, 2001 was as follows:
Common Stock, par value $.50 per share $ 602,249,313
$1.875 Cumulative Convertible
Preferred Stock (Series A) $ 2,937,256
The number of shares of the registrant's Common Stock outstanding as of March
15, 2001 was 49,745,571 shares. The following documents are hereby incorporated
by reference into this Form 10-K:
Portions of the Registrant's 2001 Proxy Statement to be filed with the
Securities and Exchange Commission (Part III).
PART I
Item 1. BUSINESS
Covanta seeks to develop, own or operate energy generating facilities
and water and wastewater facilities in the United States and abroad. Covanta
Energy Corporation is hereinafter together with its consolidated subsidiaries
referred to as "Covanta" or the "Company."
Covanta Energy Corporation is the new name of Ogden Corporation
effective as of March 13, 2001. The Company was incorporated in Delaware as a
public utilities holding company on August 4, 1939. In 1948, the Company
registered with the Securities and Exchange Commission as a closed-end
investment company. Following several acquisitions, the Company no longer
qualified as an investment company and from 1953 until 1999 has operated as a
diversified holding company operating through subsidiaries. In May 1966, Ogden
was listed on the New York Stock Exchange.
Prior to September, 1999, the Company conducted its business through
operating groups within each of three principal business units, Energy,
Entertainment and Aviation. In September 1999, the Company adopted a plan to
discontinue its Entertainment and Aviation operations, to pursue the sale or
other disposition of these businesses, pay down corporate debt and to
concentrate on its businesses previously being conducted through its Ogden
Energy Group, Inc. subsidiary. Since September, 1999, the Company implemented
its plan to sell discontinued businesses. That process was largely completed in
2000. As of March 30, 2001, the principal Entertainment or Aviation assets that
remain unsold are: (1) the businesses associated with the Arrowhead Pond Arena
in Anaheim, California, and with the Corel Centre in Ottawa, Canada and the
Ottawa Senators hockey team; (2) the Company's assets in Argentina related to a
casino and an exhibition center; and (3) the aviation fueling and fuel facility
management business.
CORE BUSINESS
Since the early 1980s, the Company has engaged in developing, and in
some cases owning, energy-generating projects fueled by municipal solid waste,
and providing long-term services from these projects to communities. The Company
is now the largest full service vendor (i.e., builder/operator) in the world for
large-scale waste-to-energy projects. In addition, since 1989, the Company has
been engaged in developing, owning and/or operating independent power production
projects utilizing a variety of fuels. The Company's involvement in the
operation of water and wastewater facilities began in 1994.
The Company generally seeks to participate in projects in which it can
make an equity investment and/or become the operator; its returns are derived
from equity distributions and/or operating fees. It also seeks to have a role in
the development of the projects. The types of projects in which the Company
seeks to participate, sell the electrical power services they generate, or the
waste or water-related services they provide, under long-term contracts or
market concessions to utilities, government agencies providing power
distribution, creditworthy industrial users, or local government units. In
selected cases, such services may be provided under short-term arrangements as
well. For power projects utilizing a combustible fuel or geothermal sources, the
Company typically seeks projects which have a secure supply of fuel or
geothermal brine through long-term supply arrangements or by obtaining control
of the fuel source. Similarly, for water and wastewater-related services, the
Company seeks to operate under long-term contracts with governmental units or
market concessions.
The number of projects being pursued at any given time by the Company
will fluctuate. The complexities and uniqueness of international project
development in particular requires that the Company continually assess the
likelihood of successful project financing throughout the development stage and
weigh that against expected benefits. In addition, the Company may, depending
upon circumstances and at the appropriate time, elect to dispose of a portion of
an equity interest it may have in a project after financing.
The Company presently has interests in power projects with an aggregate
generating capacity of approximately 2700 MW (gross) either operating or under
construction in the United States, Central and South America, Europe and Asia.
The Company has an operating, and in some cases a design and construction role,
in water and waste water projects with an aggregate processing capacity of
approximately 60 million gallons per day, all of which are in the United States.
It continues to seek to expand its ownership and operation of projects in these
and other regions. In addition to its headquarters in Fairfield, New Jersey, the
Company's business is facilitated through its Fairfax, Virginia office, with
field offices in Manila, The Philippines; Bangkok, Thailand; Beijing, China;
Calcutta, India; London, England; and Sao Paulo, Brazil.
(a) APPROACH TO PROJECTS.
(i) General Approach to Power Projects
The Company conducts its power operations through wholly-owned
subsidiaries. The Company develops, operates and/or invests in non-utility
energy generation projects in the United States and abroad which sell their
output to utilities, electricity distribution companies or industrial consumers.
The Company's operating power projects utilize a variety of energy sources:
water (hydroelectric), natural gas, coal, geothermal energy, municipal solid
waste, wood waste, landfill gas, heavy fuel oil and diesel fuel.
Within the commercial parameters of each power project, the Company
attempts to sell electricity under long-term power sales contracts, and to
structure the revenue provisions of such power sales contracts such that the
revenue components of such contracts correspond to the projects' cost structure
(including changes therein due to inflation and currency fluctuations) of
building, financing, operating and maintaining the projects.
On many of its power projects, the Company performs operation and
maintenance services on behalf of the project owner. Although all operation and
maintenance contracts are different, the Company typically seeks to perform
these services on a cost-plus-fixed-fee basis, with a bonus and limited penalty
payment mechanism related to specified benchmarks of plant performance.
Covanta generally looks to finance its projects using equity or capital
commitments provided by it and other investors, combined with limited recourse
debt for which the lender's source of payment is project revenues and which is
collateralized by project assets. Consequently, the ability of the Company's
project subsidiaries to declare and pay cash dividends to the Company is subject
to certain limitations in the project loan and other documents. In some project
situations, Covanta or one of its intermediate holding companies has provided
limited support such as operating guarantees, financial guarantees of bridge
loans or other interim debt arrangements. The Company will continue to do so in
the future where it deems this warranted.
(ii) Structural Issues on Waste to Energy Projects
In addition to generating electricity or steam, the Company's
waste-to-energy power projects provide waste disposal services to municipal
clients. Generally, the Company provides these services pursuant to long-term
service contracts ("Service Agreements") with local governmental units
sponsoring the project ("Client Communities"). One of the Company's
waste-to-energy facilities does not have a sponsoring Client Community.
Electricity, and in some cases steam, is sold pursuant to long-term power
purchase agreements with local utilities or industrial customers.
Each Service Agreement is different in order to reflect the specific
needs and concerns of the Client Community, applicable regulatory requirements,
and other factors. The following description sets forth terms that are generally
common to these agreements:
- The Company designs the facility, helps to arrange for financing
and then constructs and equips the facility on a fixed price and
schedule basis.
- The Company operates the facility and generally guarantees it
will meet minimum waste processing capacity and efficiency
standards, energy production levels and environmental standards.
The Company's failure to meet these guarantees or to otherwise
observe the material terms of the Service Agreement (unless
caused by the Client Community or by events beyond its control
("Unforeseen Circumstances")) may result in liquidated damages
being charged to the Company or, if the breach is substantial,
continuing and unremedied, the termination of the Service
Agreement. In the case of such Service Agreement termination, the
Company may be obligated to discharge project indebtedness.
- The Client Community is generally required to deliver minimum
quantities of municipal solid waste ("MSW") to the facility and
is obligated to pay a service fee for its disposal, regardless of
whether that quantity of waste is delivered to the facility (the
"Service Fee"). The Service Fee escalates to reflect indices of
inflation. In many cases the Client Community must also pay for
other costs, such as insurance, taxes and transportation and
disposal of the residue to the disposal site. If the facility is
owned by the Company, the Client Community also pays as part of
the Service Fee an amount equal to the debt service due to be
paid on the bonds issued to finance the facility. Generally,
expenses resulting from the delivery of unacceptable and
hazardous waste on the site are also borne by the Client
Community. In addition, the contracts generally require that the
Client Community pay increased expenses and capital costs
resulting from Unforeseen Circumstances, subject to limits which
may be specified in the Service Agreement.
- The Client Community usually retains a portion of the energy
revenues (generally 90%) generated by the facility, with the
balance paid to the Company.
Financing for the Company's domestic projects is generally accomplished
through the issuance of tax-exempt and taxable revenue bonds issued by or on
behalf of the Client Community. If the facility is owned by a Company
subsidiary, the Client Community loans the bond proceeds to the subsidiary to
pay for facility construction and pays to the subsidiary amounts necessary to
pay debt service. For such facilities, project-related debt is included as a
liability in Covanta's consolidated financial statements. Generally, such debt
is secured by the revenues pledged under the respective indenture and is
collateralized by the assets of the Company's subsidiary and otherwise provides
no recourse to Covanta, subject to construction and operating performance
guarantees and commitments.
(iii) Other Project Structures
The Company owns one waste-to-energy facility that is not operated
pursuant to a Service Agreement with a Client Community, and may consider
additional such projects in the future. In such projects, the Company generally
assumes the project debt and risks relating to waste availability and pricing,
risks relating to the continued performance of the electricity purchaser, as
well as risks associated with Unforeseen Circumstances. In these projects, the
Company generally retains all of the energy revenues from sales of power to
utilities or industrial power users and disposal fees for waste accepted at
these facilities. Accordingly, the Company believes that such projects carry
both greater risks and greater potential rewards than projects in which there is
a Client Community.
In addition, the Company has undertaken, or is in the process of
undertaking, restructuring of several of its waste-to-energy projects. These are
briefly described below:
- Union, New Jersey.
In Union County, New Jersey, a municipally-owned facility has been
leased to the Company, and the Client Community has agreed to deliver
approximately 50% of the facility's capacity on a put-or-pay basis. The balance
of facility capacity is marketed by the Company, at its risk. The Company
provided limited credit support in the form of an operating performance
guaranty, as well as a rent guaranty supporting one series of subordinated
bonds. In connection with this restructuring, the Client Community assigned to
the Company the long-term power contract with the local utility. As part of this
assignment, the power contract was amended to give the Company the right to sell
all or a portion of the plant's output to other purchasers. The Company has
elected to sell all of the project's power to Sempra Energy Trading Corporation
under a two year arrangement which the Company believes will enhance project
revenues. Other such arrangements may be considered in the future.
- Tulsa, Oklahoma.
In Tulsa, Oklahoma, the Client Community paid a fee to terminate its
Service Agreement. At the same time the parties entered into a new arrangement
pursuant to which the Company was required to fund the cost of the facility's
Clean Air Act retrofit; the Client Community is committed to deliver waste on a
put-or pay-basis, for a fee per ton; and the parties agreed to sharing of
certain excess revenues from facility operations. In addition, the Company no
longer has the right to require an adjustment to fees to cover the costs of
Unforeseen Circumstances, but may terminate the contract if the Client Community
declines to accept such increases. Under the new contract, the Client Community
has accepted the obligation to repay bonds issued to finance the facility,
including prepayment as a result of termination of the Service Agreement,
regardless of the reasons for the termination.
- Warren County, New Jersey.
In Warren County, New Jersey, the Company has offered to market the
facility's capacity, at its risk, in a restructuring plan that includes State
assistance with debt retirement. The Warren County restructuring is subject to
several conditions precedent, some of which are beyond the control of the
Company, notably the securing of State funds. Currently, the project's debt
service reserve funds have been depleted, and the State has provided funds to
ensure semi-annual debt service was paid to bondholders since December 1999.
There can be no assurance that an acceptable resolution will be achieved. If
such a resolution cannot be achieved, the Warren County Client Community may
default on its obligations, including obligations to bondholders, in which case
a restructuring would need to be addressed between the Company and the project's
lenders and credit enhancement providers. The project is mortgaged to its
lenders, and thus it is possible that such restructuring could result in the
Company no longer owning and/or operating the Facility.
- Lake County, Florida.
In Lake County, Florida, the Client Community has indicated its
intention to reduce or terminate its continuing payment obligations with respect
to the facility, and has expressed its desire to restructure its relationship
with the Company subsidiary to substantially reduce its payment obligation or to
institute condemnation proceedings to purchase the Facility from the Company. In
late 2000, discussions regarding a mutually acceptable resolution of these
matters ended and the County commenced a court action seeking to have the
Service Agreement declared void on various constitutional and public policy
grounds. Although the Company wishes to find mutually acceptable ways to resolve
the County's concerns, it will vigorously contest any effort by the County to
avoid its contractual responsibilities.
(iv) Waste-To-Energy Technology
The Company has the exclusive right to market in the United States the
proprietary mass-burn technology of Martin GmbH fur Umwelt und Energietechnik
("Martin"). All of the waste to energy projects that the Company has constructed
use the Martin technology, although the Company does operate some projects using
other technologies. The principal feature of the Martin technology is the
reverse-reciprocating stoker grate upon which the waste is burned. The patent
for the basic stoker grate technology used in the Martin technology expired in
1989, and there are various other expired and unexpired patents relating to the
Martin technology. The Company believes that it is Martin's know-how and
worldwide reputation in the waste-to-energy field, and the Company's know-how in
designing, constructing and operating waste-to-energy facilities, rather than
the use of patented technology, that is important to the Company's competitive
position in the waste-to-energy industry in the United States. The Company does
not believe that the expiration of the patent covering the basic stoker grate
technology or patents on other portions of the Martin technology will have a
material adverse effect on the Company's financial condition or competitive
position.
The Company believes that mass burn technology is now the predominant
technology used for the combustion of solid waste. The Company believes that the
Martin technology is a proven and reliable mass burn technology, and that its
association with Martin has created significant name recognition and value for
the Company's domestic waste-to-energy business. The Company's efforts
internationally have not been technology-specific.
The Company's rights to the Martin technology are provided pursuant to
an agreement between Martin and a Company affiliate (the "Cooperation
Agreement"). The Cooperation Agreement gives the Company exclusive rights to
market the Martin technology in the United States, Canada, Mexico, Bermuda,
certain Caribbean countries, most of Central and South America and Israel.
Martin is obligated to assist the Company in installing, operating, and
maintaining facilities incorporating the Martin technology. The 15-year term of
the Cooperation Agreement renews automatically each year unless notice of
termination is given, in which case the Cooperation Agreement would terminate 15
years after such notice. Additionally, the Cooperation Agreement may be
terminated by either party if the other fails to remedy its material default
within 90 days of notice. The Cooperation Agreement is also terminable by Martin
if there is a change of control (as defined in the Cooperation Agreement).
Termination would not affect the rights of the Company to design, construct,
operate, maintain or repair waste-to-energy facilities for which contracts have
been entered into or proposals made prior to the date of termination.
(v) General Approach to Water and Wastewater Projects
The Company's water and wastewater operation are conducted through
wholly-owned subsidiaries. The Company's mission is to develop, design,
construct, maintain, operate and, in some cases, own water and wastewater
treatment facilities and distribution and collection networks in the United
States and abroad.
In the United States, the Company seeks to participate in water
projects in which, under contracts with municipalities, it privatizes water
and/or wastewater facilities, agrees to build new or substantially augment
existing facilities and agrees to operate and maintain the facilities under
long-term contracts. The Company believes that the North American market for its
services is increasingly favorable, and intends to concentrate its development
efforts in that market for the foreseeable future.
In countries other than the United States, the Company will seek water
and wastewater opportunities in which it will provide services to municipalities
in which it can own an equity interest in facilities under a concession that
grants it the right to provide service to, and collect revenues from, consumers.
The Company believes that the lack of creditworthiness of some non-U.S.
municipalities, which may result from their limited ability to raise revenues or
from other causes, makes the collection of tariffs from the consumer a more
secure source of revenue. In most situations, projects outside of the United
States will require significant equity investment by the Company. As such, the
Company intends to pursue such projects only in very limited circumstances.
Under contractual arrangements, the Company may be required to warrant
certain levels of performance and may be subject to financial penalties or
termination if it fails to meet these warranties. The Company may be required to
guarantee the performance of its subsidiary. The Company seeks to not take
responsibility for conditions that are beyond its control.
During 1999, the Company purchased a controlling interest in DSS
Environmental, Inc., which owns the patent for the DualSand(TM) filtration
technology. The Company believes that this technology offers superior
performance at a competitive cost, and that it will have wide application for
both water and wastewater projects. In addition, the Company believes that,
because the DualSand(TM) system is based on a modular design, it can be
implemented over a wide range of project sizes.
(b) FACILITIES UNDER CONSTRUCTION.
- Balaji, India.
In 2000, the Company acquired a controlling interest in its second
Indian project, the 106 MW Balaji project located at Samayanallur, in the State
of Tamil Nadu. The project is under construction and commercial operation is
expected in the fourth quarter of 2001. The Company at project completion will
hold approximately 75% of the project equity, and through a subsidiary will also
operate the project. The balance of the project ownership interests are held by
individuals who originally developed the project. An affiliate of Wartsila North
America, Inc. is constructing the project. The project's electrical output will
be sold under a long term contract to the Tamil Nadu Electricity Board ("TNEB"),
and TNEB's obligations are supported by the Government of the State of Tamil
Nadu. The Indian Oil Corporation Limited will supply fuel to the project.
- Trezzo, Italy.
During 2000, the Company acquired a 13% equity interest in a 15 MW mass
burn waste-to-energy project near the City of Trezzo Sull' Lombardy Region,
Italy (the "Trezzo Project"). The remainder of the equity in the project is held
by TTR Tecno Trattamento Rifiuti s.r.l., a subsidiary of Falck S.p.a. ("Falck").
The Trezzo Project will be operated by Ambiente 2000 s.r.l. ("A2000"), an
Italian special purpose limited liability company of which the Company owns 40%.
The solid waste supply for the project will come from municipalities under
long-term contracts and is guaranteed by Falck. The electrical output from the
Trezzo Project will be sold at governmentally established preferential rates
under a long term purchase contract to Italy's state owned utility company, Ente
Nazionale de Electtricita S.p.a. The project closed its limited recourse
financing in February 2001, and commercial operation is expected during the
first quarter of 2002.
- San Vittore, Italy.
In January of 2001, A2000 also entered into a 15-year Operations and
Maintenance Agreement with E.A.L.L Energia Ambiente Litorale Laziale s.r.l., an
Italian limited liability company owned by CMI S.p.a. to operate and maintain a
10 MW waste-to-energy facility capable of processing up to 300 metric tons per
day of refuse derived fuel in the Municipality of San Vittore del Lazio
(Frosinone), Italy. CMI S.p.a. is a holding company controlled by Falck. Limited
recourse project financing is in place. The San Vittore project has a 15-year
waste supply agreement with Reclas S.p.a. (mostly owned by regional
municipalities), and a long term power offtake contract with ENEL, the
stateowned electricity provider. Construction of the San Vittore project began
in July 1999, and is nearly complete. Lurgi, a major German construction
company, is constructing the project and will operate the project during the
first year after completion. Commercial operation is expected during the second
quarter of 2001. A2000 will operate and maintain the project beginning in its
second year of operation.
(c) OPERATING FACILITIES.
- Geothermal Energy.
The Company has interests in two geothermal facilities in
Southern California, the Heber and SIGC facilities, with a combined gross
generating capacity of 100 MW. The Company is the sole lessee of the SIGC
project and is the sole owner of the Heber project. The Company operates these
facilities. The Company also owns a geothermal resource, which is adjacent to
and supplies fluid to both geothermal facilities. The electricity from both
projects is sold under long-term contracts with Southern California Edison.
The Company also owns a 50% partnership interest in
Mammoth-Pacific, L.P., which owns three geothermal power plants with a gross
capacity of 40 MW, located on the eastern slopes of the Sierra Nevada Mountains
at Casa Diablo Hot Springs, California. The projects have contractual rights to
the geothermal brine resource for a term not less than the term of the power
contracts. All three projects sell electricity to Southern California Edison
under long-term contracts.
- Hydroelectric.
The Company owns 50% equity interests in two run-of-river
hydroelectric projects which generate a total of 19 MW: Koma Kulshan
Hydroelectric Project ("Koma Kulshan") and Weeks Falls Hydroelectric Project
("Weeks Falls"). Both Koma Kulshan and Weeks Falls are located in Washington
State, and each sells electricity to Puget Sound Power & Light Company under
long-term contracts.
The Catalyst New Martinsville, West Virginia project, is a 40
MW run-of-river project which is operated through a subsidiary. The Company is
the lessee. The output is sold to Monongahela Power Company under a long-term
contract. The Company operates the Don Pedro project and the Rio Volcan project
in Costa Rica, pursuant to long term contracts, through an operating subsidiary.
The Company also has a nominal equity investment in each project. The electric
output from both of these facilities is sold to Instituto Costarricense de
Electricidad, a Costa Rica national electric utility. Through its investment in
Empresa Valle Hermoso (see discussion below, under "Natural Gas") the Company
also has a small (less than 7%) ownership interest in a 12 MW hydroelectric
project in Rio Yura, Bolivia. The Rio Yura project sells its output to mining
companies, local residents and the national grid.
- Municipal Solid Waste.
The Company's interests in projects fueled with municipal
solid waste are described generally in (a) (ii) and (iii) above.
- Waste Wood.
The Company owns 100% interests in three waste wood fired
electric power plants in California: Burney Mountain Power Station, Mount Lassen
Power Station and Pacific Oroville Power Station. A fourth, Pacific Ultrapower
Chinese Station Power Station, is owned by a partnership in which the Company
holds a 50% interest. Generally, fuel supply is procured from local sources
through a variety of short-term waste wood supply agreements. The four projects
have a gross capacity of 67 MW. All four projects sell electricity to Pacific
Gas & Electric Company under long-term contracts.
- Landfill Gas.
The Company owns and operates eight landfill gas projects
which produce electricity by burning methane gas produced by the anaerobic
digestion of the solid waste contained in sanitary landfills. Seven of the
projects are located in California, and one is located in Maryland. The eight
projects have a gross capacity of 43 MW. All sell electricity generated to local
utilities, under contracts having varying lengths, the longest expiring in 2011.
- Coal.
A consortium, of which the Company is a 26% member, has a 510
MW (gross) coal-fired electric generating facility in the Republic of The
Philippines (the "Quezon Project"). The project first generated electricity in
October, 1999, and full commercial operation occurred during the fourth quarter,
2000. The other members of the consortium are an affiliate of International
Generating Company, an affiliate of General Electric Capital Corporation, and
PMR Limited Co., a Philippines partnership. The consortium sells electricity to
Manila Electric Company ("Meralco"), the largest electric distribution company
in the Philippines, which serves the area surrounding and including metropolitan
Manila. Under a long-term agreement, Meralco is obligated to take or pay for
stated minimum annual quantities of electricity produced by the facility. The
consortium has entered into contracts for the supply of coal at stated prices
for a portion of the term of the power purchase agreement. The Company will
operate the project under a long-term agreement with the consortium.
The Company has majority equity interests in four coal-fired
cogeneration facilities in three different provinces in the Peoples Republic of
China. These projects are operated, in each case, by an affiliate of the
minority equity stakeholder in the respective projects. Parties holding minority
positions in the projects include a private company, a local government
enterprise and in the remaining two cases, affiliates of the local municipal
government. A majority of the electrical output of the projects is sold to the
relevant local Municipal Power Bureau and steam is sold to various host
industrial facilities, both pursuant to long-term power and steam sales
agreements.
- Natural Gas.
In 1998, the Company acquired an equity interest in a
barge-mounted 122 MW diesel/natural gas fired facility located near Haripur,
Republic of Bangladesh. This project entered commercial operation in June 1999,
and is operated by a subsidiary of the Company. The Company owns approximately
45% of the project company equity. An affiliate of El Paso Energy Corporation
owns 50% of such equity, and the remaining interest is held by Wartsila North
America, Inc. The electrical output of the project is sold to the Bangladesh
Power Development Board ("BPDB") pursuant to a long-term agreement. That
agreement also obligates the BPDB to supply all of the natural gas requirements
of the project. The BPDB's obligations under the agreement are guaranteed by the
Government of Bangladesh. In 1999, the project received $87 million in financing
and political risk insurance from the Overseas Private Investment Corporation.
In 1999, the Company acquired ownership interests in two 122
MW gas-fired combined cycle facilities in Thailand: the Sahacogen facility and
the Rojana Power facility. Both facilities, which commenced operations in 1999,
sell power under long-term contracts to adjacent industrial parks, and the
excess is sold into the national power grid. The Company acquired a 74%
ownership interest in the Sahacogen facility, and a 25% ownership interest the
Rojana Power facility. Both facilities are operated under the supervision of the
Company. In connection with these acquisitions, the Company acquired an interest
in an operating company in Thailand.
The Company owns an approximately 12% interest in Empresa
Valle Hermoso ("EVH") which was formed by the Bolivian government as part of the
capitalization of the government-owned utility ENDE. EVH owns and operates 182
MW of gas-fired generating capacity. The Company also participates in a joint
venture that supplies EVH with management services support.
The Company owns a 50% equity interest in a 15 MW natural-gas
fired cogeneration project in the Province of Murcia, Spain (the "Linasa
Project"). The Linasa Project is operated by a subsidiary of the Company. The
electrical output of the Linasa Project is being sold under a long-term purchase
contract to the Spanish electrical utility, Iberdrola, at
governmentally-established preferential rates for cogeneration projects
(currently expected to extend until 2007) and at market rates thereafter. The
thermal output and a portion of the electrical output from the Linasa Project
are being sold to our 50% partner Industria Jabonera LINA S.A., a Spanish soap
and detergent manufacturing company under a long-term energy service agreement.
- Diesel/Heavy Fuel Oil.
The Company owns interests in three diesel fuel facilities in
The Philippines. The Bataan Cogeneration project is a 65 MW facility that has a
long-term contract to sell its electrical output to the National Power
Corporation (with which it also has entered into a fuel management agreement for
fuel supply) and the Bataan Export Processing Zone Authority. The Island Power
project is a 7 MW facility that has a long-term power contract with the
Occidental Mindoro Electric Cooperative. Both projects are operated by the
Company.
In 1999, the Company acquired 100% of the stock of Magellan
Cogeneration, Inc., a Philippine company that owns and operates a 65 MW diesel
fired electric generating facility located in the province of Cavite, The
Philippines. This project sells a portion of its energy and capacity to the
National Power Corporation and a portion to the Cavite Export Processing Zone
Authority pursuant to long-term power purchase agreements.
In 1999, the Company acquired an equity interest in a 105 MW
heavy fuel oil fired generating facility located near Samalpatti, Tamil Nadu,
India. This project achieved commercial operation during the first quarter of
2001. The project is operated by a subsidiary of the Company. The Company owns a
60% interest in the project company. Shapoorji Pallonji Infrastructure Capital
Co. Ltd. and its affiliates will own 29% of such equity with the remainder of
11% being held by Wartsila India Power Investment, LLC. The electrical output of
the project will be sold to the Tamil Nadu Electricity Board ("TNEB") pursuant
to a long-term agreement. Bharat Petroleum Corporation Ltd. will supply the oil
requirements of the project. TNEB's obligations are guaranteed by the Government
of the State of Tamil Nadu.
- Water And Wastewater.
The Company operates and maintains wastewater treatment
facilities for eight small municipalities and industrial customers in New York
State. Such facilities together process the equivalent of approximately
37 million gallons per day ("mgd").
The Company also designed, built and now operates and
maintains a 24 mgd potable water treatment facility and associated transmission
and pumping equipment, which will supply water to residents and businesses in
Bessemer, Alabama, a suburb of Birmingham. Under a long-term contract with the
Governmental Services Corporation of Bessemer, the Company received a fixed
price for design and construction of the facility, and will be paid a fixed fee
plus passthrough costs for delivering processed water to the City's water
distribution system. Construction was completed ahead of schedule during 2000.
During 2000, the Company was awarded several small projects in
upstate New York for the supply of its patented DualSand(TM) systems to
municipalities that are improving existing systems. The Company's obligations
include equipment supply and installation, and in some cases construction work
related to other plant improvements, in addition to the DualSand(TM) systems.
(d) OTHER DEVELOPMENT EFFORTS.
The Company is actively pursuing a number of projects,
some of which have achieved significant development milestones such as executed
power purchase agreements, site acquisition or receipt of key governmental
approvals. Among the most advanced development efforts are:
(i) Three Mountain Power: a 500 MW gas-fired combined cycle merchant
facility, to be located at a site adjacent to the Company's Burney facility
in Shasta County, California. The project is presently in the advanced
permitting stage. The Company expects all permits to be issued during the
second quarter of 2001.
(ii) During 2000, the Company entered into agreements for the design,
construction and operation of a 28 mgd potable water desalinization project
to be constructed on behalf of Tampa Bay Water, a public authority serving
the Tampa Bay, Florida area. The project will utilize a reverse osmosis
process and incorporate DualSand(TM) technology. The Company will operate
and maintain the project for a 30-year term under a contract with the
project owner, Poseidon Resources Corporation. Financial closing is
expected during the second quarter of 2001, at which time construction will
begin.
(iii) The Company has received an award as winning bidder for a $59
million, 4 mgd wastewater collection and sewer system in Key Largo,
Florida. The Company signed definitive agreements with the Florida Keys
Aqueduct Authority for the design, construction and operation of the
project during 2000. The project is currently delayed because of litigation
challenging the procurement process for the project.
As with all development efforts, however, there are in each case
numerous conditions to be satisfied prior to financing, some of which are not
within the Company's control. As such, no assurance can be given that these
projects will ultimately be developed successfully.
(e) PROJECT SUMMARIES.
Certain information with respect to the Company's projects as of March
1, 2001 is summarized in the following table:
PROJECTS
DATE OF ACQUISITION/
COMMENCEMENT
LOCATION SIZE NATURE OF INTEREST OF OPERATIONS
-------- ---- ------------------ -------------
A. HYDROELECTRIC
1. New Martinsville West Virginia 40MW Lessee/Operator 1991
2. Rio Volcan Costa Rica 16MW Part Owner/Operator 1997
3. Don Pedro Costa Rica 16MW Part Owner/Operator 1996
4. Koma Kulshan(1) Washington 12MW Part Owner 1997
5. Weeks Falls(1) Washington 5MW Part Owner 1997
6. Rio Yura(2) Bolivia 12MW Part Owner 1998
------
SUBTOTAL 101MW
B. GEOTHERMAL
1. Heber California 52MW Owner/Operator 1989
2. SIGC California 48MW Lessee/Operator 1994
3. Mammoth G1(1) California 10MW Part Owner/Operator 1997
4. Mammoth G2(1) California 15MW Part Owner/Operator 1997
5. Mammoth G3(1) California 15MW Part Owner/Operator 1997
------
SUBTOTAL 140MW
C. NATURAL GAS
1. Empresa Valle Bolivia 182MW Part Owner/ 1995
Hermoso(3) Operations Mgmt.
2. Sahacogen(4) Thailand 122MW Owner/Operator 1999
3. Rojana(5) Thailand 122MW Owner/Operator 1999
4. Haripur(6) Bangladesh 120MW Part Owner/Operator 1999
5. Linasa(1) Spain 15MW Part Owner/Operator 2000
-------
SUBTOTAL 561MW
D. COAL
1. Quezon(7) Philippines 510MW Part Owner/Operator 2000
2. Lin'an(8) China 24MW Part Owner 1997
3. Huantai(8) China 24MW Part Owner 1997
4. Taixing(8) China 24MW Part Owner 1997
5. Yanjiang(8) China 24MW Part Owner 1997
------
SUBTOTAL 606MW
E. DIESEL/HEAVY FUEL OIL
1. Island Power Philippines 7MW Part Owner/Operator 1996
Corporation(9)
2. Bataan Philippines 65MW Owner/Operator 1996
Cogeneration
3. Magellan Philippines 65MW Owner/Operator 1999
4. Samalpatti(8) India 105MW Owner/Operator 2001
------
SUBTOTAL 242MW
F. MUNICIPAL SOLID WASTE
1. Tulsa(11) Oklahoma 11MW Lease/Operate 1986
2. Marion County Oregon 13MW Own/Operate 1987
3. Hillsborough County Florida 29MW Operate 1987
4. Tulsa(13) Oklahoma N.A. Lease/Operate 1987
5. Bristol Connecticut 16.3MW Own/Operate 1988
6. Alexandria/Arlington Virginia 22MW Own/Operate 1988
7. Indianapolis Indiana N.A. Own/Operate 1988
8. Hennepin County(11) Minnesota 38.7MW Lease/Operate 1989
9. Stanislaus County California 22.5MW Own/Operate 1989
10. Babylon(12) New York 16.8MW Own/Operate 1989
11. Haverhill Massachusetts 46MW Own/Operate 1989
12. Warren County14 New Jersey 13MW Own/Operate 1988
13. Kent County Michigan 18MW Operate 1990
14. Wallingford(14) Connecticut 11MW Own/Operate 1989
15. Fairfax County Virginia 79MW Own/Operate 1990
16. Huntsville Alabama N.A. Operate 1990
17. Lake County Florida 14.5MW Own/Operate 1991
18. Lancaster County Pennsylvania 35.7MW Operate 1991
19. Pasco County Florida 31.2MW Operate 1991
20. Huntington(15) New York 24.3MW Own/Operate 1991
21. Hartford(16) Connecticut 68.5MW Operate 1987
22. Detroit(17) Michigan 68MW Lease/Operate 1991
23. Honolulu(17) Hawaii 57MW Lease/Operate 1990
24. Union County(18) New Jersey 44MW Lease/Operate 1994
25. Lee County Florida 39.7MW Operate 1994
26. Onondaga County(15) New York 39.5MW Own/Operate 1995
27. Montgomery County Maryland 55MW Operate 1995
-------
SUBTOTAL 813.6MW
G. WASTE WOOD
1. Burney Mountain California 11.4MW Owner/Operator 1997
2. Pacific Ultrapower California 25.6MW Part Owner 1997
Chinese Station(1)
3. Mount Lassen California 11.4MW Owner/Operator 1997
4. Pacific Oroville California 18.7MW Owner/Operator 1997
-------
SUBTOTAL 67.1MW
H. LANDFILL GAS
1. Gude Maryland 3MW Owner/Operator 1997
2. Otay California 3.7MW Owner/Operator 1997
3. Oxnard California 5.6MW Owner/Operator 1997
4. Penrose California 10MW Owner/Operator 1997
5. Salinas California 1.5MW Owner/Operator 1997
6. Santa Clara California 1.5MW Owner/Operator 1997
7. Stockton California 0.8MW Owner/Operator 1997
8. Toyon California 10MW Owner/Operator 1997
------
SUBTOTAL 36.1MW
------
TOTAL MW IN OPERATION 2566MW
I. WATER AND WASTEWATER
1. Bessemer Alabama 24 mgd Design/Build/Operate 2000
2. Clinton New York 2.5 mgd Operator 1995
3. Bristol/Myers Squibb New York 20 mgd Operator 2000
4. Chittenango New York 1.0 mgd Operator 1998
5. Canastata New York 2.5 mgd Operator 1998
6. Cortland New York 10 mgd Operator 1995
7. Kendall Corp. New York 0.2 mgd Operator 1995
8. Mohawk New York 0.1 mgd Operator 1995
9. Kirkland New York 0.3 mgd Operator 1995
----------
TOTAL MGD IN OPERATION 60.6 mgd
PROJECTS UNDER CONSTRUCTION:
1. Balaji(10) India 106 MW PartOwner/Operator 2001 (est.)
2. Trezzo Italy 15 MW Part Owner/Operator 2002 (est.)
3. San Vittore Italy 15 MW Operator 2002 (est.)
------
TOTAL PROJECTS UNDER CONSTRUCTION: 136 MW
TOTAL MW IN OPERATION/UNDER CONSTRUCTION: 2702
TOTAL MGD IN OPERATION: 60.6
- --------------------------------------------------------------------------------
NOTES
(1) The Company has a 50% ownership interest in the project.
(2) The Company has an approximate 12% interest in a company that owns 58% of
this project.
(3) The Company owns an approximate 24% interest in a consortium that purchased
50% of Empresa Valle Hermoso. The remaining 50% is owned by Bolivian
pension funds.
(4) The Company has a 74% ownership interest in this project.
(5) The Company has a 25% ownership interest in this project.
(6) The Company has an approximate 45% interest in this project. This project
is capable of operating through combustion of diesel oil in addition to
natural gas.
(7) The Company has an approximate 26% ownership interest in this project.
(8) The Company has a 60% ownership interest in this project.
(9) The Company has an approximate 40% ownership interest in this project.
(10) The Company will have, at project completion, an approximate 75% interest
in this project.
(11) Facility is owned by an owner/trustee pursuant to a sale/leaseback
arrangement.
(12) Facility has been designed to allow for the addition of another unit.
(13) Phase II of the Tulsa facility, which was financed as a separate project,
expanded the capacity of the facility from two to three units.
(14) Company subsidiaries were purchased after completion, and use a mass-burn
technology that is not the Martin Technology.
(15) Owned by a limited partnership in which the limited partners are not
affiliated with Covanta.
(16) Under contracts with the Connecticut Resource Recovery Authority and
Northeast Utilities, the Company operates only the boiler and turbine for
this facility.
(17) Operating contracts were acquired after completion. Facility uses a
refuse-derived fuel technology and does not employ the Martin Technology.
(18) The Union Facility is leased to a Company subsidiary.
OTHER
During 1999, the Company continued to implement its plans to sell the
businesses in its Entertainment group. Prior to September 1999, Entertainment
was engaged in business activities related to owning, servicing and operating
public assembly facilities and entertainment attractions in the United States,
Canada, Europe, South America, Latin America and Australia both directly and
through partnerships and joint ventures. Entertainment's business operations
included concessions and venue management, parks and attractions and production.
As of March 30, 2001, the principal Entertainment assets that remain unsold are
the businesses associated with the Arrowhead Pond Arena in Anaheim, California,
and with the Corel Centre in Ottawa, Canada and the Ottawa Senators hockey club,
and its assets in Argentina related to a casino and an exhibition center.
During 1999, the Company also implemented its plan to sell the
businesses in its Aviation group. Prior to 1999, the Aviation group included two
major operations: (i) Aviation Services, and (ii) Airport Privatization and
Infrastructure Development. Aviation Services provided ground handling and
passenger services; cargo facility development and operations; and fueling and
fuel facility management, and Airport Privatization and Infrastructure
operations designed, financed, built and operated major airport facilities and
other aviation infrastructure projects; provided airport development and
management. As of March 30, 2001, the principal Aviation asset that remains
unsold is the fueling and fuel facility management business.
The Company has provided environmental consulting services through
Ogden Environmental and Energy Services Co., Inc. ("OEES"). OEES provides a
comprehensive range of environmental, infrastructure and energy consulting,
engineering and design services to industrial and commercial companies, electric
utilities and governmental agencies. In 1999, Ogden announced its intention to
sell its environmental consulting services. During 2000, the Energy Group sold
most of the assets and businesses associated with OEES.
Datacom, Inc., is a contract manufacturer which conducts assembly and
manufacturing operations at its facility located in Reynosa, Mexico near the
border with McAllen, Texas. Datacom sells an overwhelming majority of its output
under a supply contract with the Genicom Corporation, a specialty printer
supplier. During 2000, Genicom filed for protection from its creditors under
Chapter 11 of the U.S. Bankruptcy Code, and was subsequently purchased. Datacom
has contracted with Genicom's purchaser for the continuing supply of product to
Genicom. The Company is currently pursuing the sale of Datacom.
OTHER INFORMATION
Any statements in this communication which may be considered to be
"forward-looking statements," as that term is defined in the Private Securities
Litigation Reform Act of 1995, are subject to certain risk 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 Securities and Exchange Commission and more generally, general economic
conditions, including changes in interest rates and the performance of the
financial markets; changes in domestic and foreign laws, regulations, and taxes;
changes in competition and pricing environments; and regional or general changes
in asset valuations.
MARKETS, COMPETITION AND GENERAL BUSINESS CONDITIONS
(a) GENERAL BUSINESS CONDITIONS
Covanta's business can be adversely affected by general economic
conditions, war, inflation, adverse competitive conditions, governmental
restrictions and controls, natural disasters, energy shortages, weather, the
adverse financial condition of customers and suppliers, various technological
changes and other factors over which Covanta has no control.
The Company's power operations face a domestic market that is expected
to change substantially in the years ahead. Prior to the events that have taken
place in California since the summer of 2000 (see below), many states were
undertaking a transition from a mature, highly regulated and uncompetitive
market for energy services to a less regulated and more competitive market as
utilities restructure for deregulation and termination of their traditional
monopolies. As a result of the market conditions experienced in California,
several states are delaying or reconsidering the transition to more competitive
markets. The international market for energy services is characterized by a
large demand and much competition for projects within a relatively immature
market framework.
The domestic market for the Company's waste-to-energy services has
largely matured and is now heavily regulated. New opportunities for domestic
projects are expected to be scarce for the foreseeable future. This reflects a
number of factors that adversely affected communities' willingness to make
long-term capital commitments to waste disposal projects, including: declining
prices at which energy can be sold, and low alternative disposal costs. Another
factor adversely affecting the demand for new waste-to-energy projects, as well
as having an impact on existing projects, was a 1994 United States Supreme Court
decision invalidating state and local laws and regulations mandating that waste
generated within a given jurisdiction be taken to a designated facility. The
invalidation of such laws has created pressure on Client Communities as well as
the Company to lower costs or restructure contractual arrangements in order to
continue to attract waste supplies and ensure that revenues are sufficient to
pay for all project costs. See Approach to Projects, "Other Project Structures."
Foreign demand for waste-to-energy projects in which Covanta would
participate is expected to exist only in unique circumstances where other
disposal options are unavailable or unusually costly.
The Company's water and wastewater operation faces an immature but
developing domestic market for private water and wastewater services, and, like
energy, a large foreign demand within an immature marketplace.
Competition for business is intense in all the domestic and foreign
markets in which the Company conducts or intends to conduct its businesses and
its businesses are subject to a variety of competitiveness and market
influences. The economic climate can adversely affect Covanta's operations.
Covanta expends substantial amounts for the development of new businesses. The
financial support required to undertake some of these activities comes from the
Company. Beyond staffing costs, expenditures can include the costs of contract
and site acquisition, feasibility and environmental studies, technical and
financial analysis, and in some cases the preparation of extensive proposals in
response to public or private requests for proposals. Development of some
projects involves substantial risks which are not within the Company's control.
Success of a project may depend upon obtaining in a timely manner acceptable
contractual arrangements and financing, appropriate sites, acceptable licenses,
environmental permits and governmental approvals. Even after the required
contractual arrangements are achieved, implementation of the project often is
subject to substantial conditions that may be outside the control of the
Company. In some, but not all, circumstances, the Company will make contractual
arrangements for the partial recovery of development costs if the project fails
to be implemented for reasons beyond its control.
Once a project is financed and constructed, Covanta's business can be
impacted by a variety of risk factors which can affect profitability over the
life of a project. Some of these risks are at least partially within the
Company's control, such as successful operation in compliance with law, and the
presence or absence of labor difficulties or disturbances. Other risk factors
are largely out of the Company's control and, over a long-term operation may
have an adverse impact on a project. These risks include changes in law, severe
weather and related casualty events, and changes in technologies that offer less
expensive means of generating electricity or of providing water or wastewater
treatment services.
(b) CALIFORNIA CONDITIONS
The Company currently owns, in whole or in part, 17 power projects in
California, with a total gross generating capacity of approximately 260 MW.
These facilities use renewable fuels such as wastewood, biogas, geothermal, and
municipal solid waste, and sell electricity to two California utilities,
Southern California Edison Company (SCE) and Pacific Gas & Electric Corp. (PG&E)
under long-term power purchase agreements.
Significant market disruptions have occurred in the California
electricity markets. These have been caused in part by the deregulation scheme
effected by California, which froze rates utilities could charge retail and
business customers while not placing limitations on wholesale prices. At the
same time, supplies of power to California have not kept pace with demand.
During the last half of 2000, these and other factors combined to increase
wholesale prices for electricity in California, forcing utilities such as SCE
and PG&E to pay far more to purchase power than they could recover from
retail ratepayers. As a result, both utilities have failed to meet most of their
respective financial obligations, including their obligations to pay for
electricity purchased from the Company's projects. SCE has not paid its invoices
from the Company starting in January, 2001; PG&E has made only partial payments
starting in February, 2001.
To date, the Company has actively participated with affected parties
in the development of a solution to California's energy crisis, including
working with the Legislature to draft new laws designed to stabilize the
situation. On March 27, 2001, California's Public Utilities Commission approved
a significant retail rate increase for California utilities, and ordered the
utilities to pay currently for the electricity they purchase from suppliers such
as the Company beginning April, 2001. The Company believes this rate increase
will cause the Company to be paid currently for power produced starting in
April, but still leaves unresolved the issue of outstanding receivables due from
SCE and PG&E. Although the matter is not free of doubt, the Company believes
that it will ultimately collect amounts owed to it by these utilities, but
cannot predict when that will occur.
The Company intends to continue to work aggressively toward an
acceptable solution to this problem with all affected parties. No assurance can
be given, however, as to when this situation will be resolved, or whether it
will be resolved in a manner viewed favorably by the Company.
INTERNATIONAL BUSINESS DEVELOPMENT
The Company develops projects in many countries, and in doing so seeks
to implement its strategy for the development of its business in selected
international markets where private development is encouraged. The Company seeks
to do so by focusing on a limited number of opportunities which can be developed
in conjunction with local and international partners. Offices have been
established in Manila, Calcutta, Bangkok, Beijing, Sao Paulo and London in order
to service foreign projects. Opportunities in foreign countries for the services
provided by the Company are highly dependent upon the elimination of historic
legal and political barriers to the participation of foreign capital and foreign
companies in the financing, construction, ownership and operation of
infrastructure facilities.
International development of projects requires the expenditure of
significant resources by the Company, in funds, human resources and time. In
addition, because such projects sometimes involve risks or structures not found
in domestic projects, project lenders often require greater levels of equity
investment by project sponsors than would be the case for domestic projects.
Over the last several years, the Company has acquired a portfolio of
projects in Asia, located in several countries and utilizing several fuels.
During 2000, the Company determined that its mix of project investment should
include a greater number of projects in other markets in order to optimize the
balance of geographic and market diversity. During 2001, the Company intends to
focus its international development efforts in markets, such as Europe, having
favorable investment climates characterized by transparent legal systems, freely
traded currencies and policies that seek to attract foreign investment.
The Company has ownership interests and/or operates (or will operate
upon completion of construction) projects in four continents. They are:
- North America: 46 energy generating projects totaling 1113 MW
(gross); 9 water or wastewater projects totaling 60 mgd capacity.
- Asia: 13 energy generating projects totaling 1318 MW (gross).
- South and Central America: 4 energy generating projects totaling
226 MW (gross).
- Europe: 3 energy generating projects of 45 MW (gross).
The development, construction, ownership and operation of facilities in
foreign countries entails significant political and financial uncertainties and
other structuring issues that typically are not involved in such activities in
the United States. These risks include unexpected changes in electricity
tariffs, conditions in financial markets, currency exchange rates, currency
repatriation restrictions, currency convertibility, changes in laws and
regulations, and political, economic or military instability, civil unrest and
expropriation. Such risks have the potential to cause substantial delays or
material impairment to the value of the project being developed or business
being operated.
Many of the countries in which the Company is or intends to be active
are lesser developed countries or developing countries. The political, social
and economic conditions in some of these countries are typically less stable
than those prevalent in the United States. The financial condition and
creditworthiness of the potential purchasers of power and services provided by
the Company (which may be a governmental or private utility or industrial
consumer) or of the suppliers of fuel for projects in these countries may not be
as strong as those of similar entities in developed countries. The obligations
of the purchaser under the power purchase agreement, the service recipient under
the related service agreement and the supplier under the fuel supply agreement
generally are not guaranteed by any host country or other creditworthy
governmental agency. Whenever such governmental guarantees are not available,
the Company undertakes a credit analysis of the proposed power purchaser or fuel
supplier. It also seeks, to the extent appropriate and achievable within the
commercial parameters of a project, to require such entities to provide
financial instruments such as letters of credit or arrangements regarding the
escrowing of the receivables of such parties in the case of power purchasers.
The Company's power projects in particular are dependent on the
reliable and predictable delivery of fuel meeting the quantity and quality
requirements of the project facilities. The Company will typically seek to
negotiate long-term contracts for the supply of fuel with creditworthy and
reliable suppliers. However, the reliability of fuel deliveries may be
compromised by one or more of several factors that may be more acute or may
occur more frequently in developing countries than in developed countries,
including a lack of sufficient infrastructure to support deliveries under all
circumstances, bureaucratic delays in the import, transportation and storage of
fuel in the host country, customs and tariff disputes and local or regional
unrest or political instability. In most of the projects in which the Company
participates internationally, it seeks, to the extent practicable, to shift the
consequences of interruptions in the delivery of fuel, whether due to the fault
of the fuel supplier or due to reasons beyond the fuel supplier's control, to
the electricity purchaser or service recipient by securing a suspension of its
operating responsibilities under the applicable agreements and an extension of
its operating concession under such agreements and/or, in some instances, by
requiring the energy purchaser or service recipient to continue to make payments
in respect of fixed costs. In order to mitigate the effect of short-term
interruptions in the supply of fuel, the Company endeavors to provide on-site
storage of fuel in sufficient quantities to address such interruptions.
Payment for services that the Company provides will often be made in
whole or part in the domestic currencies of the host countries. Conversion of
such currencies into U.S. dollars generally is not assured by a governmental or
other creditworthy country agency, and may be subject to limitations in the
currency markets, as well as restrictions of the host country. In addition,
fluctuations in the value of such currencies against the value of the U.S.
dollar may cause the Company's participation in such projects to yield less
return than expected. Transfer of earnings and profits in any form beyond the
borders of the host country may be subject to special taxes or limitations
imposed by host country laws. The Company seeks to participate in projects in
jurisdictions where limitations on the convertibility and expatriation of
currency have been lifted by the host country and where such local currency is
freely exchangeable on the international markets. In most cases, components of
project costs incurred or funded in the currency of the United States are
recovered without risk of currency fluctuation through negotiated contractual
adjustments to the price charged for electricity or service provided. This
contractual structure may cause the cost in local currency to the project's
power purchaser or service recipient to rise from time to time in excess of
local inflation, and consequently there is risk in such situations that such
power purchaser or service recipient will, at least in the near term, be less
able or willing to pay for the project's power or service.
Due to the fact that many of the countries in which the Company is or
intends to be active are lesser developed countries or developing countries, the
successful development of a project or projects may be adversely impacted by
economic changes in such countries or by changes in government support for such
projects. Adverse economic changes may, and have, resulted in initiatives (by
local governments alone or at the request of world financial institutions) to
reduce local commitments to pay long-term obligations in U.S. dollars or U.S.
dollar equivalents. There is therefore risk that the Company's development
efforts in such countries may from time to time be adversely affected by such
changes on a temporary or long-term basis.
In addition, the Company will generally participate in projects which
provide services that are treated as a matter of national or key economic
importance by the laws and politics of many host countries. There is therefore
risk that the assets constituting the facilities of these projects could be
temporarily or permanently expropriated or nationalized by a host country, or
made subject to local or national control.
The Company will seek to manage and mitigate these risks through all
available means that it deems appropriate, including: political and financial
analysis of the host countries and the key participants in each project;
guarantees of relevant agreements with creditworthy entities; political risk and
other forms of insurance; participation by international finance institutions,
such as affiliates of the World Bank, in financing of projects in which it
participates; and joint ventures with other companies to pursue the development,
financing and construction of these projects.
EQUAL EMPLOYMENT OPPORTUNITY
In recent years, governmental agencies (including the Equal Employment
Opportunity Commission) and representatives of minority groups and women have
asserted claims against many companies, including some Covanta subsidiaries,
alleging that certain persons have been discriminated against in employment,
promotions, training or other matters. Frequently, private actions are brought
as class actions, thereby increasing the practical exposure. In some instances,
these actions are brought by many plaintiffs against groups of defendants in the
same industry, thereby increasing the risk that any defendant may incur
liability as a result of activities which are the primary responsibility of
other defendants. Although Covanta and its subsidiaries have attempted to
provide equal opportunity for all of its employees, the combination of the
foregoing factors and others increases the risk of financial exposure.
EMPLOYEE AND LABOR RELATIONS
Covanta and its subsidiaries currently employ approximately 4,700 U.S.
and foreign employees, of which approximately 2,200 are employed in the
Company's core business.
Certain employees of Covanta are employed pursuant to collective
bargaining agreements with various unions. During 2000, Covanta successfully
renegotiated collective bargaining agreements in certain of its business sectors
with no strike-related loss of service. Covanta considers relations with its
employees to be good and does not anticipate any significant labor disputes in
2001.
ENVIRONMENTAL REGULATORY LAWS
(a) DOMESTIC. Covanta's business activities in the United States are
pervasively regulated pursuant to federal, state and local environmental laws.
Federal laws, such as the Clean Air Act and Clean Water Act, and their state
counterparts govern discharges of pollutants to air and water. Other federal,
state and local laws comprehensively govern the generation, transportation,
storage, treatment and disposal of solid waste, and also regulate the storage
and handling of petroleum products, including hazardous waste (such laws and the
regulations thereunder, "Environmental Regulatory Laws").
The Environmental Regulatory Laws and other federal, state and local
laws, such as the Comprehensive Environmental Response Compensation and
Liability Act ("CERCLA") (collectively, "Environmental Remediation Laws"), make
Covanta potentially liable on a joint and several basis for any environmental
contamination which may be associated with the Company's activities and the
activities at sites, including landfills, which the Company's subsidiaries have
owned, operated or leased or at which there has been disposal of residue or
other waste handled or processed by such subsidiaries or at which there has been
disposal of waste generated by the Company's activities. Through its
subsidiaries, the Company leases and operates a landfill in Haverhill,
Massachusetts, and leases a landfill in Bristol, Connecticut, in connection with
its projects at those locations. Some state and local laws also impose
liabilities for injury to persons or property caused by site contamination. Some
Service Agreements provide for indemnification of the operating subsidiaries
from some such liabilities. In addition, other subsidiaries involved in landfill
gas projects have access rights to landfills pursuant to certain leases at
landfill sites which permit the installation, operation and maintenance of
landfill gas collection systems. A portion of these landfill sites is and has
been a federally designated "superfund" site. Each of these leases provide for
indemnification of the Company subsidiary from some liabilities associated with
these sites.
The Environmental Regulatory Laws require that many permits be obtained
before the commencement of construction and operation of waste-to-energy,
independent power and water and wastewater projects. There can be no assurance
that all required permits will be issued, and the process of obtaining such
permits can often cause lengthy delays, including delays caused by third-party
appeals challenging permit issuance. Failure to meet conditions of these permits
or of the Environmental Regulatory Laws and the corresponding regulations can
subject an operating subsidiary to regulatory enforcement actions by the
appropriate governmental unit, which could include monetary penalties, and
orders requiring certain remedial actions or limiting or prohibiting operation.
In addition, certain of Covanta's discontinued businesses also are required to
comply with various regulatory and permitting requirements and can be subject to
regulatory enforcement actions. To date, Covanta has not incurred material
penalties, been required to incur material capital costs or additional expenses,
nor been subjected to material restrictions on its operations as a result of
violations of environmental laws, regulations or permits.
The Environmental Regulatory Laws and Federal and state governmental
regulations and policies governing their enforcement are subject to revision.
New technology may be required or stricter standards may be established for the
control of discharges of air or water pollutants for storage and handling of
petroleum products or for solid or hazardous waste or ash handling and disposal.
Thus, as new technology is developed and proven, it may be required to be
incorporated into new facilities or major modifications to existing facilities.
This new technology may often be more expensive than that used previously.
The Clean Air Act Amendments of 1990 required EPA to promulgate New
Source Performance Standards ("NSPS") and Emission Guidelines ("EG") applicable
to new and existing municipal waste combustion units for particulate matter
(total and fine), opacity, sulfur dioxide, hydrogen chloride, oxides of
nitrogen, carbon monoxide, dioxins and dibenzofurans.
The NSPS and EG, which were issued in final form in 1995, require
capital improvements or operating changes to most of the waste-to-energy
facilities operated by the Company's subsidiaries to control emissions of
nitrogen oxides, organics, mercury and acid gases. EPA has since issued a final
rule which slightly revised the emission limits for NOX, CO, SO2, HCl, dioxin,
cadmium and lead, tightening all but the NOX limit. The general compliance
deadline for the NSPS and EG was December 19, 2000, and the deadline for these
seven revised limits is August 26, 2002. As a practical matter the capital and
operating changes necessary to meet them is very nearly identical to that needed
to achieve the prior NSPS and EG limits. The Company installed all new equipment
needed to achieve the applicable new limits under the NSPS and EG by December
19, 2000.
The costs to meet new rules for existing facilities owned by Client
Communities generally will be borne by the Client Communities. For projects
owned or leased by the Company and operated under a Service Agreement, the
Client Community has the obligation to fund such capital improvements, to which
the Company may be required to make an equity contribution. In certain cases,
the Company is required to fund the full cost of these capital improvements at
those facilities that are either not operated pursuant to a Service Agreement or
whose Service Agreement does not require the costs to be borne by the Client
Community. The Company estimates that only moderate additional costs are likely
to be incurred during 2001 and 2002. The Company believes that most costs
incurred to meet EG and operating permit requirements at facilities it operates
may be recovered from Client Communities and other users of its facilities
through increased service fees permitted under applicable contracts. Such
increased service fees will be paid for either out of their general revenues or
by increasing fees charged to facility users by the Client Community. Because of
the reluctance or inability of some municipalities to increase taxes, or tipping
fees if the market may not bear the increase without some loss of waste
deliveries, Client Communities may seek to have the Company's subsidiaries
subsidize the cost, or modify their contractual relationship.
The Environmental Remediation Laws prohibit disposal of hazardous waste
other than in small, household-generated quantities at the Company's municipal
solid waste facilities. The Service Agreements recognize the potential for
improper deliveries of hazardous wastes and specify procedures for dealing with
hazardous waste that is delivered to a facility. Although certain Service
Agreements require the Company's subsidiary to be responsible for some costs
related to hazardous waste deliveries, to date, no operating subsidiary has
incurred material hazardous waste disposal costs.
Domestic drinking water facilities developed in the future by the
Company will be subject to regulation of water quality by the EPA under the
Federal Safe Drinking Water Act and by similar state laws. Domestic wastewater
facilities are subject to regulation under the Federal Clean Water Act and by
similar state laws. These laws provide for the establishment of uniform minimum
national water quality standards, as well as governmental authority to specify
the type of treatment processes to be used for public drinking water. Under the
Federal Clean Water Act, the Company may be required to obtain and comply with
National Pollutant Discharge Elimination System permits for discharges from its
treatment stations. Generally, under its current contracts, the Client Community
is responsible for fines and penalties resulting from the delivery to the
Company's treatment facilities of water not meeting standards set forth in those
contracts.
(b) INTERNATIONAL. Among the Company's objectives is providing energy
generating and other infrastructure through environmentally protective project
designs, regardless of the location of a particular project. This approach is
consistent with the increasingly stringent environmental requirements of
multilateral financing institutions, such as the World Bank, and also with the
Company's experience in domestic waste-to-energy projects, where environmentally
protective facility design and performance has been required. The laws of other
countries also may require regulation of emissions into the environment, and
provide governmental entities with the authority to impose sanctions for
violations, although these requirements are generally not as rigorous as those
applicable in the United States. Compliance with environmental standards
comparable to those of the United States may be conditions to the provision of
credit by multilateral banking agencies as well as other lenders or credit
providers. As with domestic project development, there can be no assurance that
all required permits will be issued, and the process can often cause lengthy
delays.
ENERGY AND WATER REGULATIONS
The Company's domestic businesses are subject to the provisions of
federal, state and local energy laws applicable to their development, ownership
and operation of their domestic facilities, and to similar laws applicable to
their foreign operations. Federal laws and regulations govern transactions with
utilities, the types of fuel used and the power plant ownership. State
regulatory regimes govern rate approval and other terms under which utilities
purchase electricity from independent power producers, except to the extent such
regulation is pre-empted by federal law.
Pursuant to Federal Public Utility Regulatory Policies Act ("PURPA"),
the Federal Energy Regulatory Commission ("FERC") has promulgated regulations
that exempt qualifying facilities (facilities meeting certain size, fuel and
ownership requirements, or "QFs") from compliance with certain provisions of the
Federal Power Act ("FPA"), the Public Utility Holding Company Act of 1935
("PUHCA"), and certain state laws regulating the rates charged by, or the
financial and organizational activities of, electric utilities. PURPA was
enacted in 1978 to encourage the development of cogeneration facilities and
other facilities making use of non-fossil fuel power sources, including
waste-to-energy facilities. The exemptions afforded by PURPA to qualifying
facilities from regulation under the FPA and PUHCA and most aspects of state
electric utility regulation are of great importance to the Company and its
competitors in the waste-to-energy and independent power industries.
Except with respect to waste-to-energy facilities with a net power
production capacity in excess of thirty megawatts (where rates are set by FERC),
state public utility commissions must approve the rates, and in some instances
other contract terms, by which public utilities purchase electric power from
QFs. PURPA requires that electric utilities purchase electric energy produced by
QFs at negotiated rates or at a price equal to the incremental or "avoided" cost
that would have been incurred by the utility if it were to generate the power
itself or purchase it from another source. PURPA does not expressly require
public utilities to enter into long-term contracts to purchase the output
supplied by QFs.
Under PUHCA, any entity owning or controlling ten percent or more of
the voting securities of a "public utility company" or company which is a
"holding company" of a public utility company is subject to registration with
the Securities and Exchange Commission (the "SEC") and regulation by the SEC
unless exempt from registration. Under PURPA, most projects that satisfy the
definition of a "qualifying facility" are exempt from regulation under PUHCA.
Under the Energy Policy Act of 1992, projects that are not QFs under PURPA but
satisfy the definition of an "exempt wholesale generator" ("EWG") are not deemed
to be public utility companies under PUHCA. Finally, projects that satisfy the
definition of "foreign utility companies" are exempt from regulation under
PUHCA. The Company believes that all of its operating projects involved in the
generation, transmission and/or distribution of electricity, both domestically
and internationally, qualify for an exemption from PUHCA and that it is not and
will not be required to register with the SEC.
In the past there has been consideration in the U.S. Congress of
legislation to repeal PURPA entirely, or at least to repeal the obligation of
utilities to purchase power from QFs. There is continuing support for
grandfathering existing QF contracts if such legislation is passed. Various
bills have also proposed repeal of PUHCA. Repeal of PUHCA would allow both
independents and vertically integrated utilities to acquire electric assets
throughout the United States that are geographically widespread, eliminating the
current requirement that the utility's electric assets be capable of physical
integration. Also, registered holding companies would be free to acquire
non-utility businesses, which they may not do now, with certain limited
exceptions. With the repeal of PURPA or PUHCA, competition for independent power
generators from utilities would likely increase. This is likely to have little
or no impact on existing Covanta projects, but may mean additional competition
from highly capitalized companies seeking to develop projects in the U.S.
In addition, the FERC, many state public utility commissions and
Congress have implemented or are considering a series of proposals to
restructure the electric utility industry in the United States to permit utility
customers to choose their utility supplier in a competitive electric energy
market. The FERC has issued a series of orders requiring utilities to offer
wholesale customers and suppliers open access on their transmission lines on a
comparable basis to the utilities' own use of the line. All public utilities
have already filed "open access" tariffs to implement this requirement. As the
trend toward increased competition continues, the utilities contend that they
are entitled to recover from departing customers their fixed costs that will be
"stranded" by the ability of their wholesale customers (and perhaps eventually,
their retail customers) to choose new electric power suppliers. These include
the costs utilities are required to pay under many QF contracts which the
utilities view as excessive when compared with current market prices. Many
utilities are therefore seeking ways to lower these contract prices, or rescind
or buy out these contracts altogether, out of concern that their shareholders
will be required to bear all or part of such "stranded" costs. Regulatory
agencies to date have recognized the continuing validity of approved power
purchase agreements, and have rejected attempts by some utilities to abrogate
these contracts. At the same time, regulatory agencies have encouraged
renegotiations of power contracts where rate payer savings can be achieved as a
result. The Company anticipates that the regulatory impetus to restructure
"above market" power purchase agreements will continue in many of the
jurisdictions where it owns or operates generating facilities. Future U.S.
electric rates may be deregulated in a restructured U.S. electric utility
industry and increased competition may result in lower rates and less profit for
U.S. electricity sellers developing new projects. Falling electricity prices and
uncertainty as to the future structure of the industry can be expected to
inhibit United States utilities from entering into long-term power purchase
contracts. On the other hand, deregulation could open up markets for the sale of
electricity, including retail markets, previously available only to regulated
utilities. While at present, the impact of the recent California situation (see
MARKETS, COMPETITION AND GENERAL BUSINESS CONDITIONS, above) cannot be
predicted, it has led some states and their public service commissions to
re-examine the timing, nature and desirability of electric utility
restructuring.
The Company presently has, and intends to continue to acquire,
ownership and operating interests in electric generating projects outside the
United States. Most countries have expansive systems for the regulation of the
power business. These generally include provisions relating to ownership,
licensing, rate setting and financing of generating and transmission facilities.
Covanta's water and wastewater business may be subject to the
provisions of state, local and, in the case of foreign operations, national
utility laws applicable to the development, ownership and operation of water
supply and wastewater facilities. Whether such laws apply depends upon the local
regulatory scheme as well as the manner in which the Company provides its
services. Where such regulations apply, they may relate to rates charged,
services provided, accounting procedures, acquisitions and other matters. In the
United States, rate regulations have typically been structured to provide a
predetermined return on the regulated entities investments. In other
jurisdictions, the trend is towards periodic price reviews comparing rates to
anticipated capital and operating revenues. The regulated entity benefits from
efficiencies achieved during the period for which the rate is set.
Item 2. PROPERTIES
During 2000, Covanta moved its executive offices from New York City to
Fairfield, New Jersey. The Company's executive offices are now located at 40
Lane Road, Fairfield, New Jersey, in an office building located on a 5.4 acre
site owned by Covanta Projects, Inc. It also leases approximately 47,000 square
feet of office space in Fairfax, Virginia.
The following table summarizes certain information relating to the
locations of the properties owned or leased by Covanta Energy Group, Inc. or its
subsidiaries:
APPROXIMATE
SITE SIZE
LOCATION IN ACRES SITE USE NATURE OF INTEREST(1)
- ----------- ---------- --------- ------------------------
1. Fairfield, New Jersey 5.4 Office Space Own
2. Fairfax, Virginia -- Office Space Lease
3. New York, New York -- Office Space Lease
4. Marion County, Oregon 15.2 Waste-to-energy facility Own
5. Alexandria/Arlington,
Virginia 3.3 Waste-to-energy facility Lease
6. Bristol, Connecticut 18.2 Waste-to-energy facility Own
7. Bristol, Connecticut 35 Landfill Lease
8. Indianapolis, Indiana 23.5 Waste-to-energy facility Lease
9. Stanislaus County, California 16.5 Waste-to-energy facility Lease
10. Babylon, New York 9.5 Waste-to-energy facility Lease
11. Haverhill, Massachusetts 12.7 Waste-to-energy facility Lease
12. Haverhill, Massachusetts 16.8 RDF processing facility Lease
13. Haverhill, Massachusetts 20.2 Landfill Lease
14. Lawrence, Massachusetts 11.8 RDF power plant (closed) Own
15. Lake County, Florida 15 Waste-to-energy facility Own
16. Wallingford, Connecticut 10.3 Waste-to-energy facility Lease
17. Fairfax County, Virginia 22.9 Waste-to-energy facility Lease
18. Union County, New Jersey 20 Waste-to-energy facility Lease
19. Huntington, New York 13 Waste-to-energy facility Lease
20. Warren County, New Jersey 19.8 Waste-to-energy facility Lease
21. Hennepin County, Minnesota 14.6 Waste-to-energy facility Lease
22. Tulsa, Oklahoma 22 Waste-to-energy facility Lease
23. Onondaga County, New York 12 Waste-to-energy facility Lease
24. New Martinsville, W. VA N/A Hydroelectric Power Generating Lease
25. Heber, California 8 Geothermal Power Plant Own
26. Heber, California 18 Geothermal Power Plant Own
27. Heber, California 40 Geothermal Power Plant Lease
28. Bataan, Philippines 3,049 Diesel Power Plant Lease
sq. meters
29. Zhejiang Province, N/A Coal-fired Land Use Right
People's Republic of Cogeneration Facility reverts to China Joint
China Venture Partner upon
termination of Joint
Venture Agreement.
30. Shandong Province, N/A Coal-fired Land Use Right
People's Republic of Cogeneration Facility reverts to China Joint
China Venture Partner upon
termination of Joint
Venture Agreement.
31. Jiangsu Province, N/A Coal-fired Land Use Right
People's Republic of Cogeneration Facility reverts to China Joint
China Venture Partner upon
termination of Joint
Venture Agreement
32. Jiangsu Province, N/A Coal-fired Land Use Right
People's Republic of China Cogeneration Facility reverts to China Joint
Venture Partner upon
termination of Joint
Venture Agreement
33. Casa Diablo Hot Springs, 1,510 Geothermal Projects Land Use Rights from
California Geothermal Resource
Lease
34. Rockville, Maryland N/A Landfill Gas Project Lease
35. San Diego, California N/A Landfill Gas Project Lease
36. Oxnard, California N/A Landfill Gas Project Lease
37. Sun Valley, California N/A Landfill Gas Project Lease
38. Salinas, California N/A Landfill Gas Project Lease
39. Santa Clara, California N/A Landfill Gas Project Lease
40. Stockton, California N/A Landfill Gas Project Lease
41. Los Angeles, California N/A Landfill Gas Project Lease
42. Burney, California 40 Wood Waste Project Lease
43. Jamestown, California 26 Wood Waste Project Own (50%)
44. Westwood, California 60 Wood Waste Project Own
45. Oroville, California 43 Wood Waste Project Lease
46. Whatcom County, Washington N/A Hydroelectric Project Own (50%)
47. Weeks Falls, Washington N/A Hydroelectric Project Lease
48. Cavite, Philippines 13,122 Diesel Project Lease
sq. meters
49. Chonburi, Thailand 5.9 Gas Project Own
50. Bangkok, Thailand 182 sq. meters Office Space Lease
51. Manila, The Philippines 535 sq. meters Office Space Lease
52. Bangkok, Thailand 265 sq. meters Office Space Lease
53. Calcutta, India 320 sq. meters Office Space Lease
54. Samalpatti, India 211 sq. meters Office Space Lease
55. Samayanallur, India 144 sq. meters Office Space Lease
56. Samayanallur, India 19.4 Heavy Fuel Oil Project Lease
57. Samayanallur, India 11.4 Heavy Fuel Oil Project Lease
58. Samalpatti, India 30.3 Heavy Fuel Oil Project Lease
- --------
(1) All ownership or leasehold interests relating to projects are subject
to material liens in connection with the financing of the related
project, except those listed above under items 12, 29-32, and 34-41. In
addition, all leasehold interests extend at least as long as the term
of applicable project contracts, and several of the leasehold interests
are subject to renewal and/or purchase options.
ITEM 3. LEGAL PROCEEDINGS
The Company has various legal proceedings involving matters arising in
the ordinary course of business. The Company does not believe that there are any
pending legal proceedings, other than ordinary routine litigation incidental to
its business, to which the Company is a party or to which any of its property is
subject, the outcome of which would have a material adverse effect on the
Company's consolidated position or results of operation.
The Company's operations are subject to various federal, state and
local environmental laws and regulations, including the Clean Air Act, the Clean
Water Act, the Comprehensive Environmental Response Compensation and Liability
Act (CERCLA) and Resource Conservation and Recovery Act (RCRA). Although the
Company's operations are occasionally subject to proceedings and orders
pertaining to emissions into the environment and other environmental violations,
the Company believes that it is in substantial compliance with existing
environmental laws and regulations.
In connection with certain previously divested operations, the Company
may be identified, along with other entities, as being among potentially
responsible parties responsible for contribution for costs associated with the
correction and remediation of environmental conditions at various hazardous
waste disposal sites subject to CERCLA. 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 its contractual arrangement with the purchaser of such
operations.
The potential costs related to all of the foregoing matters and the
possible impact on future operations are uncertain due in part to the complexity
of government laws and regulations and their interpretations, the varying costs
and effectiveness of cleanup technologies, the uncertain level of insurance or
other types of recovery and the questionable level of the Company's
responsibility.
Although the ultimate outcome and expense of any litigation, including
environmental remediation, is uncertain, the Company believes that the following
proceedings will not have a material adverse effect on the Company's
consolidated financial position or results of operations.
(a) Environmental Matters
(i) As a result of a criminal investigation by the U.S. Department of
Justice, on September 6, 2000, Ogden Aviation Fueling Company of
Virginia, Inc., entered a guilty plea to a single count misdemeanor
under the Clean Water Act as a result of a spill of aviation fuel from
a holding tank in October 1996 at a former tank farm it operated at
Dulles International Airport in Washington, D.C. Under the terms of a
written plea agreement, Ogden Aviation Fueling Company of Virginia,
Inc., agreed to pay a fine of $200,000. The court approved the plea
agreement on November 28, 2000 and the Company paid the fine shortly
thereafter.
(ii) In 1999, Ogden Aviation Fueling Company of Virginia, Inc. and Ogden
Aviation Services, Inc. were served with a lawsuit entitled "AIRFRANCE,
ET. AL. V. OGDEN AVIATION FUELING COMPANY OF VIRGINIA, INC. AND OGDEN
AVIATION SERVICES, INC." (Circuit Ct., Fairfax Co., Index No. 183590)
in which certain of the airlines sought recovery of cleanup costs
arising from a spill of aviation fuel from a tank operated by a Company
subsidiary at Dulles International Airport for which they reimbursed
the Company subsidiary. The plaintiffs included United Air Lines, Inc.,
the largest carrier that operated out of Dulles in 1996, as well as
nine other airlines: Air France, America West Airlines, Inc., Austrian
Airlines, British Airways PLC, Continental Airlines, Inc., Lufthansa
A.G., Northwest Airlines, Inc., United Parcel Service Co., and Virgin
Atlantic Airways, Ltd.
The suit claimed damages in the amount of at least $731,000, plus
interest. This dollar amount reflected the portion of the spill cleanup
paid by the named plaintiffs. The suit alleged damages on two theories:
(1) breach of contract in that Ogden subsidiary was not authorized
under the contract to charge the airlines spill related costs; and (2)
equitable relief in that the Ogden subsidiary had been unjustly
enriched at the expense of the airlines.
After a five-day trial in September 2000, the Court granted judgment
against Ogden Aviation Fueling Company of Virginia, Inc. in the amount
of $721,206.95 plus pre-judgment and post judgment interest. Ogden
filed a notice to appeal to the Supreme Court of Virginia on October
29, 2000. By stipulation dated February 2, 2001, this matter was
settled by Ogden's payment of $1,000,000 to plaintiffs.
(iii) On January 4, 2000 and January 21, 2000, United Air Lines, Inc.
("United") and American Airlines, Inc. ("American") named Ogden New
York Services, Inc. ("Ogden New York"), in two separate lawsuits filed
in the Supreme Court of the State of New York. The lawsuits seek
judgment declaring that Ogden New York is responsible for petroleum
contamination at airport terminals formerly or currently leased by
United and American. On October 24, 2000 the Court granted Ogden's
motion to consolidate the two lawsuits for joint trial.
Both United and American allege that Ogden negligently caused
discharges of petroleum at the airport and that Ogden is obligated to
indemnify the airlines pursuant to the Fuel Services Agreements between
Ogden and the respective airline. United and American further allege
that Ogden is liable under New York's Navigation Law which imposes
liability on persons responsible for discharges of petroleum and under
common law theories of indemnity and contribution.
The United complaint is asserted against Ogden, American, Delta,
Northwest and American Eagle. United is seeking $1,540,000 in technical
contractor costs and $432,000 in legal expenses related to the
investigation and remediation of contamination at the airport, as well
as a declaration that Ogden and the airline defendants are responsible
for all or a portion of future costs that United may incur.
The American complaint, which is asserted against both Ogden and
United, sets forth essentially the same legal basis for liability as
the United complaint. American is seeking reimbursement of all or a
portion of $4,600,000 allegedly expended in cleanup costs and legal
fees it expects to incur to complete an investigation and cleanup that
it is conducting under an administrative order with the State
Department of Environmental Conservation. The estimate of those sums
alleged in the complaint is $70,000,000.
Ogden disputes the allegations and believes that the damages sought are
excessive in view of the Airlines' responsibility for the contamination
under their respective leases and permits with the Port Authority. On
May 1, 2000 the Company filed a motion to dismiss the complaints on the
ground that the controlling agreements limit the Airlines' recovery
against the Company to the coverage afforded under the Company's
insurance policies. The motion was granted in part and denied in part.
The Company served answers to the complaints on February 26, 2001 and
the litigation has proceeded to discovery stage.
(iv) On December 23, 1999 Allied Services, Inc. was named as a third party
defendant in an action filed in the Superior Court of the State of New
Jersey. The third-party complaint alleges that Allied generated
hazardous substances to a reclamation facility known as the Swope Oil
and Chemical Company Site, and that contamination migrated from the
Swope Oil Site to the Pennsauken Landfill and surrounding areas.
Third-party plaintiffs seek contribution and indemnification from
Allied and over 90 other third-party defendants for costs incurred and
to be incurred to cleanup the Pennsauken landfill and surrounding
areas. By order dated June 7, 2000, this action was stayed, pending the
outcome of first and second party claims.
As a result of uncertainties regarding the source and scope of
contamination, the large number of potentially responsible parties and
the varying degrees of responsibility among various classes of
potentially responsible parties, the Company's share of liability, if
any, cannot be determined at this time.
(v) On January 12, 1998, the Province of Newfoundland filed an Information
Against Airconsol Aviation Services Limited ("Airconsol") alleging that
Airconsol violated provincial environmental laws in connection with a
fuel spill on or about January 14, 1997 at Airconsol's fuel facility at
the Deer Lake, Canada Airport. Airconsol contested the allegations and
prevailed. The Court voided the Information. The Crown has appealed the
Court's decision. The Company will continue to contest its alleged
liability on appeal.
(vi) The Company and/or certain subsidiaries have been advised by various
authorities that they are responsible for investigation, remediation
and/or corrective action in connection with fueling operations at
various airports. Although the Company and/or its subsidiaries do not
acknowledge any legal obligation to do so, the Company and/or its
subsidiaries are cooperating with the government agencies in each
matter to seek fair and reasonable solutions.
(vii) On May 25, 2000 the California Regional Water Quality Control Board,
Central Valley Region ("Board"), issued a cleanup and abatement order
to Pacific-Ultrapower Chinese Station ("Chinese Station"), a general
partnership of which a Company subsidiary owns 50% and which operates a
wood-burning power plant located in Jamestown, California. This order
arises from the use of boiler bottom ash, or "tramp material,"
generated by Chinese Station as fill material by its neighbor, Hatler
Industrial Park. The order was issued jointly to Chinese Station and to
Hatler Industrial Park. Chinese Station filed a petition for review of
the order in June, 2000 that is pending. As required by the order,
Chinese Station undertook and has submitted to the Board an
environmental site assessment. Chinese Station also submitted to the
Board a clean closure work plan for the removal of the tramp material.
On February 27, 2001, the Board issued a Notice of Violation to Chinese
Station and Hatler Industrial Park as joint respondents, alleging
deficiencies in the Clean Closure Work Plan. On March 5, 2001, the
Board issued comments to Chinese Station and Hatler Industrial Park
alleging deficiencies in the environmental site assessment. The Board
further alleges that as a result of time delays in completing the
cleanup activities respondents have a potential civil liability, as of
March 5, 2001, of $470,000. Chinese Station is in the process of
preparing responses to both the February 27 and March 5, 2001 issuances
from the Board, and believes that it has meritorious factual and legal
defenses to the deficiencies alleged therein. This matter remains under
investigation by the Board and other state agencies with respect to
alleged civil and criminal violations associated with the management of
the tramp material.
(viii) On December 26, 2000, I. Schumann & Co. named Ogden Corporation, Ogden
Alloys, Inc., Ogden Metals, Inc. and American Motorists Insurance
Company in a lawsuit filed in the United States District Court for the
Northern District of Ohio. The lawsuit seeks reimbursement for response
costs at a site formerly owned and operated by the Company's subsidiary
related entities, damages for breach of contract and judgment declaring
that the Company and its named subsidiaries is responsible for certain
future remediation costs. The plaintiff is seeking response costs in
excess of $3 million and unspecified damages from the Company. The
Company has not yet answered the complaint and has commenced an
investigation of the matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of Covanta
during the fourth quarter of 2000.
EXECUTIVE OFFICERS OF COVANTA
Set forth below are the names, ages, positions and offices
held and years appointed of Covanta's current "executive officers" (as defined
by Rule 3b-7 of the Securities Exchange Act of 1934).
CONTINUALLY
POSITION AND AN EXECUTIVE
NAME OFFICE HELD AGE AS OF 3/1/2001 OFFICER SINCE
- ---- ----------- ------------------ -------------
Scott G. Mackin President and Chief 44 1992
Executive Officer
Bruce W. Stone Executive Vice President 53 1997
Chief Administrative Officer
Edward W. Moneypenny Executive Vice President 59 2001
Chief Financial Officer
William E. Whitman Senior Vice President 45 2001
Strategic Planning and
Business Development
Lynde H. Coit Senior Vice President and 46 1991
General Counsel
Jeffrey R. Horowitz Senior Vice President 51 2001
Legal Affairs
Paul B. Clements Senior Vice President 45 2001
Independent Power Projects
Anthony J. Orlando Senior Vice President 41 2001
Waste to Energy
J. Joseph Burgess Executive Vice President 42 2001
of Covanta's subsidiaries
Covanta Water Systems, Inc. and
Covanta Projects, Inc.
B. Kent Burton Senior Vice President 49 1997
Policy and International
Government Relations
William J. Metzger Vice President and Chief 42 1999
Accounting Officer
Stephen M. Gansler Vice President 46 2001
Human Resources
Peter Allen Senior Vice President 64 1998
David L. Hahn Senior Vice President 49 1997
Aviation
Louis M. Walters Vice President and Treasurer 48 2001
There is no family relationship by blood, marriage or adoption
(not more remote than first cousins) between any of the above
individuals and any Covanta director.
The term of office of all officers shall be until the next
election of directors and until their respective successors
are chosen and qualified.
There are no arrangements or understandings between any of the
above officers and any other person pursuant to which any of
the above was selected as an officer.
The following briefly describes the business experience,
principal occupation and employment of the foregoing Executive
Officers during the past five years:
Scott G. Mackin has served as President and Chief Executive
Officer of Covanta since September 1999. Prior thereto he
served as Executive Vice President of Covanta from January
1997 to September 1999 and as President and Chief Operating
Officer of Covanta Energy Group, Inc., a Covanta subsidiary,
since January 1991.
Lynde H. Coit has been Senior Vice President and General
Counsel of Covanta for more than the last five years.
Bruce W. Stone was named an Executive Officer of Covanta in
1997. He currently serves as Executive Vice President and
Chief Administrative Officer of Covanta, to which he was
appointed in 2001. Previously, Mr. Stone served as Executive
Vice President and Managing Director of Covanta Energy Group,
Inc., a Covanta subsidiary, a position he held since January
1991.
Edward W. Moneypenny was named Covanta's Executive Vice
President and Chief Financial Officer in 2001. Previously, Mr.
Moneypenny was Senior Vice President - Finance and Chief
Financial Officer at Florida Progress Corporation, and prior
to that Executive Vice President and Chief Financial Officer
at Oryx Energy Company.
Jeffrey R. Horowitz was named Senior Vice President for Legal
Affairs and Secretary in 2001. Prior to that time, Mr.
Horowitz served as Executive Vice President, General Counsel
and Secretary of Covanta Energy Group, Inc, a Covanta
subsidiary. Mr. Horowitz joined the Company in 1991.
William E. Whitman was named Covanta's Senior Vice President
for Strategic Planning and Business Development in 2001.
Previously Mr. Whitman served as Executive Vice President and
Chief Financial Officer of Covanta Energy Group, Inc., a
Covanta subsidiary. Mr. Whitman joined the Company in 1986.
Paul B. Clements was named Covanta's Senior Vice President of
Independent Power Operations in 2001. Mr. Clements previously
served as Executive Vice President of Covanta Energy Group,
Inc., and President of Covanta Energy West, Inc., both of
which are Covanta subsidiaries. Mr. Clements joined the
Company in 1988.
Anthony J. Orlando was named Covanta's Senior Vice President
of Waste to Energy Operations in 2001. Previously he served as
Executive Vice President of Ogden Energy Group, Inc., a
Covanta subsidiary. Mr. Orlando joined the Company in 1987.
J. Joseph Burgess was designated an Executive Officer of
Covanta in 2001. Mr. Burgess currently serves as Executive
Vice President of Covanta Projects, Inc., and of Covanta Water
Systems, Inc., both of which are Covanta subsidiaries. Mr.
Burgess joined the Company in 1988.
B. Kent Burton has served as Senior Vice President - Policy
and International Government Relations of Covanta since May
1999, from May 1997 to May 1999 he served as Vice President -
Policy and Communications of Covanta and prior thereto he
served as Senior Vice President of the Covanta Energy Group,
Inc., a Covanta subsidiary, in political affairs and lobbying
activities.
Stephen M. Gansler was named Vice President of Human Resources
in March, 2001. Before joining the Company, Mr. Gansler
was Worldwide Vice President, Human Resources, at Johnson &
Johnson, where he held various positions in Human Resources
for more than 20 years.
William J. Metzger has served as Vice President and Chief
Accounting Officer of Covanta since May 1999. From April 1996
to April 1999 he served as the Chief Accounting Officer of
Covanta Energy Group, Inc., a Covanta subsidiary, and from
September 1990 to April 1996 he served as a Senior Manager at
Deloitte & Touche, LLP.
Louis M. Walters was named Treasurer of Covanta in 2001. Prior
to that time, Mr. Walters served as Treasurer of Covanta
Energy Group, Inc., since January, 2000. Before joining
Covanta, Mr. Walters was Treasurer at Conectiv, and before
that held various positions at Atlantic Energy, Inc.
Peter Allen has served as a Senior Vice President of Covanta
since January, 1998, and as Senior Vice President and General
Counsel of Covanta Services Corp., a Covanta subsidiary, for
more than the last five years.
David L. Hahn was appointed Senior Vice President, Business
Development, Asia in January 1995 and since 1997 he has served
as Covanta's Senior Vice President, Aviation and Chief
Operating Officer of Covanta's Aviation operations. Prior to
1995 he served as Vice President-Marketing of Covanta Services
Corporation.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Covanta Energy Corporation and Subsidiaries
PRICE RANGE OF STOCK AND DIVIDEND DATA
2000 1999
- --------------------------------------------------------------------------------------------------
High Low High Low
Common:
First Quarter .................. 14-1/16 10-1/8 28 22-5/8
Second Quarter.................. 12-3/8 7-1/4 25-15/16 23-3/16
Third Quarter................... 17-1/2 8-3/4 27-1/2 9-1/2
Fourth Quarter.................. 16 12-3/8 14-3/8 8-7/16
---------------------------------------------------------
Preferred:
First Quarter................... 75 75 160 160
Second Quarter.................. 75 75 160 155
Third Quarter................... 80 80 155 154
Fourth Quarter.................. 83-1/16 83-1/16 154 68
---------------------------------------------------------
Covanta's common and $1.875 preferred stocks are listed on the New York Stock
Exchange. As of March 15, 2001 there were approximately 5,123 common
stockholders and 669 preferred stockholders.
Quarterly common stock dividends of $.3125 per share were paid to shareholders
of record for the first two quarters of 1999. The Company suspended its common
stock dividend in the third quarter of 1999. Quarterly dividends of $.46875 and
$.8376 were paid for the four quarters of 2000 and 1999, respectively, on the
$1.875 preferred stock. For additional information concerning the payment of
dividends, see Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations.
On March 3, 1999, pursuant to an Agreement and Plan of Merger, a subsidiary of
Covanta acquired 100% of the issued and outstanding stock of Flight Services
Group, Inc. ("FSG") from the two individual shareholders (the "Shareholders") of
FSG. Pursuant to this transaction Covanta issued an aggregate of 207,190 shares
of restricted common stock, par value $.50 per share (the "Common Stock") to the
Shareholders. The Common Stock issued to the Shareholders was exempt from
registration pursuant to Rule 501 and 505 of Regulation D of the Securities Act
of 1933, as amended (the "1933 Act") and Rule 144 of the Securities Exchange Act
of 1934, as amended. The Shareholders executed an Investment Letter agreeing to
abide by all of the requirements of the foregoing Rules and Regulations and each
share of Common Stock issued to the Shareholders contains a legend to the effect
that the shares were acquired for investment and not with a view to the public
distribution thereof and will not be transferred in violation of the 1933 Act.
Covanta Energy Corporation and Subsidiaries
ITEM 6. SELECTED FINANCIAL DATA
- ---------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2000 1999 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands of dollars, except per-share amounts)
TOTAL REVENUES FROM CONTINUING OPERATIONS.................. $1,020,002 $1,027,693 $ 925,153 $ 960,458 $1,213,874
--------- -------- -------- --------- ---------
Income (loss) from continuing operations before
cumulative effect of change in accounting principle........ (85,621) (36,290) 37,248 36,787 39,081
Income (loss) from discontinued operations................. (143,664) (41,851) 49,722 38,886 25,453
Cumulative effect of change in accounting principle........ (3,820)
--------- -------- -------- --------- ---------
Net income (loss).......................................... (229,285) (81,961) 86,970 75,673 64,534
--------- -------- -------- --------- ---------
BASIC EARNINGS (LOSS) PER SHARE:
Income (loss) from continuing operations before
cumulative effect of change in accounting principle........ (1.73) (0.74) 0.74 0.73 0.78
Income (loss) from discontinued operations................. (2.90) (0.85) 1.00 0.78 0.51
Cumulative effect of change in accounting principle........ (0.08)
--------- -------- -------- --------- ---------
Total...................................................... (4.63) (1.67) 1.74 1.51 1.29
--------- -------- -------- --------- ---------
DILUTED EARNINGS (LOSS) PER SHARE:
Income (loss) from continuing operations before
cumulative effect of change in accounting principle........ (1.73) (0.74) 0.73 0.72 0.77
Income (loss) from discontinued operations................. (2.90) (0.85) 0.98 0.76 0.50
Cumulative effect of change in accounting principle........ (0.08)
--------- -------- -------- --------- ---------
Total...................................................... (4.63) (1.67) 1.71 1.48 1.27
--------- -------- -------- --------- ---------
TOTAL ASSETS............................................... 3,295,451 3,726,099 3,647,554 3,443,981 3,401,382
--------- -------- -------- --------- ---------
LONG-TERM OBLIGATIONS...................................... 1,749,164 1,884,427 1,864,772 1,911,707 1,935,306
--------- -------- -------- --------- ---------
SHAREHOLDERS' EQUITY....................................... 231,556 442,001 549,100 566,091 550,925
--------- -------- -------- --------- ---------
SHAREHOLDERS' EQUITY PER COMMON SHARE...................... 4.65 8.92 11.20 11.24 11.06
--------- -------- -------- --------- ---------
CASH DIVIDENDS DECLARED PER COMMON SHARE.................. .625 1.25 1.25 1.25
--------- -------- -------- --------- ---------
Net income in 1999 reflects net after-tax charges of $97.8 million, or $1.99 per
diluted share, reflecting costs associated with existing non-core businesses and
impairment of certain assets, comprised of $62.5 million, or $1.27 per diluted
share, for continuing operations, and $35.3 million, or $.72 per diluted share,
for discontinued operations. Net income in 2000 reflects net after tax charges
of $56.0 million, or $1.13 per diluted share, reflecting the writedown of net
assets held for sale and $60.4 million, or $1.22 per diluted share, reflecting
costs associated with noncore businesses and organizational streamlining costs
comprised of $45.5 million, or $.92 per diluted share, for continuing
operations, and $14.9 million, or $.30 per diluted share, for discontinued
operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's Financial Statements and Notes thereto.
DISCONTINUED OPERATIONS AND NET ASSETS HELD FOR SALE
On September 17, 1999, the Company announced that it intended to sell its
Aviation and Entertainment businesses and on September 29, 1999, the Board of
Directors of the Company formally adopted a plan to sell the operations of its
Aviation and Entertainment units, which were previously reported as separate
business segments. As a result of the adoption of this plan, the financial
statements present the results of these operations as discontinued.
At December 31, 2000, the Company had substantially completed its sales of the
discontinued operations and, therefore, reclassified the remaining unsold
Aviation and Entertainment businesses in the accompanying December 31, 2000
balance sheet to present these businesses as net assets held for sale. These
non-core businesses are reported in the "Other" segment at December 31, 2000. In
addition, the Company reclassified its other non-core subsidiaries, Datacom,
Inc. (Datacom), a contract manufacturing company located in Mexico, and Compania
General de Sondeos, S.A. (CGS), an environmental and infrastructure company in
Spain, to present these businesses as net assets held for sale. Datacom and CGS
are reported in the Other segment and Energy segment, respectively. Net assets
held for sale at December 31, 2000 totaled $70,600,000 net of associated debt
of $29,300,000.
2000 VS. 1999
Continuing Operations: Revenues from continuing operations for 2000 were
$7,700,000 lower than 1999, primarily reflecting a decrease in Corporate and
Other segment revenues of $33,700,000, partially offset by an increase in Energy
segment revenues of $26,000,000.
Service revenues in 2000 decreased $13,400,000 compared to 1999. Energy service
revenues increased $4,400,000 compared to 1999 primarily due to increased
production and contractual annual escalation adjustments at many plants of
$7,600,000, offset by a decrease of $3,200,000 in the environmental consulting
business that was sold in November 2000. The Other segment's service revenues
decreased $17,800,000 mainly due to the sale of Applied Data Technology, Inc.
(ADTI) in the first quarter of 2000.
Electricity and steam sales revenue increased $71,000,000 compared to 1999
attributable mainly to increased production and to favorable energy pricing
experienced primarily at our power plants in California, including incremental
revenues from the acquisition of the remaining interest in a California plant
during the second quarter of 1999. The commencement of operations during 1999 of
projects in Thailand and The Philippines, as well as increased pricing
experienced at certain waste-to-energy plants with merchant energy capacity,
also contributed to the overall increase in this category.
Equity in income of investees and joint ventures increased $11,100,000 compared
to the year ended December 31, 1999. Approximately $9,400,000 of the increase is
attributable to the commencement of operations of projects in Asia. The
remaining increase is mainly due to increased generation at existing projects.
Construction revenues decreased $50,100,000 compared to 1999. The decrease is
attributable to the near completion of the retrofit construction activity
mandated by the Clean Air Act Amendments of 1990, the decision to wind down
activities in the civil construction business and the completion of a wastewater
project in 2000.
Other sales - net decreased $9,700,000 due mainly to reduced activity in the
operations of Datacom associated with the Chapter XI bankruptcy filing in March
2000 of Genicom Corporation (Genicom), its major customer. In August 2000, the
Company reached agreement with Genicom for a waiver of all preference exposure.
The Company also reached agreement with the purchaser of Genicom regarding terms
under which it will continue to supply product to Genicom. With the resolution
of Genicom's bankruptcy, the Company is now in the process of marketing Datacom
for sale.
Other revenues - net decreased $9,900,000 from 1999. Other revenues in 2000
included $12,200,000 and in 1999 included $7,800,000 of insurance settlements
relating to the Lawrence, Massachusetts facility. 1999 also included a gain on
the sale of an investment of $5,100,000 and a $9,200,000 gain on the termination
and restructuring of the Tulsa, Oklahoma facility's operating contract.
Net gain (loss) on sale of businesses in 2000 includes a $1,100,000 loss on the
sale of ADTI. 1999 includes a $5,700,000 gain on the sale of a joint venture
interest.
Total costs and expenses increased by $65,600,000 in 2000 compared to 1999. The
increase reflects an increase in the Energy segment of $10,000,000 and an
aggregate increase in Corporate and the Other segment of $55,600,000.
The Energy segment's plant operating expenses increased by $54,100,000 in 2000
compared to 1999 due primarily to a full year of consolidated operations in 2000
related to the acquisition of the remaining interest in a California plant and a
full year of operations in 2000 of plants in The Philippines and Thailand, both
of which commenced commercial operations during the second quarter of 1999.
Construction costs decreased by $46,500,000 in 2000 compared to 1999. This
decrease is due in part to the decline in the civil construction business, which
management anticipates will cease in 2001, the near completion of the retrofit
construction activity mandated by the Clean Air Act Amendments of 1990 and the
completion of a wastewater project in 2000.
Depreciation and amortization expense increased by $8,900,000 in 2000 compared
to 1999. This increase is primarily related to an increase in Corporate
depreciation and amortization of $6,200,000 due mainly to the accelerated
amortization of a new data processing system. Also, the Energy segment's
depreciation and amortization increased $2,600,000 compared to 1999 primarily
due to a full year of operating results in 2000 (versus a partial year in 1999)
at the plant in California and the commencement of operations of the plants in
The Philippines and Thailand.
Debt service charges decreased $3,700,000 in 2000 compared to 1999. This amount
includes a $6,900,000 decrease due to lower project debt outstanding on various
facilities caused by redemption and maturity of bonds, partially offset by an
increase of $3,200,000 due to a full year of expense related to commencement of
operations of the plants in The Philippines and Thailand that began operations
during 1999. The Energy segment had one interest rate swap agreement outstanding
that resulted in additional debt service expense of $1,100,000 and $1,700,000
for 2000 and 1999, respectively. The effect of this swap on the weighted-average
interest rate of project debt was not significant.
Other operating costs and expenses decreased $900,000 from 2000 due to activity
in the Other segment. This decrease was mainly associated with lessened activity
at ADTI of $1,700,000 as a result of its sale and the writeoff of goodwill
related to ADTI in 1999 of $7,800,000. In addition, operating costs and expenses
at Datacom decreased by $4,000,000 primarily due to writedowns in 1999 of
obsolete inventory, receivables and other assets totaling $15,200,000, partially
offset by a writedown of receivables in 2000 of $6,500,000 and higher costs
related to the bankruptcy of Genicom, its major customer. These decreases were
partially offset by $8,700,000 of accruals for workers' compensation insurance
related to other sold businesses.
Costs of goods sold decreased $23,700,000 compared to 1999 due in part to
activity in the Other segment. Costs of goods sold at ADTI decreased $12,600,000
because of its sale in 2000. Datacom's costs of goods sold decreased $10,700,000
due mainly to lessened activity caused by the Genicom bankruptcy filing.
Selling, administrative and general expenses decreased $23,200,000 compared to
1999 mainly due to unallocated corporate overhead expenses. This decrease is
fundamentally the result of a decrease in Corporate severance and an employment
contract termination settlement together totaling $33,000,000 and a decrease in
most other overhead costs due to the wind down of the New York headquarters
office. These decreases were partially offset by an increase in professional
fees relating to the sale of noncore business and related issues of $5,100,000.
Selling, administrative and general expenses for the Energy and Other segments
remained relatively constant.
Project development expenses increased $1,200,000 from 1999. The overall
increase is due primarily to increased development activities in domestic and
European markets during 2000.
Other expenses - net increased $22,200,000 compared to 1999, including an
increase in the Energy segment of $700,000 and an increase in Corporate of
$21,500,000. In 2000, other expenses - net in the Energy segment included a
charge of approximately $16,600,000 related to the cost reduction plan approved
and effected in December 2000, whereby the Company decided to reorganize its
operating structure and to redirect its development spending program away from
the Asian markets. This has resulted in overhead reductions both domestically
and internationally and the announced closure of the Company's Hong Kong
headquarters. In addition, in 2000 an impairment write-off was taken of
approximately $2,800,000 related to one project in China. The 1999 amount
includes asset impairment charges of approximately $28,400,000 related to the
environmental consulting business that was sold in November 2000 at
approximately its revised carrying value, partially offset by income of
$9,000,000 related to the favorable resolution of matters related to a power
project. Other expenses - net at Corporate in 2000 include $18,000,000 of
creditors' fees and expenses and $4,800,000 representing fees and expenses
incurred in connection with financing efforts to support the Company's balance
sheet recapitalization plan (see Liquidity/Cash Flow below).
Writedown of net assets held for sale of $77,240,000 represents the writedown to
estimated fair value (less costs to sell) of the noncore businesses previously
included in the Entertainment segment. The Company applied the provisions of
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" to
all the net assets held for sale. SFAS No. 121 requires assets held for sale be
valued on an asset by asset basis at the lower of carrying amount or fair value
less costs to sell. In applying those provisions, the Company considered recent
appraisals, valuations, offers and bids, and in some cases, its estimate of
future cash flows related to those businesses.
Interest expense - net increased $4,700,000 from 1999. The Energy segment's
interest expense - net increased $4,900,000 from 1999 due to higher average debt
outstanding. Corporate interest expense - net decreased $700,000 compared to
1999. Corporate interest expense in 2000 increased $3,400,000 due primarily to
increased borrowing on the Company's revolving line of credit, and higher rates
on adjustable rate debt. Corporate interest income in 2000 increased $4,100,000
due mainly to interest earned on proceeds from sales of assets partially offset
by interest earned in 1999 on proceeds from an energy contract repayment.
The effective tax rate for 2000 was 29.7% compared with 18.7% for 1999. This
increase of 11.0% representing tax benefits was primarily due to the writeoff in
1999 of goodwill for which the Company did not have any tax basis, lower foreign
taxes and lower non-deductible foreign losses in 2000, partially offset in 2000
by a valuation allowance relating to tax assets resulting from the writedown of
assets held for sale. Note 23 to the Consolidated Financial Statements contains
a more detailed reconciliation of variances from the Federal statutory income
tax rate.
Discontinued Operations: Losses from discontinued operations for 2000 were
$143,700,000, representing a decrease in earnings of $101,800,000 from the
comparable period of 1999. Loss before interest and taxes from discontinued
operations was $169,500,000 in 2000 compared to $37,200,000 in 1999. This
$132,300,000 decrease in income was primarily associated with losses on the
sales of businesses in 2000 of $97,000,000 compared to gains on the sales of
businesses in 1999 of $16,800,000. Businesses sold include Entertainment's Food
and Beverage/Venue Management business, and the Themed Attractions/Parks
business, and Aviation's Ground Handling business and Fixed Based Operations
business. In addition, Aviation's operations, exclusive of sales of businesses,
decreased $22,200,000 primarily due to increased overhead costs of $9,200,000
representing mainly professional fees relating to the sale of businesses,
decreases in the fueling business of $4,900,000 representing higher insurance
costs and lower activity at certain locations, decreases in the ground services
business of $16,700,000 caused mainly by lower results in Europe, Asia and
domestic operations and an increase in workers' compensation expense of
$6,100,000, partially offset by a decrease in severance charges of $13,700,000.
Entertainment's operations, exclusive of sales of businesses, decreased
$3,600,000 compared to 1999. This is primarily due to decreases in the Food and
Beverage/Venue Management business of $10,400,000 and the Themed
Attractions/Parks business of $16,600,000 primarily as a result of those
businesses being sold. The decrease also includes increased overhead costs of
$3,600,000 representing mainly professional fees relating to the sale of
businesses, an increase in workers' compensation expense of $3,700,000 and in
1999 a $7,200,000 gain on a series of food and beverage/venue management
contract buyouts. These decreases are partially offset by a decrease in
severance charges of $12,100,000 and in 1999 a charge of $10,500,000 relating to
a non-refundable deposit and related expenditures for the proposed purchase of
Volume Services America (VSA). In addition, in 1999, the Company reached
agreements to sell its interest in the Grizzly Nature Center and its interest in
a casino operation in Aruba, resulting in losses of $4,000,000 and $2,500,000,
respectively. In 1999, the Company also wrote off unrecoverable contract
acquisition costs at two sport facilities, $5,000,000 related to the Great
Western Forum and $1,500,000 related to the U.S. Air Arena, both of which had
ceased to be utilized by professional sports teams. The Company also abandoned
its casino development activities in South Africa resulting in charges of
$7,300,000.
In addition to the Energy segment's swap, the Company had three interest rate
swap agreements covering notional amounts of $1,600,000 (decreasing to zero),
$2,700,000 and $2,800,000 (both amortizing to $2,100,000 on their termination
dates) during 2000. The first swap agreement expired November 2000 and was
entered into to convert Entertainment's $1,600,000 variable rate debt to a fixed
rate. The other swap agreements, which were denominated in Hong Kong dollars and
were terminated in November 2000, were entered into to convert Aviation's
$7,500,000 variable rate debt to a fixed rate. During 1999 the Company also had
three other interest rate swaps outstanding with a total notional amount of
$3,500,000 which expired in September and October 1999. These agreements
resulted in additional interest expense in 2000 and 1999 of $370,000 and
$470,000, respectively, including $150,000 in 2000 for terminating those swaps.
These amounts were included in discontinued operations. The effect of these swap
agreements on the weighted average interest rate was not significant.
1999 vs. 1998
Continuing Operations: Revenues from continuing operations for 1999 were
$102,500,000 higher than in 1998, primarily reflecting an increase in Energy
segment revenues of $113,000,000, partially offset by a decrease in Corporate
and the Other segment revenues of $10,500,000.
Service revenues in 1999 decreased $3,500,000 compared to 1998. Energy service
revenues decreased $2,800,000 due mainly to a $12,600,000 decrease in the
environmental consulting business, partially offset by $9,800,000 in revenues at
energy facilities principally due to contractual annual escalation adjustments.
The Other segment's revenues decreased $600,000 due mainly to lower activity at
the Support Services subsidiary of $5,400,000, which was discontinued in 1998,
partially offset by increased activity at ADTI of $5,000,000.
Electricity and steam sales revenue increased $42,500,000 from 1998. The
increase is attributable to incremental revenues from the acquisition of the
remaining interest in a California plant during the second quarter of 1999, the
commencement of operations during 1999 of projects in Thailand and The
Philippines, and increases at facilities where service agreements were
renegotiated.
Equity in income of investees and joint ventures decreased $6,300,000 compared
to 1998. This decrease is primarily due to $6,800,000 in 1998 related to the
buyout of an energy sales agreement with respect to a 50% owned joint venture.
Construction revenues increased $74,600,000 compared to 1998. This increase is
primarily due to an increase in civil construction of $42,000,000, increases of
$23,000,000 related to retrofit activity at several facilities and an increase
of $9,000,000 due to the construction of a potable water treatment plant.
Other sales - net decreased $12,100,000 compared to 1998 due mainly to lower
activity at Datacom.
Other revenues in 1999 increased $3,100,000 compared to 1998. In 1999, other
revenues included $7,800,000 of insurance proceeds attributable to the Lawrence
facility, $9,200,000 relating to the termination and restructuring of an
operating contract at a waste-to-energy facility, and a $5,100,000 gain on the
sale of an investment. In 1998, Other revenues included a gain of $9,100,000 on
the buyout of a power sales agreement, a gain of $8,000,000 in connection with a
payment received for the termination and restructuring of a facility operating
contract, $600,000 of insurance proceeds and $1,300,000 of various other gains.
Net gain (loss) on sale of businesses in 1999 includes a $5,700,000 gain on the
sale of a joint venture interest, and in 1998 includes a $1,000,000 gain on the
sale of the Facilities Services group's operations in New York and a $500,000
gain on the sale of Datacom's Cork, Ireland operations.
Total costs and expenses increased to $1,034,000,000 in 1999 compared to
$842,500,000 in 1998. The increase of $191,500,000 reflects an increase in the
Energy segment of $165,200,000 and an increase in Corporate and the Other
segment of $26,400,000.
Energy's plant operating expenses increased $49,200,000 compared to 1998 due
primarily to the acquisition of the remaining interest in a California plant,
and plants in The Philippines and in Thailand which commenced commercial
operations during the second quarter of 1999. In addition, operating expenses in
1999 include a charge of approximately $3,000,000 associated with a negotiated
settlement reached with a contractor.
Construction costs increased by $80,900,000 compared to 1998. This increase is
due to the increased activity in construction as a result of increased civil
construction projects, increased activity in retrofit construction as noted
above and the construction of a potable water treatment plant. Construction
costs in 1999 included costs in excess of revenues associated with the civil
construction projects of approximately $10,200,000.
Depreciation and amortization expense increased $12,600,000 compared to 1998.
This increase is primarily related to the Energy segment, which showed an
increase of $8,600,000. In connection with the Clean Air Act Amendments, the
Company shortened the estimated useful lives of certain air pollution control
equipment resulting in additional depreciation of approximately $5,000,000 in
1999. In addition, increased depreciation is also attributed to the commencement
of operations of certain plants and the acquisition of a remaining interest in a
power project during 1999, as noted above. The remaining $4,000,000 increase is
primarily due to the commencement of amortization of a new data processing
system.
Debt service charges decreased $4,300,000 from 1998 due mainly to lower project
debt outstanding on various facilities caused by redemption and maturity of
bonds and certain refinancings. The Energy segment had three interest rate swap
agreements (two of which were terminated in 1998) outstanding during 1999 and
1998 that resulted in additional debt service expense of $1,700,000 and $800,000
for 1999 and 1998, respectively. The effect of these swap agreements on the
weighted-average interest rate of project debt was not significant.
Other operating costs and expenses decreased $7,600,000 primarily related to a
decrease in Support Services operations of $9,700,000, a decrease in operating
expenses at ADTI of $12,700,000, and a decrease in operating costs at Datacom of
$6,300,000, partially offset by a writedown of ADTI goodwill in 1999 of
$7,800,000 and writedowns of inventory, accounts receivable and other assets in
1999 totaling $15,200,000.
Costs of goods sold increased $7,800,000 compared to 1998 due to activity in the
Other segment. Costs of goods sold at ADTI increased $16,800,000 due to higher
activity, and Datacom's costs of goods sold decreased $9,400,000 because of
lower activity.
Selling, administrative and general expenses increased $20,400,000 compared to
1998 due mainly to unallocated corporate overhead expenses. This increase is
mainly due to an increase in severance charges and an employment contract
termination settlement together totaling $33,900,000 as well as increased
professional fees and Y2K costs, partially offset by the settlement of certain
litigation, and proxy related charges in 1998.
Project development expenses increased by $11,300,000 compared to 1998 primarily
due to increased development and overhead expenses in Asia.
Other expenses - net increased $21,200,000 compared to 1998 primarily because of
the writedown due to impairment of assets of the environmental consulting
business that was sold in November 2000 at approximately its revised carrying
value, offset by income of $9,000,000 related to a favorable resolution of
matters related to a power project.
Interest expense - net increased $10,900,000 from 1998. The Energy segment's
interest expense - net increased $2,000,000 due to higher average debt
outstanding. Corporate interest expense - net increased $8,900,000 primarily due
to a decrease in interest income of $6,300,000, primarily reflecting lower cash
balances available for investment, interest on a customer note repaid in 1999,
interest received on a legal settlement in 1998, and in 1999, an increase in
interest expense chiefly associated with increased borrowings on the Company's
revolving line of credit and interest accrued on an Internal Revenue Service tax
assessment.
In addition to the Energy segment's swaps, the Company had one interest rate
swap agreement (which expired in December 1998) covering a notional amount of
$100,000,000. The swap was entered into to convert Covanta's fixed rate
$100,000,000 9.25% debentures into variable-rate debt. This agreement resulted
in additional interest expense in 1998 of $100,000. The effect of this swap
agreement on the weighted-average interest rate was not significant.
The effective income tax rate for 1999 was 18.7% compared with 34.2% for 1998.
This decrease of 15.5% was primarily due to the write-off of goodwill for which
the Company did not have any tax basis, higher foreign taxes and non-deductible
foreign losses. Note 23 to the Consolidated Financial Statements contains a more
detailed reconciliation of the variances from the Federal statutory income tax
rate.
DISCONTINUED OPERATIONS: Losses from discontinued operations for 1999 were
$41,900,000, a decrease in earnings of $91,600,000 from the comparable period of
1998. Income (loss) before interest and taxes of discontinued operations was
($37,200,000) in 1999 compared to $86,100,000 in 1998. This $123,300,000
decrease was primarily associated with a decrease of $72,600,000 in
Entertainment income (loss) before interest and taxes reflecting, in part,
severance charges of $13,300,000, and a charge of $10,500,000 relating to a
non-refundable deposit and related expenditures for the proposed purchase of
Volume Services America (VSA). In addition, in the third quarter of 1999, the
Company reached agreements to sell its interest in the Grizzly Nature Center and
its interest in a casino operation in Aruba, resulting in losses of $4,000,000
and $2,500,000, respectively. It also wrote off unrecoverable contract
acquisition costs at two sport facilities, $5,000,000 related to the Great
Western Forum and $1,500,000 related to the U.S. Air Arena, both of which had
ceased to be utilized by professional sports teams. The Company also abandoned
its casino development activities in South Africa resulting in charges of
$7,300,000. In 1999 the Company's income derived from its La Rural project in
Argentina was $12,300,000 lower than in 1998. 1999 included a $3,400,000 charge
due to the venture's inability to obtain necessary building permits to complete
a new facility. The Entertainment segment also had lower income in its gaming
operations of $10,400,000, themed attractions of $5,300,000, and restaurants in
malls of $10,200,000, as well as increased overhead of $3,800,000 and other
charges of $3,700,000. These decreases were partially offset by increased income
of $10,100,000 from water parks acquired in 1999, the increase in gains on the
sale of certain amphitheater contracts of $2,300,000 and a gain of $6,000,000 on
the negotiation of a revised management contract at Arrowhead Pond in Anaheim,
California.
Aviation's income (loss) before interest and taxes in 1999 was $50,600,000 lower
than 1998 chiefly due to the $39,900,000 gain on the sale of its in-flight
catering business in 1998 and an additional gain of $10,500,000 from related
transactions; 1999 severance charges of $11,800,000; lower income of $4,000,000
on reduced sales of ownership interests in the Hong Kong airport ground services
company; and increased overhead costs of $3,300,000. These decreases were
partially offset by the additional gain in 1999 on the sales of the Spanish
in-flight kitchens, domestic catering operations and certain ground operations
of $6,800,000; settlement of litigation in 1998 of $1,500,000; insurance
proceeds of $1,500,000; management fee income from South American ventures of
$3,200,000; increased operating income in domestic fueling and ground services
operations of $2,000,000; and a $700,000 increase from operations of companies
acquired in 1999 in the Fixed Base Operations Group.
In addition to the Energy segment's swaps, the Company had interest rate swap
agreements (one of which expired in December 1998) covering notional amounts of
$1,600,000, $2,700,000 and $2,800,000 at December 31, 1999. The first swap
agreement expired November 30, 2000 and was entered into to convert
Entertainment's $1,600,000 variable rate debt to a fixed rate. The other swap
agreements, which were denominated in Hong Kong dollars and were terminated in
November 2000, were entered into to convert Aviation's $7,500,000 variable rate
debt to a fixed rate. During 1999, the Company also had three other interest
rate swaps outstanding with a total notional amount of $3,500,000, which expired
in September and October 1999. These agreements resulted in additional interest
expense in 1999 of $470,000. The effect of these swap agreements on the
weighted-average interest rate was not significant.
CAPITAL INVESTMENT AND COMMITMENTS: For the year ended December 31, 2000,
capital investments for continuing operations amounted to $55,000,000, of which
$54,200,000 was for Energy and $800,000 was for Other and Corporate operations.
At December 31, 2000, capital commitments for continuing operations amounted to
$13,200,000 for normal replacement and growth in Energy and $100,000 for
Corporate and Other operations. Other capital commitments for Energy as of
December 31, 2000 amounted to approximately $29,100,000. This amount includes a
commitment to pay, in 2008, $10,600,000 for a service contract extension at an
energy facility. In addition, this amount includes $15,400,000 for two oil-fired
projects in India; $2,900,000 for additional equity commitments related to a
coal-fired power project in The Philippines; and $200,000 for a mass-burn
waste-to-energy facility in Italy. Funding for the additional mandatory equity
contributions to the coal-fired power project in The Philippines was being
provided through bank credit facilities, which were repaid in March 2001.
Covanta and certain of its subsidiaries have issued or are party to performance
bonds and guarantees and related contractual obligations undertaken mainly
pursuant to agreements to construct and operate certain energy,
entertainment and other facilities. In the normal course of business, they are
involved in legal proceedings in which damages and other remedies are sought.
Management does not expect that these contractual obligations, legal
proceedings, or any other contingent obligations incurred in the normal course
of business will have a material adverse effect on Covanta's Consolidated
Financial Statements. (See Liquidity/Cash Flow below.)
The Company did not include its interests in either the Arrowhead Pond in
Anaheim, California or the Corel Centre near Ottawa, Canada as part of the sale
of its Venue Management business in June 2000. The Company manages the Arrowhead
Pond under a long-term contract. As part of this contract, the Company is a
party, along with the City of Anaheim, to a reimbursement agreement in
connection with a letter of credit in the amount of approximately $119,000,000.
Under the reimbursement agreement, the Company is responsible for draws, if any,
under the letter of credit caused by the Company's failure to perform its duties
under its management contract at that venue which include its obligation to pay
shortfalls, if any, if net revenues of the venue are insufficient to pay debt
service underlying the venue. The Company is exploring alternatives for
disposing of these operations along with the reimbursement agreement and related
obligations.
During 1994, a subsidiary of Covanta entered into a 30-year facility management
contract at the Corel Centre pursuant to which it agreed to advance funds to a
customer, and if necessary, to assist the customer's refinancing of senior
secured debt incurred in connection with the construction of the facility.
Covanta is obligated to purchase such senior debt in the amount of $90,500,000
on December 23, 2002, if the debt is not refinanced prior to that time. Covanta
is also required to repurchase the outstanding amount of certain subordinated
secured debt of such customer in the amount of $48,000,000 on December 23, 2002.
In addition, as of December 31, 2000, the Company had guaranteed $3,300,000 of
senior secured term debt of an affiliate and principal tenant (the NHL Ottawa
Senators) of this customer. Further, Covanta is obligated to purchase
$20,000,000 of the tenant's secured subordinated indebtedness on January 29,
2004, if such indebtedness has not been repaid or refinanced prior to that time.
The Company is also exploring alternatives for disposing of these operations
along with the related obligations.
Management does not expect that these arrangements will have a material adverse
effect on Covanta's Consolidated Financial Statements.
The Company is exposed to various market risks including changes in interest
rates and foreign currency exchange rates. Since approximately 73% of the
Company's debt is at fixed interest rates, the Company's exposure to
interest-rate fluctuations is not material to the Consolidated Financial
Statements. The Company has entered into financial instruments on several
occasions to reduce the impact of changes in interest rates. At December 31,
2000, Covanta had one interest rate swap agreement, which is described above and
in the Long-Term Debt and Project Debt notes to the Consolidated Financial
Statements. Covanta is also exposed to foreign currency risks due to changes in
exchange rates. Foreign countries in which the Company operates are primarily
Canada and countries in Latin America, Europe and Asia. Since the Company does
not plan to repatriate Energy foreign assets and considers foreign earnings to
be permanently invested overseas, the exposure to changes in foreign currency
exchange rates is primarily limited to cumulative translation adjustments, which
have been charged to Other Comprehensive Income (Loss). Covanta does not enter
into derivatives or other financial instruments for trading or speculative
purposes.
LIQUIDITY/CASH FLOW: Net cash used in operating activities for 2000 was
$58,700,000 compared to cash provided by operating activities in 1999 of
$109,900,000, resulting in a decrease of $168,600,000. This decrease primarily
reflects a decrease in net income from continuing operations of $49,300,000. In
addition, there was an increase in other assets of $24,100,000, an increase in
inventories of $2,900,000, a decrease of $130,500,000 in accounts payable and
accrued expenses, a decrease in severance and other employment charges of
$22,300,000, an increase in deferred tax benefits of $20,900,000, and a decrease
in other noncash charges of $10,000,000. These decreases in cash from operations
were partially offset by an increase in depreciation and amortization of
$8,900,000, an increase in the writedown of net assets of $41,100,000, a
decrease in accounts receivable of $37,000,000, and an increase in deferred
income and other liabilities of $4,600,000.
Net cash used in investing activities was $34,700,000 lower than 1999 primarily
relating to a decrease in entities purchased of $59,400,000, a decrease in
capital expenditures of $10,800,000, and an increase in proceeds from the sales
of businesses of $8,800,000 and property, plant and equipment of $8,600,000, and
a decrease in investments in and advances to joint ventures of $10,000,000.
These decreases in cash used in investing activities were partially offset by a
decrease in proceeds from the sales of marketable securities of $59,800,000 and
an investment of $5,100,000.
Net cash used in financing activities for 2000 was $268,200,000 compared to cash
provided by financing activities of $12,400,000 in 1999. This decrease of
$280,600,000 is due primarily to an increase in restricted cash of $194,100,000,
an increase in net debt payments of $123,500,000, a decrease of $4,000,000 in
the use of funds held in trust, and $8,300,000 in lower proceeds from the
exercise of stock options. Those decreases are partially offset by a reduction
in dividends paid of $46,200,000, and a reduction in the purchase of treasury
shares of $2,500,000.
In addition, cash provided from discontinued operations totaled $346,400,000 in
2000 compared to cash used in 1999 of $127,900,000. This increase in cash
provided from discontinued operations was primarily due to proceeds from the
sales of businesses and decreases in capital expenditures and acquisitions in
Aviation and Entertainment, partially offset by operating losses in those
businesses. During the year ended December 31, 2000, the Company substantially
completed the sales of its Aviation and Entertainment businesses. The following
is a list of Aviation and Entertainment businesses sold in 2000 and the gross
cash proceeds from those sales:
Description of Business Gross Proceeds
Food and Beverage/Venue Management $222,000,000
Aviation Ground Handling 99,000,000
Parks and Themed Attractions 38,000,000
Argentina Airport Privatization 27,000,000
Aviation Fixed Base Operations 15,000,000
Fairmount Racetrack 15,000,000
Dominican Republic Airport Privatization 3,000,000
Other businesses 3,000,000
------------
Total Gross Proceeds $422,000,000
============
In connection with the above sales, the Company also reduced its debt by
approximately $119,000,000. The Company also incurred $11,000,000 in costs
associated with disposing of certain other assets. In addition, in February
2001, the Company sold its Aviation Ground business in Rome, Italy for
$10,100,000.
The Company also sold certain businesses in its continuing operations. The
following is a list of those businesses sold in 2000 and the gross cash proceeds
from those sales:
Environmental Consulting and Engineering(OEES) $15,000,000
Applied Data Technology, Inc. 5,000,000
-----------
Total Gross Proceeds $20,000,000
===========
In connection with several of the above sales, the Company is also entitled to
certain deferred payments subject to certain contingencies. In addition, the
Company has contingent obligations under most of the related sale agreements in
respect of liabilities arising before and, in some cases, after the consummation
of the sale, including environmental and other liabilities.
At December 31, 2000, the Company had approximately $282,000,000 in cash and
cash equivalents, of which $7,000,000 related to net assets held for sale.
$194,000,000 of that cash was restricted and intended for debt repayment. In
addition, the Company had a revolving credit facility on which the Company had
drawn $50,000,000 at December 31, 2000. The Company had further agreed not to
incur any additional indebtedness other than that incurred under the revolving
credit facility.
The Company's credit facilities with its principal credit providers, which were
scheduled to expire on November 30, 2000, extended into 2001 while the parties
continued to negotiate the terms of a new facility. On March 14, 2001, the
Company closed its Revolving Credit and Participation Agreement (the "Master
Credit Facility") with its principal credit providers. The Master Credit
Facility consolidates most of the Company's major outstanding credit facilities
into one credit facility. Certain of the Company's lenders to its non-Energy
business elected not to participate in the consolidated credit facility, but
agreed to extend the maturity dates of those facilities through May 30, 2002 and
to conform relevant financial covenants to those under the Master Credit
Facility. The Master Credit Facility, which matures on May 30, 2002 and is
secured by substantially all of the Company's assets, provides the Company with
a credit line of approximately $146,000,000, including a sub-facility which may
only be used to provide certain letters of credit that may be required to be
posted by the Company in the event that the Company's long-term debt rating is
downgraded below investment grade. The Company may utilize the balance of the
credit facility for continued investment in existing and, to a more limited
extent, new energy projects, as well as for working capital and other general
corporate purposes. The Company's ability to make investments in new energy
projects is subject to certain conditions more fully discussed below. The
Company repaid approximately $157,000,000 of outstanding indebtedness, which
included the $50,000,000 outstanding under the prior credit facility, on the
closing date of Master Credit Facility. This debt amount was repaid from the
amount that has been on the Company's balance sheet under the heading
"Restricted Cash".
The Master Credit Facility contains several financial covenants relating to the
Company's cash position, net worth, and compliance with leverage and interest
coverage tests. The Company is restricted from incurring additional recourse
indebtedness. However, the terms of the Master Credit Facility permit the
Company to continue to finance its investments in new energy projects with the
proceeds from limited recourse project financing and subject to certain
restrictions. The Master Credit Facility also prohibits the payment of dividends
on the Company's common stock. In addition, the Company's 9 1/4% Debentures are,
to the extent required by their terms, equally and ratably secured by the
security interest granted under the Master Credit Facility.
Under the Master Credit Facility, the Company will pay a commitment fee of 0.75%
on the unused portion of the facility. In addition, at the Company's option,
funds drawn from the facility will accrue interest at the prime rate plus 0.5%
or Eurodollar rate plus 2.75%. In connection with the closing of the Master
Credit Facility, the Company incurred fees and expenses of $12,200,000.
Additional fees will be incurred prior to the expiration of this Master Credit
Facility. The Company will amortize these fees and expenses over the term of the
new facility. The fees and expenses previously incurred in connection with the
waiver of certain covenants and the extension of credit into 2001, which totaled
$18,000,000 were recognized in 2000.
The Company believes that it will derive the liquidity required for its working
capital, currently planned investment activities and other capital commitments
from operations and sales of noncore assets. The Company expects to complete the
sale of its aviation fueling business and its other remaining Aviation and
Entertainment assets in 2001. Sales of its noncore businesses are not totally
within the Company's control. The successful completion of the sales processes
for noncore assets may be impacted by general economic conditions in the markets
in which these assets must be sold, and in some instances necessary regulatory
and third party consents.
In 2000, events affecting the California energy markets resulted in delays in
payments for power sold to two utilities. As of February 28, 2001, the
outstanding receivable net of reserves and cash receipts through March 7, 2001
amounted to approximately $49,000,000 (including receivables due partnerships in
which the Company owns 50% interests). On March 27, 2001, the California Public
Utilities Commission approved a substantial rate increase and directed the
utilities to begin making current payments for power sales in April. Payment of
receivables for California power sales is likely to be obtained only in
connection with a resolution of that state's power crisis. Therefore the amounts
received and the timeliness of payment are subject to legal, regulatory and
legislative developments. Although the matter is not free of doubt, the Company
believes it will ultimately receive payment of the outstanding receivables.
Under its Master Credit Facility, the Company agreed to meet budgeted cash
flows. The Company's ability to meet these tests could be adversely affected if
payment of receivables for California power sales or completion of asset sales
are significantly delayed. However, even if payments of these receivables or
these asset sales are further delayed, the Company believes that it can meet
these covenants by seeking access to the capital markets and through scheduling
the incurrence of expenditures.
In addition, under the Master Credit Facility newly identified investment
commitments can be made once stated asset sale objectives are achieved. Although
the Company believes these sales objectives will be met in 2001, if the Company
is not permitted to make newly identified investment commitments in 2001 due to
delays in completing asset sales, it does not expect any substantial impact on
the Company's anticipated business activities in the current year or in 2002.
Further, to date the Company has been able to work with its creditors for
obligations specifically related to its California assets to assure compliance
with obligations that might have been adversely impacted by payment delay, and
it expects that it will continue to be able to do so unless the status of the
California utilities substantially deteriorates.
Under certain agreements previously reported, the Company is required to provide
letters of credit if its debt securities are no longer rated investment grade.
The Master Credit Facility provides a subfacility which the Company believes is
adequate for this purpose.
The Master Credit Facility expires in May 2002. At that time, outstanding
revolving loans, if any, under this facility must be repaid and all letters of
credit issued thereunder and other obligations must be satisfied or released.
The Company expects to be able to replace this facility on a timely basis.
In 1998, the Company's Board of Directors increased the authorization to
purchase shares of the Corporation's common stock up to a total of $200,000,000.
No shares were purchased during 2000. Through December 31, 2000, 2,223,000
shares of common stock were purchased for a total cost of $58,890,000.
In addition, the Company suspended its common stock dividend in the third
quarter of 1999.
The Company adopted Statement of Position 98-5 (SOP) "Reporting on the Costs of
Start-Up Activities" on January 1, 1999. This SOP established accounting
standards for these costs and requires that they generally be expensed as
incurred. The effect of adopting the SOP is shown as a cumulative effect of a
change in accounting principle and is reflected as a net charge to income of
$3,820,000 in 1999.
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133), is effective for the Company
as of January 1, 2001. SFAS No. 133, as amended and interpreted, establishes
accounting and reporting standards for derivative instruments, including certain
derivatives embedded in other contracts, and for hedging activities. All
derivatives are required to be recorded in the balance sheet as either an asset
or liability measured at fair value, with changes in fair value recognized
currently in earnings unless specific hedge accounting criteria is met. Special
accounting for qualifying hedges allows derivative gains and losses to offset
related results on the hedged item in the statement of income, and requires that
a company must formally document, designate and assess the effectiveness of
derivatives that receive hedge accounting.
The Company has adopted SFAS No. 133 as of January 1, 2001, and has identified
all derivatives within its scope. The adoption of SFAS No. 133 as of January 1,
2001 did not have a material impact on the results of operations of the Company
and will increase both assets and liabilities recorded on the balance sheet by
approximately $12,300,000. The $12,300,000 relates to the Company's interest
rate swap agreement that economically fixes the interest rate on certain
adjustable rate revenue bonds reported in the category "Revenue Bonds Issued by
and Prime Responsibility of Municipalities". The swap agreement was entered into
in September 1995 and expires in January 2019. Any payments made or received
under the swap agreement, including fair value amounts upon termination, are
included as an explicit component of the client community's obligation under the
related service agreement. Accordingly, all payments under the swap agreement
are a pass-through to the client community.
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
(SAB No. 101). SAB No. 101 provides guidance on the recognition, presentation,
and disclosure of revenue, and was implemented by the Company in the quarter
ending December 31, 2000. There was no impact from adoption of SAB No. 101 on
the Company's financial position or results of operations.
Any statements in this communication, which may be considered to be
"forward-looking statements," as that term is defined in the Private Securities
Litigation Reform Act of 1995, are subject to certain risk 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 Securities and Exchange Commission and more generally, general economic
conditions, including changes in interest rates and the performance of the
financial markets; changes in domestic and foreign laws, regulations, and taxes;
changes in competition and pricing environments; and regional or general changes
in asset valuations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See the Capital Investments and Commitments portion of Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS of this Form 10-K Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
Statements of Consolidated Income and Comprehensive Income for the Years
ended December 31, 2000, 1999 and 1998
Consolidated Balance Sheets - December 31, 2000 and 1999
Statements of Shareholders' Equity for the Years
ended December 31, 2000, 1999 and 1998
Statements of Consolidated Cash Flows
for the Years ended December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
Independent Auditors' Report
Report of Management
Quarterly Results of Operations
Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
for the Years ended December 31, 2000, 1999 and 1998
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the
consolidated financial statements or notes thereto.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
Covanta Energy Corporation and Subsidiaries
STATEMENTS OF CONSOLIDATED INCOME
AND COMPREHENSIVE INCOME
- -------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------
Service revenues.......................................... $ 577,564,000 $ 590,924,000 $ 594,381,000
Electricity and steam sales............................... 292,514,000 221,476,000 178,934,000
Equity in income of investees and joint ventures.......... 24,088,000 13,005,000 19,340,000
Construction revenues..................................... 69,341,000 119,455,000 44,861,000
Other sales-net........................................... 45,329,000 54,997,000 67,113,000
Other-net................................................. 12,233,000 22,171,000 19,053,000
Net gain (loss) on sale of businesses..................... (1,067,000) 5,665,000 1,471,000
-------------- -------------- --------------
Total revenues............................................ 1,020,002,000 1,027,693,000 925,153,000
-------------- -------------- --------------
Plant operating expenses.................................. 539,482,000 485,406,000 436,222,000
Construction costs........................................ 74,271,000 120,757,000 39,857,000
Depreciation and amortization............................. 110,325,000 101,470,000 88,884,000
Debt service charges...................................... 84,727,000 88,439,000 92,747,000
Other operating costs and expenses........................ 29,446,000 30,317,000 37,881,000
Costs of goods sold....................................... 41,809,000 65,460,000 57,685,000
Selling, administrative and general expenses.............. 74,416,000 97,658,000 77,261,000
Project development expenses.............................. 24,483,000 23,300,000 11,946,000
Other-net................................................. 43,445,000 21,220,000
Writedown of net assets held for sale..................... 77,240,000
-------------- -------------- --------------
Total costs and expenses.................................. 1,099,644,000 1,034,027,000 842,483,000
-------------- -------------- --------------
Consolidated operating income (loss)...................... (79,642,000) (6,334,000) 82,670,000
Interest expense-net...................................... (35,347,000) (30,697,000) (19,812,000)
-------------- -------------- --------------
Income (loss) from continuing operations before income
taxes, minority interests and the cumulative effect
of change in accounting principle.................... (114,989,000) (37,031,000) 62,858,000
Income taxes.............................................. 34,149,000 6,917,000 (21,557,000)
Minority interests........................................ (4,781,000) (6,176,000) (4,053,000)
-------------- -------------- --------------
Income (loss) from continuing operations.................. (85,621,000) (36,290,000) 37,248,000
Income (loss) from discontinued operations (net of income
taxes of: 2000, ($29,263,000); 1999, $6,000; and 1998,
$40,240,000)......................................... (143,664,000) (41,851,000) 49,722,000
Cumulative effect of change in accounting principle
(net of income taxes of $1,313,000).................. (3,820,000)
-------------- -------------- --------------
NET INCOME (LOSS)......................................... (229,285,000) (81,961,000) 86,970,000
-------------- -------------- --------------
Other Comprehensive Income, Net of Tax:
Foreign currency translation adjustments (net of
income taxes of $1,858,000 in 2000).................. (8,015,000) (4,631,000) (2,170,000)
Less: reclassification adjustment for translation
adjustments included in loss from discontinued
operations........................................... 25,323,000
Unrealized Gains (Losses) on Securities:
Unrealized holding gains (losses) arising during period... (60,000) 470,000
Less: reclassification adjustment for losses (gains)
included in net income (loss)........................ (150,000) 275,000
Minimum pension liability adjustment...................... (102,000) 409,000 (392,000)
-------------- -------------- --------------
Other comprehensive income (loss)......................... 17,056,000 (4,007,000) (2,092,000)
-------------- -------------- --------------
Comprehensive income (loss)............................... $ (212,229,000) $ (85,968,000) $ 84,878,000
============== ============== ==============
Basic Earnings Per Share:
Income (loss) from continuing operations.................. $ (1.73) $ (0.74) $ 0.74
Income (loss) from discontinued operations................ (2.90) (0.85) 1.00
Cumulative effect of change in accounting principle....... (0.08)
-------------- -------------- --------------
Net Income (Loss)......................................... $ (4.63) $ (1.67) $ 1.74
============== ============== ==============
Diluted Earnings Per Share:...............................
Income (loss) from continuing operations.................. $ (1.73) $ (0.74) $ 0.73
Income (loss) from discontinued operations................ (2.90) (0.85) 0.98
Cumulative effect of change in accounting principle....... (0.08)
-------------- -------------- --------------
Net Income (Loss)......................................... $ (4.63) $ (1.67) $ 1.71
============== ============== ==============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Covanta Energy Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------------------------------------------
ASSETS December 31, 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents................................................ $ 80,643,000 $ 101,020,000
Restricted cash.......................................................... 194,118,000
Restricted funds held in trust........................................... 96,280,000 103,662,000
Receivables (less allowances: 2000, $19,234,000 and 1999, $17,942,000)... 247,914,000 293,002,000
Inventories.............................................................. 10,767,000
Deferred income taxes.................................................... 36,514,000 36,189,000
Prepaid expenses and other current assets................................ 77,239,000 79,052,000
Net assets of discontinued operations.................................... 568,146,000
Net assets held for sale................................................. 70,614,000
------------- -------------
Total current assets................................................ 803,322,000 1,191,838,000
Property, plant and equipment-net........................................ 1,789,430,000 1,841,811,000
Restricted funds held in trust........................................... 157,061,000 166,784,000
Unbilled service and other receivables................................... 155,210,000 159,457,000
Unamortized contract acquisition costs................................... 88,702,000 94,998,000
Goodwill and other intangible assets..................................... 14,944,000 12,520,000
Investments in and advances to investees and joint ventures.............. 223,435,000 180,523,000
Other assets............................................................. 63,347,000 78,168,000
------------- -------------
Total Assets........................................................ $ 3,295,451,000 $ 3,726,099,000
============= =============
Liabilities and Shareholders' Equity
Liabilities:
Current Liabilities:
Current portion of long-term debt........................................ $ 145,289,000 $ 113,815,000
Current portion of project debt.......................................... 99,875,000 80,383,000
Accounts payable......................................................... 41,106,000 75,169,000
Accrued expenses, etc.................................................... 308,681,000 360,155,000
Deferred income.......................................................... 38,517,000 45,806,000
------------- -------------
Total current liabilities........................................... 633,468,000 675,328,000
Long-term debt........................................................... 310,126,000 344,945,000
Project debt............................................................. 1,290,388,000 1,390,832,000
Deferred income taxes.................................................... 315,931,000 380,812,000
Deferred income.......................................................... 172,050,000 182,663,000
Other liabilities........................................................ 158,992,000 127,559,000
Minority interests....................................................... 34,290,000 33,309,000
Convertible subordinated debentures...................................... 148,650,000 148,650,000
------------- -------------
Total liabilities................................................... 3,063,895,000 3,284,098,000
------------- -------------
Shareholders' Equity:
Serial cumulative convertible preferred stock, par value $1.00 per share,
authorized, 4,000,000 shares; shares outstanding: 35,582 in 2000 and
39,246 in 1999, net of treasury shares of 29,820 in 2000 and 1999........ 36,000 39,000
Common stock, par value $.50 per share; authorized, 80,000,000 shares;
outstanding: 49,645,459 in 2000 and 49,468,195 in 1999, net of treasury
shares of 4,265,115 and 4,405,103, respectively.......................... 24,823,000 24,734,000
Capital surplus.......................................................... 185,681,000 183,915,000
Notes receivable from key employees for common stock issuance............ (1,049,000) (1,049,000)
Earned surplus........................................................... 25,829,000 255,182,000
Accumulated other comprehensive loss..................................... (3,764,000) (20,820,000)
------------- -------------
Total Shareholders' Equity............................................... 231,556,000 442,001,000
------------- -------------
Total Liabilities and Shareholders' Equity............................... $ 3,295,451,000 $ 3,726,099,000
============= =============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Covanta Energy Corporation and Subsidiaries
STATEMENTS OF SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
SHARES AMOUNTS SHARES AMOUNTS SHARES AMOUNTS
- -----------------------------------------------------------------------------------------------------------------------------------
SERIAL CUMULATIVE CONVERTIBLE
PREFERRED STOCK, PAR VALUE $1.00
PER SHARE; AUTHORIZED, 4,000,000 SHARES
Balance at beginning of year............... 69,066 $ 69,000 72,038 $ 73,000 74,166 $ 75,000
Shares converted into common stock......... (3,664) (3,000) (2,972) (4,000) (2,128) (2,000)
---------- ----------- ----------- ----------- ---------- ------------
Total...................................... 65,402 66,000 69,066 69,000 72,038 73,000
Treasury shares............................ (29,820) (30,000) (29,820) (30,000) (29,820) (30,000)
---------- ----------- ----------- ----------- ---------- ------------
Balance at end of year (aggregate
involuntary liquidation value -
2000, $717,000)............................ 35,582 36,000 39,246 39,000 42,218 43,000
---------- ----------- ----------- ----------- ---------- ------------
COMMON STOCK, PAR VALUE $.50 PER
SHARE; AUTHORIZED, 80,000,000 SHARES:
Balance at beginning of year............... 53,873,298 26,937,000 53,507,952 26,754,000 53,430,246 26,715,000
Exercise of stock options.................. 155,801 78,000 65,000 33,000
Shares issued for acquisition.............. 15,390 8,000 191,800 96,000
Conversion of preferred shares............. 21,886 11,000 17,745 9,000 12,706 6,000
---------- ----------- ----------- ----------- ---------- ------------
Total...................................... 53,910,574 26,956,000 53,873,298 26,937,000 53,507,952 26,754,000
---------- ----------- ----------- ----------- ---------- ------------
Treasury shares at beginning of year ...... 4,405,103 2,203,000 4,561,963 2,281,000 3,135,123 1,568,000
Purchase of treasury shares................ 102,000 51,000 2,121,100 1,060,000
Issuance of restricted stock............... (139,988) (70,000)
Exercise of stock options.................. (258,860) (129,000) (694,260) (347,000)
---------- ----------- ----------- ----------- ---------- ------------
Treasury shares at end of year............. 4,265,115 2,133,000 4,405,103 2,203,000 4,561,963 2,281,000
---------- ----------- ----------- ----------- ---------- ------------
Balance at end of year..................... 49,645,459 24,823,000 49,468,195 24,734,000 48,945,989 24,473,000
---------- ----------- ----------- ----------- ---------- ------------
CAPITAL SURPLUS:
Balance at beginning of year............... 183,915,000 173,413,000 212,383,000
Exercise of stock options.................. 8,061,000 16,355,000
Issuance of restricted stock............... 1,602,000
Shares issued for acquisition.............. 172,000 4,904,000
Purchase of treasury shares................ (2,458,000) (55,321,000)
Conversion of preferred shares............. (8,000) (5,000) (4,000)
------------ ----------- ------------
Balance at end of year..................... 185,681,000 183,915,000 173,413,000
------------ ----------- ------------
Notes receivable from key employees for
common stock issuance...................... (1,049,000) (1,049,000)
------------ ----------- ------------
EARNED SURPLUS:
Balance at beginning of year............... 255,182,000 367,984,000 343,237,000
Net income (loss).......................... (229,285,000) (81,961,000) 86,970,000
------------ ----------- ------------
Total...................................... 25,897,000 286,023,000 430,207,000
------------ ----------- ------------
Preferred dividends-per share 2000, $1.875;
1999 and 1998, $3.35....................... 68,000 137,000 144,000
Common Dividends-per share 2000, zero;
1999, $.625; and 1998, $1.25............... 30,704,000 62,079,000
------------ ----------- ------------
Total dividends............................ 68,000 30,841,000 62,223,000
------------ ----------- ------------
Balance at end of year..................... 25,829,000 255,182,000 367,984,000
------------ ----------- ------------
CUMULATIVE TRANSLATION
ADJUSTMENT-NET............................. (3,355,000) (20,663,000) (16,032,000)
------------ ----------- ------------
MINIMUM PENSION LIABILITY ADJUSTMENT....... (409,000) (307,000) (716,000)
------------ ----------- ------------
NET UNREALIZED GAIN (LOSS) ON
SECURITIES AVAILABLE FOR SALE.............. 150,000 (65,000)
------------ ----------- ------------
TOTAL SHAREHOLDERS' EQUITY................. $ 231,556,000 $ 442,001,000 $ 549,100,000
=========== =========== ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Covanta Energy Corporation and Subsidiaries
STATEMENTS OF CONSOLIDATED CASH FLOWS
- -------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income (loss)........................................... $(229,285,000) $ (81,961,000) $ 86,970,000
Adjustments to Reconcile Net Income (Loss) to Net Cash
(Used in) Provided by Operating Activities of Continuing
Operations:
Loss (Income) from discontinued operations.................. 143,664,000 41,851,000 (49,722,000)
Depreciation and amortization............................... 110,325,000 101,470,000 88,884,000
Deferred income taxes....................................... (37,868,000) (16,944,000) 18,820,000
Cumulative effect of change in accounting principle......... 3,820,000
Write-down of assets........................................ 77,240,000 36,150,000
Severance and other employment charges...................... 10,271,000 32,602,000
Other....................................................... (13,412,000) (3,395,000) (17,504,000)
Management of Operating Assets and Liabilities:
Decrease (Increase) in Assets:
Receivables................................................. 11,651,000 (25,365,000) (1,522,000)
Inventories................................................. (722,000) 2,208,000 1,132,000
Other assets................................................ (5,309,000) 18,834,000 (25,110,000)
Increase (Decrease) in Liabilities:
Accounts payable............................................ (27,082,000) 19,572,000 (7,584,000)
Accrued expenses............................................ (47,925,000) 35,921,000 27,799,000
Deferred income............................................. (8,901,000) (3,698,000) 192,137,000
Other liabilities........................................... (41,386,000) (51,214,000) 12,887,000
------------ ------------ ------------
Net cash (used in) provided by operating activities
of continuing operations.................................... (58,739,000) 109,851,000 327,187,000
------------ ------------ ------------
Cash Flows From Investing Activities:
Entities purchased, net of cash acquired.................... (59,436,000) (900,000)
Proceeds from sale of marketable securities available
for sale.................................................... 6,560,000 66,355,000 14,232,000
Proceeds from sale of businesses and other.................. 19,354,000 10,560,000 225,000
Proceeds from sale of property, plant, and equipment........ 9,814,000 1,175,000 181,000
Proceeds from sale of investment............................ 5,138,000
Investments in facilities .................................. (30,051,000) (50,749,000) (18,847,000)
Other capital expenditures.................................. (24,914,000) (15,048,000) (17,675,000)
Decrease in other receivables............................... 3,963,000 820,000 2,865,000
Investments in marketable securities available for sale..... (1,815,000) (58,917,000)
Distributions from investees and joint ventures............. 9,459,000 12,459,000 8,479,000
Increase in investments in and advances to investees
and joint ventures.......................................... (34,032,000) (43,997,000) (32,458,000)
------------ ------------ ------------
Net cash used in investing activities of continuing
operations................................................. (39,847,000) (74,538,000) (102,815,000)
------------ ------------ ------------
Cash Flows From Financing Activities:
Borrowings for Energy facilities............................ 92,643,000 150,894,000 506,518,000
Other new debt.............................................. 2,378,000 90,508,000 34,525,000
Payment of debt............................................. (182,228,000) (205,089,000) (601,396,000)
Dividends paid.............................................. (68,000) (46,241,000) (62,541,000)
Purchase of treasury shares................................. (2,509,000) (56,381,000)
Decrease in funds held in trust............................. 16,991,000 21,019,000 40,415,000
Increase in restricted cash................................. (194,118,000)
Proceeds from exercise of stock options..................... 8,268,000 16,735,000
Other....................................................... (3,800,000) (4,412,000) (5,922,000)
------------ ------------ ------------
Net cash (used in) provided by financing activities
of continuing operations.................................... (268,202,000) 12,438,000 (128,047,000)
------------ ------------ ------------
Net cash provided by (used in) discontinued operations...... 346,411,000 (127,900,000) (59,880,000)
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS................................................. (20,377,000) (80,149,000) 36,445,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 101,020,000 181,169,000 144,724,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 80,643,000 $ 101,020,000 $ 181,169,000
============ ============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Covanta Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Principles of Consolidation, Combinations, etc.: The Consolidated Financial
Statements include the accounts of Covanta Energy Corporation and its
Subsidiaries (Covanta or the Company). In March 2001, the Company changed its
name from Ogden Corporation to Covanta Energy Corporation. Companies in which
Covanta has equity investments of 50% or less are accounted for using the
"Equity Method," if appropriate. All intercompany transactions and balances have
been eliminated.
On September 17, 1999, the Company announced that it intended to sell its
Aviation and Entertainment businesses and on September 29, 1999, the Board of
Directors of the Company formally adopted a plan to sell the operations of its
Aviation and Entertainment units which were previously reported as separate
business segments. As a result of the adoption of this plan, the financial
results have been reclassified in the accompanying Financial Statements to show
these operations as discontinued and the prior periods have been restated (see
Note 2).
At December 31, 2000, the Company had substantially completed its sales of the
discontinued operations and has reclassified the remaining unsold Aviation and
Entertainment businesses as net assets held for sale in the accompanying
December 31, 2000 financial statements. These non-core businesses are reported
in the Other segment at December 31, 2000. In addition, the Company reclassified
its other non-core subsidiaries, Datacom, Inc. (Datacom), a contract
manufacturing company located in Mexico, and Compania General de Sondeos, S.A.
(CGS), an environmental and infrastructure company in Spain, to include these
businesses in net assets held for sale. Datacom and CGS are reported in the
Other segment and Energy segment, respectively. Also, during 2000, the Company
sold other non-core businesses including Applied Data Technology, Inc. (ADTI)
and its environmental consulting subsidiary.
In 1999, in transactions accounted for as purchases, Covanta acquired the shares
of a Philippine diesel-fired power plant, a 74% interest in a Thailand gas-fired
facility, a 90% interest in a Thailand company that operates and maintains
several power plant facilities, the unowned 50% partnership interests in the
Heber Geothermal Company, which owns a geothermal power plant in California, and
Heber Field Company in California for a total cost of $58,500,000. The
operations of these companies have been included in the accompanying Financial
Statements from the dates of acquisition. If Covanta had acquired these
companies at January 1, 1998, consolidated revenues, net income (loss) and
diluted earnings (loss) per share would have been $1,004,900,000, ($85,568,000)
and ($1.74) for 1999 and $919,259,000, $81,633,000 and $1.60 for 1998.
In 1998, in transactions accounted for as purchases, Covanta acquired the shares
of a civil construction company for a total cost of $900,000. The operations of
this company have been included in the accompanying financial statements from
date of acquisition. If Covanta had acquired this company at January 1, 1998,
consolidated revenues, net income and diluted earnings per share would have been
$897,524,000, $87,406,000 and $1.72 for 1998.
In connection with an earlier restructuring plan, the Binghamton, New York and
Cork, Ireland operations of Datacom were sold in January 1998.
Use of Estimates: The preparation of consolidated Financial Statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the Financial Statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. Significant estimates include management's estimate
of the carrying values of its discontinued operations and assets held for sale,
estimated useful lives on long-lived assets, allowances for doubtful accounts
receivable, reserves for obsolete inventory, and liabilities for workers
compensation, severance, restructuring and certain litigation.
Cash and Cash Equivalents: Cash and cash equivalents include all cash balances
and highly liquid investments having original maturities of three months or
less.
Restricted Cash: In accordance with the Company's revolving credit agreement in
effect at December 31, 2000, certain amounts of cash at December 31, 2000 raised
from asset sales are restricted as to their use. These funds are restricted
primarily to repay current debt or repay certain other financial obligations. In
March 2001, the Company entered into a new Revolving Credit and Participation
Agreement (see Note 14). In connection with that Agreement, the Company was
required to paydown certain debt totaling approximately $157,000,000 (including
approximately $26,000,000 classified in Net Assets Held for Sale on the December
31, 2000 Consolidated Balance Sheet, see Note 3) using this restricted cash (see
Note 12).
Marketable Securities: Marketable securities are classified as available for
sale and recorded at current market value. Net unrealized gains and losses on
marketable securities available for sale are credited or charged to Other
Comprehensive Income (see Note 5).
Contracts and Revenue Recognition: Service revenues primarily include only the
fees for cost-plus contracts and other types of contracts. Both service revenues
and operating expenses exclude reimbursed expenditures of zero, zero and
$1,800,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
Subsidiaries engaged in governmental contracting recognize revenues from
cost-plus-fixed-fee contracts on the basis of direct costs incurred plus
indirect expenses and the allocable portion of the fixed fee. Revenues under
time and material contracts are recorded at the contracted rates as the labor
hours and other direct costs are incurred. Revenues under fixed-price contracts
are recognized on the basis of the estimated percentage of completion of
services rendered. Service revenues also include the fees earned under contracts
to operate and maintain energy facilities and to service the facilities' debt,
with additional fees earned based on excess tonnage processed and energy
generation. Service revenues also represent fees for environmental consulting
and engineering services rendered under various contracts and the operation of
and maintenance of water and wastewater facilities. Revenue from the sale of
electricity and steam are earned at energy facilities and are recorded based
upon output delivered and capacity provided at rates specified under contract
terms or prevailing market rates. A majority of the Company's power plants rely
primarily on one power sales agreement with a single customer for the majority
of their electricity sales revenues.
Long-term unbilled service receivables related to energy operations are
discounted in recognizing the present value for services performed currently.
Such unbilled receivables amounted to $147,850,000 and $151,257,000 at December
31, 2000 and 1999, respectively. Subsidiaries engaged in long-term construction
contracting record income on the percentage-of-completion method of accounting
and recognize income as the work progresses. Anticipated losses on contracts are
recognized as soon as they become known.
Also, other revenues include amounts related to the settlement of certain legal
matters.
Inventories: Inventories, consisting primarily of raw materials, work in
progress and finished goods, are recorded principally at the lower of first-in,
first-out cost or market.
Property, Plant, and Equipment: Property, plant, and equipment is stated at
cost. For financial reporting purposes, depreciation is provided by the
straight-line method over the estimated useful lives of the assets, which range
generally from three years for computer equipment to 50 years for
waste-to-energy facilities. Accelerated depreciation is generally used for
Federal income tax purposes. Leasehold improvements are amortized by the
straight-line method over the terms of the leases or the estimated useful lives
of the improvements as appropriate. Landfills are amortized based on the
quantities deposited into each landfill compared to the total estimated capacity
of such landfill. Property, plant, and equipment is periodically reviewed to
determine recoverability by comparing the carrying value to expected future cash
flows.
Contract Acquisition Costs: Costs associated with the acquisition of specific
contracts are amortized over their respective contract terms.
Bond Issuance Costs: Costs incurred in connection with the issuance of revenue
bonds are amortized over the terms of the respective debt issues.
Restricted Funds: Restricted funds represent proceeds from the financing and
operations of energy facilities. Funds are held in trust and released as
expenditures are made or upon satisfaction of conditions provided under the
respective trust agreements.
Deferred Financing Costs: Costs incurred in connection with obtaining financing
are capitalized and amortized over the terms of the related financings.
Project Development Costs: The Company capitalizes project development costs
once it is determined that it is probable that such costs will be realized
through the ultimate construction of an energy plant. These costs include
outside professional services, permits and other third party costs directly
related to the development of a specific new project. Upon the start-up of plant
operations or the completion of an acquisition, these costs are generally
transferred to property, plant and equipment and are amortized over the
estimated useful life of the related project. Capitalized project development
costs are charged to expense when it is determined that the related project is
impaired.
Goodwill: Goodwill is amortized by the straight-line method over periods ranging
from 15 to 25 years.
Interest Rate Swap Agreements: Amounts received or paid relating to swap
agreements during the year are credited or charged to interest expense or debt
service charges, as appropriate.
Income Taxes: Covanta files a consolidated Federal income tax return, which
includes all eligible United States subsidiary companies. Foreign subsidiaries
are taxed according to regulations existing in the countries in which they do
business. Provision has not been made for United States income taxes on
distributions, which may be received from foreign subsidiaries that are
considered to be permanently invested overseas.
Long-Lived Assets: Covanta accounts for the impairment of long-lived assets to
be held and used by evaluating the carrying value of its long-lived assets in
relation to the operating performance and future undiscounted cash flows of the
underlying businesses when indications of impairment are present. Long-lived
assets to be disposed of are evaluated in relation to the estimated fair value
of such assets less costs to sell (see Note 3).
Foreign Currency Translation: For foreign operations assets and liabilities are
translated at year-end exchange rates, and revenues and expenses are translated
at the average exchange rates during the year. Gains and losses resulting from
foreign currency translation are included as a component of other comprehensive
income. For subsidiaries whose functional currency is deemed to be other than
the U.S. dollar, translation adjustments are included as a separate component of
other comprehensive income and shareholders' equity. Currency transactions gains
and losses are recorded in income.
Earnings per Share: Basic Earnings (Loss) per Share is represented by net income
(loss) available to common shareholders divided by the weighted-average number
of common shares outstanding during the period. Diluted earnings (loss) per
share reflects the potential dilution that could occur if securities or stock
options were exercised or converted into common stock during the period, if
dilutive (see Note 25).
New Accounting Pronouncements: The American Institute of Certified Public
Accountants (AICPA) issued Statement of Position (SOP) 98-5 "Reporting on the
Costs of Start-Up Activities" in April 1998. This SOP established accounting
standards for these costs and requires that they generally be expensed as
incurred. Covanta adopted SOP 98-5 on January 1, 1999. The effect of adopting
the SOP is shown as a cumulative effect of a change in accounting principle and
is reflected as a net charge to income of $3,820,000 in 1999.
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133), is effective for the Company
as of January 1, 2001. SFAS No. 133, as amended and interpreted, establishes
accounting and reporting standards for derivative instruments, including certain
derivatives embedded in other contracts, and for hedging activities. All
derivatives are required to be recorded in the balance sheet as either an asset
or liability measured at fair value, with changes in fair value recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows derivative gains and losses to offset
related results on the hedged item in the statement of income, and requires that
a company must formally document, designate, and assess the effectiveness of
derivatives that receive hedge accounting.
The Company has adopted SFAS No. 133 as of January 1, 2001, and has identified
all derivatives within its scope. The adoption of SFAS No. 133 as of January 1,
2001 did not have a material impact on the results of operations of the Company
and will increase both assets and liabilities recorded on the balance sheet by
approximately $12,300,000. Accordingly, all payments under the swap agreement
are a pass-through to the client community.
Reclassification: Certain amounts, including various revenues and expenses, have
been reclassified in the accompanying financial statements to conform with the
2000 presentation which is more tailored for a stand-alone Energy company.
2. Discontinued Operations
As a result of the adoption of the plan to discontinue the operations of the
Entertainment and Aviation businesses, operating results of those businesses are
now reported as Discontinued Operations. Results for the two segments previously
reported under the segment headings "Energy" and "Other" are reported as
Continuing Operations and will continue to be reported under those headings.
At December 31, 2000, the Company had substantially completed its sales of the
discontinued operations and reclassified the remaining Aviation and
Entertainment businesses in the accompanying December 31, 2000 Consolidated
Balance Sheet to show these businesses as net assets held for sale (see Note 3).
Revenues and income (loss) from discontinued operations (expressed in thousands
of dollars) were as follows:
2000 1999 1998
- --------------------------------------------------------------------------------
Revenues $ 318,252 $ 809,752 $ 795,436
----------- ----------- ----------
Operating income (loss) $ (173,460) $ (35,183) $ 87,203
----------- ----------- ----------
Income (Loss) Before Income Taxes
And Minority Interests $ (172,620) $ (40,169) $ 90,172
Income Tax Provision (Benefit) (29,263) 6 40,240
Minority Interests 307 1,676 210
----------- ----------- ----------
Income (Loss) from
Discontinued Operations $ (143,664) $ (41,851) $ 49,722
=========== =========== ==========
Net assets of discontinued operations at December 31, 1999 (expressed in
thousands of dollars) were as follows:
Current Assets $ 221,200
Property, Plant and Equipment - Net 375,211
Other Assets 336,700
Notes Payable and Current Portion of Long-Term Debt (51,081)
Other Current Liabilities (142,327)
Long-Term Debt (108,681)
Other Liabilities (62,876)
---------
Net Assets of Discontinued Operations $ 568,146
=========
3. Net Assets Held for Sale
All non-core businesses, including remaining Entertainment and Aviation
businesses previously shown as discontinued operations, were reclassified as Net
Assets Held for Sale in the accompanying December 31, 2000 Consolidated Balance
Sheet. Those businesses include: the venue management businesses at the
Arrowhead Pond Arena in Anaheim, California, and the Corel Centre near Ottawa,
Canada; the Company's interest in certain Entertainment assets in Argentina; its
aviation fueling business; and the Company's interests in aviation businesses in
Spain, Italy and Colombia. The Aviation business in Italy was sold in February,
2001. Other non-core businesses included in Net Assets Held for Sale are Datacom
and CGS, totaling net assets of $13,400,000. The Company expects to sell these
remaining businesses during 2001. Net Assets Held for Sale at December 31, 2000
(expressed in thousands of dollars) were as follows:
Current Assets $ 73,237
Property, Plant and Equipment - Net 19,939
Other Assets 73,310
Notes Payable and Current Portion of Long-Term Debt (28,651)
Other Current Liabilities (52,053)
Long-Term Debt (670)
Other Liabilities (14,498)
--------
Net Assets Held for Sale $ 70,614
========
With the exception of the operations of Datacom and CGS, the operations of these
businesses are included in Discontinued Operations for the years ended December
31, 2000, 1999 and 1998. At December 31, 2000, the Company applied the
provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and For Long-Lived Assets to be Disposed Of" to the Net Assets Held for Sale.
SFAS No. 121 requires assets held for sale be valued on an asset by asset basis
at the lower of carrying amount or fair value less costs to sell. In applying
those provisions, Covanta management considered recent appraisals, valuations,
offers and bids, and its estimate of future cash flows related to those
businesses. As a result, the Company recorded a pre-tax loss of $77,240,000.
This amount relates entirely to businesses previously classified in the
Entertainment segment. This amount is shown in Writedown of Net Assets Held for
Sale in the accompanying 2000 Statement of Consolidated Income and Comprehensive
Income. As of December 31, 2000, as noted above, these assets were reclassified
and the valuation provision provided against them during 2000 was reversed in
discontinued operations.
In accordance with the provisions of SFAS No. 121, the assets included in Net
Assets Held for Sale will not be depreciated commencing January 1, 2001.
4. Investments In And Advances to Investees
The Company is party to joint venture agreements through which the Company has
equity investments in several operating projects and certain projects that are
expected to become operational during the next two years. The joint venture
agreements generally provide for the sharing of operational control as well as
voting percentages. The Company records its share of earnings from its equity
investees on a pre-tax basis and records the Company's share of the investee's
income taxes in income tax expense.
In 2000, the Company acquired an ownership interest in a 106 MW low sulphur
furnace oil based diesel engine power plant located in the State of Tamil Nadu,
India. The Company's ownership interest is expected to reach 74.8% by commercial
operation date. This project is under construction and commercial operation is
expected in the fourth quarter of 2001. The Company's estimated investment in
this project is approximately $28,500,000, of which $14,200,000 was paid in
2000.
In 2000, the Company acquired a 13% ownership interest in a 15 MW mass burn
waste-to-energy project near the City of Trezzo Sull' Lombardy Region, Italy.
This project is currently under construction and commercial operation is
expected in the first quarter of 2002. The Company's estimated investment in
this project is $3,500,000 of which $3,300,000 was paid in 2000.
The Company is a party in a joint venture formed to design, construct, own and
operate a coal-fired electricity generation facility in Quezon province of The
Philippines ("Quezon Joint Venture"). The Company owns 26.125% of, and has
committed to invest 27.5% of the total equity in, the Quezon Joint Venture (See
Notes 12 and 26). This project commenced commercial operations in 2000. The
Company's investment in the Quezon Joint Venture at December 31, 2000 and 1999
was approximately $70,700,000 and $62,000,000, respectively
In addition, the Company owns interests of up to 50% in 13 other affiliates
which principally own and operate, or are developing, energy facilities. The
Company's investments in and advances to those affiliates were approximately
$135,200,000 at December 31, 2000.
The aggregate carrying value of the investments in and advances to investees of
$223,400,000 is less than the Company's equity in the underlying net assets of
those investees by approximately $9,700,000 at December 31, 2000. This
difference is comprised primarily of negative goodwill, which is being amortized
to net income over periods of up to 22 years.
5. Investments in Marketable Securities Available for Sale
At December 31, 2000 and 1999, marketable equity and debt securities held for
current and noncurrent uses, such as nonqualified pension liabilities and
deferred compensation plan, are classified as current assets and long-term
assets (see Note 9), respectively. Net unrealized gains and losses on marketable
equity and debt securities held for current and noncurrent uses are charged to
Other Comprehensive Income.
Marketable securities at December 31, 2000 and 1999 (expressed in thousands of
dollars), include the following:
2000 1999
- -----------------------------------------------------------------------------------
Market Market
Value Cost Value Cost
- -----------------------------------------------------------------------------------
Classified as Noncurrent Assets:
Mutual and bond funds $ 213 $ 213 $6,777 $6,627
======= ======= ====== ======
At December 31, 2000 and 1999, unrealized gains were zero and $150,000,
respectively. The deferred tax benefits on these gains at both December 31, 2000
and 1999 were zero, resulting in a net (credit) of zero and ($150,000),
respectively, to Accumulated Other Comprehensive Loss.
Proceeds, realized gains and realized losses from the sales of securities
classified as available for sale for the years ended December 31, 2000, 1999,
and 1998, were $6,560,000, $146,000 and zero; $66,355,000, $743,000 and
$1,963,000; and $14,232,000, zero, and zero; respectively. For the purpose of
determining realized gains and losses, the cost of securities sold was based on
specific identification.
6. Unbilled Service and Other Receivables
Unbilled service and other receivables (expressed in thousands of dollars)
consisted of the following:
2000 1999
- -----------------------------------------------------------------------
Unbilled service receivables $147,850 $151,257
Notes receivable 3,650 8,200
Other 3,710
-------- --------
Total $155,210 $159,457
======== ========
Long-term unbilled service receivables are for services, which have been
performed for municipalities, that are due by contract at a later date and are
discounted in recognizing the present value of such services. Current unbilled
service receivables, which are included in Receivables, amounted to $61,117,000
and $49,305,000 at December 31, 2000 and 1999, respectively. Long-term notes
receivable primarily represent notes received relating to the sale of noncore
businesses.
7. Restricted Funds Held in Trust
Funds held by trustees include debt service reserves for payment of principal
and interest on project debt; deposits of revenues received; lease reserves for
lease payments under operating leases; and proceeds received from financing the
construction of energy facilities. Such funds are invested principally in United
States Treasury bills and notes and United States governmental agency
securities.
Fund balances (expressed in thousands of dollars) were as follows:
2000 1999
- -----------------------------------------------------------------------------------------------
Current Noncurrent Current Noncurrent
- -----------------------------------------------------------------------------------------------
Debt service funds $42,981 $122,801 $56,624 $121,929
Revenue funds 13,765 23,932
Lease reserve funds 3,117 18,247 4,112 22,774
Construction funds 1,203 1,074
Other funds 35,214 16,013 17,920 22,081
------- -------- -------- --------
Total $96,280 $157,061 $103,662 $166,784
======= ======== ======== ========
8. Property, Plant, and Equipment
Property, plant, and equipment (expressed in thousands of dollars) consisted of
the following:
2000 1999
- ---------------------------------------------------------------------------------------------------------
Land $ 8,059 $ 8,111
Energy facilities 2,047,315 2,112,057
Buildings and improvements 135,733 111,490
Machinery and equipment 121,451 121,587
Landfills 13,741 12,955
Construction in progress 48,940 49,836
---------- ----------
Total 2,375,239 2,416,036
Less accumulated depreciation and amortization 585,809 574,225
---------- ----------
Property, plant, and equipment - net $1,789,430 $1,841,811
========== ==========
9. Other Assets
Other assets (expressed in thousands of dollars) consisted of the following:
2000 1999
- ---------------------------------------------------------------------------------------------------------
Unamortized bond issuance costs $33,941 $35,152
Deferred financing costs 8,329 11,858
Noncurrent securities available for sale 213 6,777
Other 20,864 24,381
------- -------
Total $63,347 $78,168
======= =======
10. Accrued Expenses, etc.
Accrued expenses, etc. (expressed in thousands of dollars), consisted of the following:
2000 1999
- ---------------------------------------------------------------------------------------------------------
Operating expenses $87,532 $117,773
Severance and employment litigation settlement 32,862 50,532
Insurance 17,001 24,476
Debt service charges and interest 29,315 31,008
Municipalities' share of energy revenues 29,481 28,160
Payroll 17,222 14,763
Payroll and other taxes 19,439 17,200
Lease payments 18,308 15,193
Construction costs 11,636
Pension and profit sharing 8,724 8,391
Other 48,797 41,023
-------- -------
Total $308,681 $360,155
======== ========
11. Deferred Income
Deferred income (expressed in thousands of dollars) consisted of the following:
2000 1999
- ----------------------------------------------------------------------------------------------------
Current Noncurrent Current Noncurrent
- ----------------------------------------------------------------------------------------------------
Power sales agreement prepayment $ 9,001 $156,307 $ 9,001 $165,311
Sale and leaseback arrangements 1,523 15,743 1,523 17,352
Advance billings to municipalities 10,419 6,733
Other 17,574 28,549
-------- -------- -------- --------
Total $ 38,517 $172,050 $ 45,806 $182,663
======== ======== ======== ========
In 1998, Covanta received a payment for future energy deliveries required under
a power sales agreement. This prepayment is being amortized over the life of the
agreement. The gain from sale and leaseback transactions consummated in 1986 and
1987 were deferred and are being amortized as a reduction of rental expense over
the respective lease terms. Advance billings to various customers are billed one
or two months prior to performance of service and are recognized as income in
the period the service is provided.
12. Long-Term Debt
Long-term debt (expressed in thousands of dollars) consisted of the following:
2000 1999
- -------------------------------------------------------------------------------
Adjustable-rate revenue bonds due 2014-2024 $124,755 $124,755
9.25% debentures due 2022 100,000 100,000
Revolving credit facility 50,000
Other long-term debt 85,371 70,190
-------- --------
Total $310,126 $344,945
======== ========
The adjustable-rate revenue bonds are adjusted periodically to reflect current
market rates for similar issues, generally with an upside cap of 15%. The
average rates for this debt were 4.03% and 3.21% in 2000 and 1999, respectively.
At December 31, 2000 the Company had drawn the entirety of its $50,000,000
revolving credit facility. The interest rate on this facility at December 31,
2000 was 6.975% and was based on the 30 day LIBOR plus 0.225% (see Note 14). The
Company also had $63,671,000 (1999, $61,793,000) of bank debt related to the
Company's investment in the Quezon Joint Venture. The loans bear interest at the
current LIBOR plus .45% (6.98% at December 31, 2000). In connection with the
closing of the Revolving Credit and Participation Agreement, this debt and the
revolving credit facility were paid in March 2001 and, therefore, are classified
in current portion of long-term debt in the accompanying December 31, 2000
Consolidated Balance Sheet.
Other long-term debt includes an obligation for $28,423,000, representing the
equity component of a sale and leaseback arrangement relating to an energy
facility. This arrangement is accounted for as a financing, has an effective
interest rate of 5%, and extends through 2017. Other long-term debt also
includes $22,450,000 resulting from the sale of limited partnership interests in
and related tax benefits of an energy facility, which has been accounted for as
a financing for accounting purposes. This obligation has an effective interest
rate of 10% and extends through 2015.
In connection with an acquisition, the Company issued long-term notes payable
totaling $10,105,000 at December 31, 2000 which bear interest at 10%. Effective
March 14, 2001, in connection with the closing of the Revolving Credit and
Participation Agreement, these notes were restructured and their term was
extended until May 2002. The remaining other long-term debt of $24,392,000
consists primarily of notes payable, loans and capital leases associated with
the acquisition of Energy assets. These instruments bear interest at rates
ranging from 6.0% to 8.6% with various maturity dates.
The Company's 9 1/4% Debentures are, to the extent required by their terms,
equally and ratably secured by the security interests granted under the
Company's Revolving Credit and Participation Agreement (see Note 14).
In 1998, Covanta also had an interest rate swap agreement to convert its
fixed-rate $100,000,000 9.25% debentures into variable-rate debt, which expired
December 16, 1998. Amounts paid on this swap agreement amounted to $100,000 for
1998, and was charged to interest expense. The effect on Covanta's
weighted-average borrowing rate for 1998 was an increase of .04%. The Company
recorded total interest expense and total interest income of $44,843,000 and
$9,496,000, $35,487,000 and $4,790,000, and $32,597,000 and $12,785,000 for the
years ended December 31, 2000, 1999 and 1998, respectively.
The maturities on long-term debt (expressed in thousands of dollars) at December
31, 2000 were as follows:
2001 $145,289
2002 33,517
2003 202
2004 215
2005 228
Later years 275,964
--------
Total 455,415
Less current portion 145,289
--------
Total long-term debt $310,126
========
13. Project Debt
Project debt (expressed in thousands of dollars) consisted of the following:
2000 1999
- --------------------------------------------------------------------------------------------------------------
Revenue Bonds Issued by and Prime Responsibility of Municipalities:
3.5-6.75% serial revenue bonds due 2002 through 2011 $ 414,605 $ 442,205
5.1-7.0% term revenue bonds due 2002 through 2015 330,869 412,838
Adjustable-rate revenue bonds due 2006 through 2013 136,475 80,220
---------- ----------
Total 881,949 935,263
---------- ----------
Revenue Bonds Issued by Municipal Agencies with Sufficient Service Revenues
Guaranteed by Third Parties:
5.0-8.9% serial revenue bonds due 2002 through 2008 78,420 90,666
---------- ----------
Other Revenue Bonds:
4.6-5.5% serial revenue bonds due 2002 through 2015 92,795 98,720
5.5-6.7% term revenue bonds due 2014 through 2019 68,020 68,020
---------- ----------
Total 160,815 166,740
---------- ----------
Other project debt 169,204 198,163
---------- ----------
Total long-term project debt $1,290,388 $1,390,832
========== ==========
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 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
Corporation is limited to the waste-to-energy facilities and restricted funds
pledged to secure such obligations. The category, "Revenue Bonds Issued by
Municipal Agencies with Sufficient Service Revenues Guaranteed by Third
Parties," includes bonds issued to finance two facilities for which contractual
obligations of third parties to deliver waste ensure sufficient revenues to pay
debt service, although such debt service is not an explicit component of the
third parties' service fee obligations.
The category "Other Revenue Bonds" includes bonds issued to finance one facility
for which current contractual obligations of third parties to deliver waste
provide sufficient revenues to pay debt service related to that facility through
2011, although such debt service is not an explicit component of the third
parties' service fee obligations. The Company anticipates renewing such
contracts prior to 2011.
Payment obligations for the project debt associated with waste-to-energy
facilities are limited recource to the operating subsidiary and nonrecourse to
the Company, subject to construction and operating performance guarantees and
commitments. These obligations are secured by the revenues pledged under various
indentures and are collateralized principally by a mortgage lien and a security
interest in each of the respective waste-to-energy facilities and related
assets. At December 31, 2000, such revenue bonds were collateralized by
property, plant and equipment with a net carrying value of $1,697,100,000, and
restricted funds held in trust of approximately $219,000,000 (see Note 7).
The interest rates on adjustable-rate revenue bonds are adjusted periodically
based on current municipal-based interest rates. The average adjustable rate for
such revenue bonds was 3.86% and 5.5% in 2000 and 1999, respectively.
Other project debt includes an obligation of a special-purpose limited
partnership acquired by special-purpose subsidiaries of Covanta and represents
the lease of a geothermal power plant, which has been accounted for as a
financing. This obligation, which amounted to $43,558,000 at December 31, 2000,
has an effective interest rate of 5.3% and extends through 2008 with options to
renew for additional periods and has a fair market value purchase option at the
conclusion of the initial lease term. Payment obligations under this lease
arrangement are limited to assets of the limited partnership and revenues
derived from a power sales agreement with a third party, which are expected to
provide sufficient revenues to make rental payments. Such payment obligations
are secured by all the assets, revenues, and other benefits derived from the
geothermal power plant, which had a net carrying value of approximately
$74,200,000 at December 31, 2000. Other project debt also includes $10,161,000
due to a financial institution as part of the refinancing of project debt in the
category "Revenue Bonds Issued by and Prime Responsibility of Municipalities."
The debt service associated with this loan is included as an explicit component
of the client community's obligation under the related service agreement. A
portion of the funds was retained in the Company's restricted funds and is
loaned to the community each month to cover the community's monthly service
fees. The Company's repayment for the other part of the loan is limited to the
extent repayment is received from the client community. This obligation has an
effective interest rate of 7.06% and extends through 2005.
Other project debt includes $22,421,000 due to financial institutions which
bears interest at an adjustable rate that was the two-month LIBOR rate plus 1.3%
(7.83% at December 31, 2000). The debt extends through 2005 and is secured by
substantially all the assets of a subsidiary that owns various power plants in
the United States, which had a carrying value of approximately $118,600,000 at
December 31, 2000 and a credit enhancement of $10,000,000.
Other project debt includes $59,631,000 due to banks of which $48,740,000 is
denominated in U.S. dollars and $10,891,000 is denominated in Thai Baht. This
debt relates to a Thailand gas-fired energy facility. The U.S. dollar debt bears
interest at the three-month LIBOR plus 3.5% (9.9% at December 31, 2000) and the
Thai Baht debt bears an interest rate of Thai bank MLR plus 1.75%. The MLR,
which is the melded Maximum Lending Rate of the consortium of Thai banks that
has lent to the project, was approximately 8.0% at December 31, 2000. The debt
extends through 2012, is nonrecourse to Covanta and is secured by all project
assets, which had a net carrying value of approximately $101,900,000 at December
31, 2000.
Other project debt includes $33,433,000 due to financial institutions for the
purchase of the MCI power plant in The Philippines. This debt bears interest at
rates equal to the three-month LIBOR (6.4% at December 31, 2000) plus spreads
that increase from plus 4.25% until June 2002, to plus 4.5% from June 2002 to
June 2005, to plus 4.875% from June 2005 to June 2007. The rate was 10.93% at
December 31, 2000. This debt is nonrecourse to Covanta and is secured by all
assets of the project, which had a net carrying value of $49,000,000 at December
31, 2000, and all revenues and contracts of the project and by pledge of the
Company's ownership in the project.
At December 31, 2000, the Company had one interest rate swap agreement that
economically fixes the interest rate on certain adjustable-rate revenue bonds.
The swap agreement expires in January 2019. This swap agreement relates to
adjustable rate revenue bonds in the category "Revenue Bonds Issued by and Prime
Responsibility of Municipalities" and any payments made or received under the
swap agreement, including fair value amounts upon termination, are included as
an explicit component of the client community's obligation under the related
service agreement. Under the swap agreement, the Company will pay an average
fixed rate of 9.8% for 2001 through January 2005, and 5.18% thereafter through
January 2019, and will receive a floating rate based on current municipal
interest rates, similar to the rate on the adjustable rate revenue bonds, unless
certain triggering events occur (primarily credit events), which results in the
floating rate converting to either a set percentage of LIBOR or a set percentage
of the BMA Municipal Swap Index, at the option of the swap counterparty. In the
event the Company terminates the swap prior to its maturity, the floating rate
used for determination of settling the fair value of the swap would also be
based on a set percentage of one of these two rates at the option of the
counterparty. For the year ended December 31, 2000, the floating rate on the
swap averaged 4.09%. The notional amount of the swap at December 31, 2000 was
$80,220,000 and is reduced in accordance with the scheduled repayments of the
applicable revenue bonds. In addition, the Company terminated two other interest
rate swap agreements during 1998. The swap agreements resulted in increased debt
service expense of $1,055,000, $1,659,000, and $824,000 for 2000, 1999, and
1998, respectively, including $211,000 paid to terminate two swap agreements
during the year ended December 31, 1998. The effect on Covanta's
weighted-average borrowing rate was an increase of .07%, .11%, and .06% for
2000, 1999 and 1998, respectively. The counterparty to the swap is a major
financial institution. The Company believes the credit risk associated with
nonperformance by the counterparty is not significant.
The maturities on long-term project debt (expressed in thousands of dollars) at
December 31, 2000 were as follows:
2001 $ 99,875
2002 101,914
2003 105,350
2004 107,142
2005 108,151
Later years 867,831
----------
Total 1,390,263
Less current portion 99,875
----------
Total long-term project debt $1,290,388
==========
14. Credit Arrangements
At December 31, 2000, Covanta had no unused revolving credit lines, and under
its principal revolving credit facility the Company had borrowed $50,000,000
(see Note 12). On March 14, 2001, the Company entered into a Revolving Credit
and Participation Agreement (the "Master Credit Facility") with its principal
credit providers. The Credit Agreement replaced the Company's major outstanding
credit facilities with one master credit facility that creates a credit line of
approximately $146,000,000 and includes a subfacility which may only be used to
provide certain letters of credit which may be required if the Company's
outstanding debt securities are no longer rated investment grade. Under the
terms of the Master Credit Facility, which matures on May 31, 2002 and is
secured by substantially all of the Company's assets, the Company may use the
credit facility for working capital and other general Corporate purposes as well
as to fund certain letter of credit requirements. Under the facility the Company
will be able to continue making investments in existing and new energy projects
which could approximate up to $100,000,000 in 2001. The Company's ability to
make investments in new energy projects is subject to certain conditions,
including meeting minimum cash flow requirements, which includes the sale of
non-core assets. The Master Credit Facility also contains several financial
covenants relating to the Company's cash position, net worth, and compliance
with leverage and interest coverage tests. Funds drawn from the facility are
expected to be repaid from the cash flows generated by the Company and the
proceeds of sales of the Company's noncore assets, equity or debt issuance, and
certain other sources, and interest will accrue at the prime rate plus .5%, or
the Eurodollar rate plus 2.75% at the Company's option.
15. Convertible Subordinated Debentures
Convertible subordinated debentures (expressed in thousands of dollars)
consisted of the following:
2000 1999
- --------------------------------------------------------------------------
6% debentures due June 1, 2002 $ 85,000 $ 85,000
5 3/4% debentures due October 20, 2002 63,650 63,650
--------- ---------
Total $ 148,650 $ 148,650
========= =========
The 6% convertible subordinated debentures are convertible into Covanta common
stock at the rate of one share for each $39.077 principal amount of debentures.
These debentures are redeemable at Covanta's option at 100% face value. The 5
3/4% convertible subordinated debentures are convertible into Covanta common
stock at the rate of one share for each $41.772 principal amount of debentures.
These debentures are redeemable at Covanta's option at 100% of face value.
16. Preferred Stock
The outstanding Series A $1.875 Cumulative Convertible Preferred Stock is
convertible at any time at the rate of 5.97626 common shares for each preferred
share. Covanta may redeem the outstanding shares of preferred stock at $50 per
share, plus all accrued dividends. These preferred shares are entitled to
receive cumulative annual dividends at the rate of $1.875 per share, plus an
amount equal to 150% of the amount, if any, by which the dividend paid or any
cash distribution made on the common stock in the preceding calendar quarter
exceeded $.0667 per share.
17. Common Stock and Stock Options
In 1986, Covanta adopted a nonqualified stock option plan (the "1986 Plan").
Under this plan, options and/or stock appreciation rights were granted to key
management employees to purchase Covanta common stock at prices not less than
the fair market value at the time of grant, which became exercisable during a
five-year period from the date of grant. Options were exercisable for a period
of ten years after the date of grant. As adopted and as adjusted for stock
splits, the 1986 Plan called for up to an aggregate of 2,700,000 shares of
Covanta common stock to be available for issuance upon the exercise of options
and stock appreciation rights, which were granted over a ten-year period ending
March 10, 1996.
In October 1990, Covanta adopted a nonqualified stock option plan (the "1990
Plan"). Under this plan, nonqualified options, incentive stock options, and/or
stock appreciation rights and stock bonuses may be granted to key management
employees and outside directors to purchase Covanta common stock at an exercise
price to be determined by the Covanta Compensation Committee, which become
exercisable during the five-year period from the date of grant. These options
are exercisable for a period of ten years after the date of grant. Pursuant to
the 1990 Plan, which was amended in 1994 to increase the number of shares
available by 3,200,000 shares, an aggregate of 6,200,000 shares of Covanta
common stock were available for grant over a ten-year period which ended October
11, 2000.
In 1999, Covanta adopted a nonqualified stock option plan (the "1999 Plan").
Under this plan, nonqualified options, incentive stock options, limited stock
appreciation rights (LSAR's) and performance-based cash awards may be granted to
employees and outside directors to purchase Covanta common stock at an exercise
price not less than 100% of the fair market value of the common stock on the
date of grant which become exercisable over a three-year period from the date of
grant. These options are exercisable for a period of ten years after the date of
grant. In addition, performance-based cash awards may also be granted to
employees and outside directors. As adopted, the 1999 Plan calls for up to an
aggregate of 4,000,000 shares of Covanta common stock to be available for
issuance upon the exercise of such options and LSAR's, which may be granted over
a ten-year period ending May 19, 2009. At December 31, 2000, 2,511,100 shares
were available for grant.
Effective January 1, 2000, the 1999 Plan was amended and restated, to change the
name of the plan to the "1999 Stock Incentive Plan" and to include the award of
restricted stock to key employees based on the attainment of pre-established
performance goals. The maximum number of shares of common stock that is
available for awards of restricted stock is 1,000,000. As of December 31, 2000,
no awards of restricted stock have been made under the plan.
Under the foregoing plans, Covanta issued 3,952,900 LSARs in conjunction with
the stock options granted. These LSARs are exercisable only during the period
commencing on the first day following the occurrence of any of the following
events and terminate 90 days after such date: the acquisition by any person of
20% or more of the voting power of Covanta's outstanding securities; the
approval by Covanta shareholders of an agreement to merge or to sell
substantially all of its assets; or the occurrence of certain changes in the
membership of the Covanta Board of Directors. The exercise of these limited
rights entitles participants to receive an amount in cash with respect to each
share subject thereto, equal to the excess of the market value of a share of
Covanta common stock on the exercise date or the date these limited rights
became exercisable, over the related option price.
In February 2000, Covanta adopted the Restricted Stock Plan for Non-Employee
Directors (the "Directors Plan") and the Restricted Stock Plan for Key Employees
(the "Key Employees Plan"). Awards of restricted stock will be made from
treasury shares of Covanta common stock, par value $.50 per share. The Company
accounts for restricted shares at their market value on their respective dates
of grant. Restricted shares awarded under the Directors Plan vest 100% at the
end of three months from the date of award. Shares of restricted sock awarded
under the Key Employees Plan are subject to a two-year vesting schedule, 50% one
year following the date of award and 50% two years following the date of award.
As of December 31, 2000, an aggregate of 80,000 shares of restricted stock had
been awarded under the Key Employees Plan and an aggregate of 59,988 shares of
restricted stock had been awarded under the Directors Plan. The total
compensation cost recorded by the Company in 2000 relating to the restricted
stock plans was $661,000.
In connection with the acquisition of the minority interest of Covanta Energy
Group, Inc. (CEGI), Covanta assumed the pre-existing CEGI stock option plan then
outstanding and converted these options into options to acquire shares of
Covanta common stock. All of these options were exercised or cancelled at August
31, 1999.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized for these stock option plans. Had compensation cost for the
options granted in 2000, 1999 and 1998 under these plans been determined
consistent with the provisions of SFAS No. 123, using the binomial
option-pricing model with the following weighted average assumptions - dividend
yield of 0.0%, 0.0% and 4.8%; volatility of 39.61%, 33.52% and 27.22%; risk-free
interest rate of 6.53%, 5.89% and 5.42%; and a weighted average expected life of
7.5 years--the effect on net income (loss) and diluted earnings per share would
have been $3,896,370 and $0.08 for 2000, $1,334,000 and $0.03 for 1999, and
$626,000 and $.01 for 1998. The weighted-average fair value of options granted
during 2000, 1999 and 1998, was $3.50, $4.53 and $3.84, respectively.
Information regarding the Company's stock option plans is summarized as
follows:
Option Price Weighted-Average
Per Share Outstanding Exercisable Exercise Price
- ------------------------------------------------------------------------------------------------------------------------
1986 Plan:
December 31, 1997, balance $18.31-$28.54 865,500 819,300 $19.74
Became exercisable $22.50 19,100
Exercised $18.32-$26.40 (217,000) (217,000) $18.92
Cancelled $22.50-$28.54 (28,000) (20,000) $27.32
------------- -------- -------- ------
December 31, 1998, balance $18.31-$28.54 620,500 601,400 $19.69
Became exercisable $22.50 19,100
Cancelled $28.54 (50,000) (50,000) $28.54
------ -------- -------- ------
December 31, 1999, balance $18.31-$22.50 570,500 570,500 $19.01
Cancelled $18.31 (475,000) (475,000) $18.31
------ ------- -------- ------
December 31, 2000, balance $22.50 95,500 95,500 $22.50
------ ------- -------- ------
1990 Plan:
December 31, 1997, balance $18.31-$31.50 3,684,000 2,373,600 $20.39
Granted $25.97-$29.38 923,000 $26.29
Became exercisable $20.06-$31.50 460,900
Exercised $18.31-$23.56 (538,900) (538,900) $19.05
Cancelled $20.06-$20.31 (7,500) (2,000) $20.17
------------- ------- -------- ------
December 31, 1998, balance $18.31-$31.50 4,060,600 2,293,600 $20.56
Granted $26.78 655,000 $26.78
Became exercisable $20.06-$29.38 589,800
Exercised $18.31-$23.56 (242,600) (242,600) $19.47
Cancelled $20.06-$31.50 (198,500) $23.21
------------- --------- -------- ------
December 31, 1999 balance $18.31-$29.38 4,274,500 2,640,800 $21.14
Granted $9.97 50,000 $9.97
Became exercisable $20.06-$29.38 450,900
Cancelled $18.31-$26.78 (1,956,000) (1,580,500) $21.29
------------- ---------- ---------- ------
December 31, 2000 balance $ 9.97-$29.38 2,368,500 1,511,200 $23.56
------------- ---------- ---------- ------
1999 Plan:
Granted $8.66-$26.59 1,437,400 $13.13
------------ --------- ------
Balance December 31, 1999 $8.66-$26.59 1,437,400 $13.13
Granted $9.97-$14.77 78,000 $12.61
Became exercisable $8.66-$26.59 474,033
Cancelled $11.78-$14.73 (26,500) (2,500) $12.34
------------- --------- ------- ------
December 31, 2000 balance $8.66-$26.59 1,488,900 471,533 $13.12
------------- --------- ------- ------
Conversion of CEGI Plan:
December 31, 1997 balance $14.17 175,421 175,421 $14.17
Exercised $14.17 (3,360) (3,360) $14.17
------------- --------- ------- ------
December 31, 1998 balance $14.17 172,061 172,061 $14.17
Exercised $14.17 (172,061) (172,061) $14.17
------------- ----------- ----------- --------
December 31, 1999 balance - - - -
------------- ----------- ----------- --------
December 31, 2000 balance - - - -
------------- ----------- ----------- --------
Total December 31, 2000 $8.66-$29.38 3,952,900 2,078,233 $20.67
-------------- ----------- ----------- --------
The following table summarizes information about stock options outstanding at
December 31, 2000:
Options Outstanding Options Exercisable
----------------------------------------------------------- ----------------------------------
Range of Number of Weighted-Average Weighted-Average Number of Weighted-Average
Exercise Shares Remaining Exercise Shares Exercise
Prices Outstanding Contractual Life Price Outstanding Price
- --------------------------------------------------------------------------------------------------------------------
$ 8.66-$12.98 962,400 8.9 years $11.56 285,682 $11.62
$14.10-$21.15 1,050,000 7.2 years $17.44 582,011 $18.59
$21.19-$29.38 1,940,500 5.8 years $24.76 1,210,540 $23.81
- ------------- --------- ----------- ------ ---------- ------
$ 8.66-$29.38 3,952,900 6.9 years $19.60 2,078,233 $20.67
- ------------- --------- ----------- ------ ---------- ------
The weighted-average exercise price for all exercisable options at December 31,
2000, 1999 and 1998 were $20.67, $20.76 and $20.04, respectively.
At December 31, 2000, there were 10,843,600 shares of common stock reserved for
the exercise of stock options, the issuance of restricted stock and the
conversion of preferred shares and debentures.
In 1998, Covanta's Board of Directors authorized the purchase of shares of the
Company's common stock in an amount up to $200,000,000. No shares were purchased
during 2000. Through January 2001, 2,223,000 shares of common stock were
purchased at a total cost of $58,890,000.
18. Shareholders' Rights Agreement
In 1990, the Board of Directors declared a dividend of one preferred stock
purchase right (Right) on each outstanding share of common stock pursuant to a
Rights Agreement. In 2000, the Board of Directors amended and extended the
Rights Agreement. Among other provisions, each Right may be exercised to
purchase a one one-hundredth share of a new series of cumulative participating
preferred stock at an exercise price of $80, subject to adjustment. The Rights
may only be exercised after a party has acquired 15% or more of the Company's
common stock or commenced a tender offer to acquire 15% or more of the Company's
common stock. The Rights do not have voting rights, expire October 2, 2010, and
may be redeemed by the Corporation at a price of $.01 per Right at any time
prior to the acquisition of 15% of the Corporation's common stock.
In the event a party acquires 15% or more of the Company's outstanding common
stock in accordance with certain defined terms, each Right will then entitle its
holders (other than such party) to purchase, at the Right's then-current
exercise price, a number of the Company's common shares having a market value of
twice the Right's exercise price. At December 31, 2000, 49,645,459 Rights were
outstanding.
19. Foreign Exchange
Foreign exchange translation adjustments for 2000, 1999 and 1998, amounting to
$8,015,000, $4,631,000 and $2,170,000, respectively, have been charged directly
to Other Comprehensive Income (Loss). In 2000, $25,323,000 relating to Aviation
and Entertainment businesses sold, were reclassified to loss from discontinued
operations. Foreign exchange transaction adjustments, amounting to $387,000,
($7,000) and zero, have been charged (credited) directly to income (loss) for
2000, 1999 and 1998, respectively.
20. Debt Service Charges
Debt service charges for Covanta's project debt (expressed in thousands of
dollars) consisted of the following:
2000 1999 1998
- ----------------------------------------------------------------------------------------
Interest incurred on taxable and
tax-exempt borrowings $86,090 $90,430 $96,939
Interest earned on temporary investment
of certain restricted funds 1,363 1,991 4,192
------- ------- -------
Debt service expense--net $84,727 $88,439 $92,747
======= ======= =======
21. Pensions and Other Postretirement Benefits
Covanta has retirement plans that cover substantially all of its employees. A
substantial portion of hourly employees participate in defined contribution
plans. Other employees participate in defined benefit or defined contribution
plans. The defined benefit plans provide benefits based on years of service and
either employee compensation or a fixed benefit amount. Covanta's funding policy
for those plans is to contribute annually an amount no less than the minimum
funding required by ERISA. Contributions are intended to provide not only
benefits attributed to service to date but also for those expected to be earned
in the future.
In 1992, the Company discontinued its policy of providing postretirement health
care and life insurance benefits for all salaried employees, except those
employees who were retired or eligible for retirement at December 31, 1992.
In 1999, the Company discontinued a defined benefit retirement plan for certain
Covanta salaried employees and paid benefits due to employees at December 31,
1999.
1999 amounts exclude details related to the defined benefit plans and other
postretirement benefits for the Aviation and Entertainment businesses, since
these businesses were previously classified as discontinued operations. The
following table sets forth the details of Covanta's defined benefit plans' and
other postretirement benefit plans' funded status and related amounts recognized
in Covanta's Consolidated Balance Sheets (expressed in thousands of dollars):
Pension Benefits Other Benefits
- -----------------------------------------------------------------------------------------------------------------------
2000 1999 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
Change in Benefit Obligation:
Benefit obligation at beginning of year $25,108 $26,869 $ 8,905 $ 8,580
Service cost 2,105 2,866 57 39
Interest cost 2,012 1,871 675 593
Effect of curtailment (3,081)
Effect of settlement (7,047) (86)
Actuarial (gain) loss 1,231 (1,618) 7 (374)
Benefits paid (792) (786) (233) (414)
------- ------- -------- --------
Benefit obligation at end of year 29,664 19,074 9,325 8,424
------- ------- -------- --------
Change in Plan Assets:
Plan assets at fair value
at beginning of year 23,430 16,827
Actual return on plan assets 2,056 1,749
Company contributions 300 7,653 233 414
Effect of settlement (7,047)
Benefits paid (792) (786) (233) (414)
------- ------- -------- --------
Plan assets at fair value at end of year 24,994 18,396
------- ------- -------- --------
Reconciliation of Prepaid (Actual) and Total
Recognized:
Funded status of the plan (4,670) (678) (9,325) (8,424)
Unrecognized:
Net transition (asset) obligation (54) (107)
Prior service cost 638 76
Net gain (2,528) (4,346) (1,937) (1,206)
------- ------- -------- --------
Net Amount Recognized $(6,614) $(5,055) $(11,262) $(9,630)
======= ======= ======== ========
Amounts Recognized in the Consolidated Balance
Sheets Consist of:
Accrued benefit liability $ (6,614) $ (5,055) $ (11,262) $ (9,630)
-------- -------- --------- --------
Net Amount Recognized $ (6,614) $ (5,055) $ (11,262) $ (9,630)
======== ======== ========= ========
Weighted Average Assumptions
as of December 31:
Discount Rate 7.75% 7.75% 7.75% 7.75%
Expected return on plan assets 8.00% 8.00%
Rate of compensation increase 4.50% 4.50% 4.50% 4.50%
For management purposes, annual rates of increase of 8.0% and 7.0% in the per
capita cost of health care benefits were assumed for 2000 for covered employees
under age 65 and over age 65, respectively. The rate was assumed to decrease
gradually to 5.5% and 5.0% for employees under age 65 and over age 65,
respectively, in 2005 and remain at that level.
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the pension plans with accumulated benefit obligations in
excess of plan assets were $8,712,000, $10,339,000 and $5,321,000, respectively
as of December 31, 2000 and $2,502,000, $2,676,000 and zero, respectively as of
December 31, 1999.
Contributions and costs for defined contribution plans are determined by benefit
formulas based on percentage of compensation as well as discretionary
contributions and totaled $6,559,000, $9,002,000 and $8,257,000, in 2000, 1999
and 1998, respectively. Plan assets at December 31, 2000, 1999 and 1998,
primarily consisted of common stocks, United States government securities, and
guaranteed insurance contracts.
With respect to union employees, the Company is required under contracts with
various unions to pay, generally based on hours worked retirement, health and
welfare benefits. These multi-employer defined contribution plans are not
controlled or administered by the Company. The amount charged to expense for
such plans during 2000, 1999 and 1998 was $3,554,000, $4,935,000 and $4,777,000,
respectively.
Pension costs for Covanta's defined benefit plans and other postretirement
benefit plans included the following components (expressed in thousands of
dollars):
Pension Benefits Other Benefits
----------------------------------------------------------------------------
2000 1999 1998 2000 1999 1998
Components on Net Periodic ----------------------------------------------------------------------------
Benefit Cost:
Service Cost $2,105 $ 2,866 $ 2,434 $ 57 $ 39 $ 35
Interest Cost 2,012 1,871 1,620 675 593 547
Expected return on plan assets (1,859) (1,441) (1,191)
Amortization of unrecognized:
Net transition (asset) obligation (54) 27 27
Prior service cost 207 233 416
Net gain (100) (33) (22) (197) (124) (170)
------- ------- ------- ----- ----- -----
Net periodic benefit cost $ 2,311 $ 3,523 $ 3,284 $ 535 $ 508 $ 412
======= ======= ======= ===== ===== =====
Curtailment Gain $(2,493)
Settlement Gain (51) $(117)
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plan. A one percentage point change in the assumed
health care trend rate would have the following effects (expressed in thousands
of dollars):
One Percentage One Percentage
Point Increase Point Decrease
-------------- --------------
Effect on total service and
interest cost components $ 23 $ (21)
Effect on postretirement
benefit obligation $ 254 $(236)
22. Special Charges
In December 2000, the Company approved a plan to reorganize its development
office in Hong Kong and its New Jersey Energy headquarters. As a result, Energy
implemented a reduction in its workforce of approximately 80 employees, both
domestically and internationally, in connection with the refocusing of the
Company's energy development activities and streamlining its organizational
structure. This plan includes closure of the Company's Hong Kong office and
consolidation of certain domestic regional organizational structure. The plan
should be completed within the next year and includes $10,300,000 for severance
costs, $4,000,000 related to the buyout of certain leases, the writedown of
certain fixed assets of $300,000, and $2,000,000 in legal and consulting
services fees related to that plan. Also, in 2000 Energy determined that a
majority-owned project in China exceeded its net realizable value, and in
accordance with SFAS No. 121, the Company recorded a $2,800,000 writedown of
that project. The project is currently operating, but the Company is in
negotiations to exchange ownership in this project for an increase in its
ownership in another project in China. The estimated value used as a basis for
the writedown was obtained as a result of these negotiations.
In September 1999, the Company's Board of Directors approved a plan to dispose
of its Aviation and Entertainment businesses and close its New York
headquarters, and in December 1999 approved a plan to exit other noncore
businesses so that Covanta can focus its resources on its Energy business.
As a result of these decisions, the Company has incurred various expenses, which
have been recognized in its continuing and discontinued operations. These
expenses in 2000, include $22,800,000 of creditors' fees and expenses and fees
incurred in connection with financing efforts to support the Company's balance
sheet recapitalization plan; legal, accounting and consulting expenses related
to the capitalization plan and to the sales of businesses of $14,700,000; and
workers' compensation insurance charges of $17,500,000 related to discontinued
operations and other sold businesses. The Company also assigned its lease of the
Corporate aircraft resulting in the writeoff of certain lease prepayments of
$1,100,000. The expenses also include the accelerated amortization of a new data
processing system of $11,400,000 in 2000 and $2,300,000 in 1999, based upon a
revised useful life of 15 months starting October 1, 1999.
In 1999, these expenses include severance costs mainly for its New York City
employees of $41,500,000; contract termination costs of its former Chairman and
Chief Executive Officer of $17,500,000; the write-down to estimated net
realizable value of other noncore businesses of $36,200,000 based upon the
estimated proceeds from the sale of such businesses; and the accelerated
amortization of a new data processing system of $2,300,000 based upon a revised
useful life of 15 months starting October 1, 1999. Such expenses also include
the costs to abandon expansion plans of its Entertainment business totaling
$17,800,000, which includes the forfeiture of the nonrefundable deposit and
related costs totaling $10,500,000 in connection with the termination of the
proposed acquisition of Volume Services America (VSA). In addition, charges
totaling $13,200,000 were recorded to recognize losses prior to the decision to
discontinue the Entertainment business relating to the sale of assets and to the
write-down of unamortized contract acquisition costs at two venues.
In addition, Datacom recorded write-downs of its accounts receivable from
Genicom in 2000 of $6,500,000 and in 1999, writedowns of inventories and
accounts receivable from Genicom of $10,500,000, primarily as a result of
Genicom's poor financial position in 1999 evidenced by Genicom's announcement of
its violation of its credit facilities in the third quarter and its subsequent
filing for protection from creditors under the provisions of Chapter 11 of the
Bankruptcy Code on March 10, 2000. As of December 31, 2000, the Company is
continuing its business relationship with Genicom and believes it will realize
the net carrying value of its accounts receivable and inventory on hand at
December 31, 2000.
The following is a summary of the principal special charges (both cash and
noncash charges) recognized in the years ended December 31, 2000 and 1999
(expressed in thousands of dollars):
Balance at Charges for Charges for Total Amounts Balance at
January 1, Continuing Discontinued Special Paid In December
2000 Operations Operations Charges 2000 31, 2000
---------------------------------------------------------------------------------
2000
Severance for approximately
200 employees $40,400 $ 900 $ (700) $ 200 $13,100 $27,500
Contract termination settlement 15,700 15,300 400
Bank fees 18,000 18,000 15,900 2,100
Recapitalization plan expenses 4,800 4,800 4,800
Professional services relating to
recapitalization and sales of
businesses 5,100 9,600 14,700 14,700
Workers' compensation charges 8,700 8,800 17,500 17,500
Severance for approximately
80 Energy employees 10,300 10,300 10,300
Office closure costs 4,000 4,000 4,000
Professional services relating to
Energy reorganization 2,000 2,000 500 1,500
------- ------- ------- -------- ------- -------
Subtotal 56,100 53,800 17,700 71,500 $64,300 $63,300
======= =======
Writedown of Datacom receivables 6,500 6,500
Write-off of aircraft lease
prepayments 1,100 1,100
Accelerated amortization of new
data processing system 5,600 5,800 11,400
Writedown of impaired Energy assets 3,100 3,100
------- ------- ------- --------
Total $56,100 $70,100 $23,500 $93,600
======= ======= ======= ========
Continuing Discontinued Total Amount Balance at
Operations Operations Special Paid In December
Charges 1999 31, 1999
------------------------------------------------------------------
1999
Severance for approximately
220 employees (mainly New York) $ 16,400 $ 25,100 $ 41,500 $ 1,100 $ 40,400
Contract termination settlement 17,500 17,500 1,800 15,700
Termination of VSA acquisition 10,500 10,500 10,500
-------- -------- -------- -------- --------
Subtotal 33,900 35,600 69,500 $ 13,400 $ 56,100
======== ========
Write-down of non-core businesses:
OEES goodwill ($23,000) and
property and other assets
($5,400); ADTI goodwill
($7,800) 36,200 36,200
Datacom inventory ($7,200) and
receivables ($3,300) 10,500 10,500
Entertainment asset sales and
abandonment:
Sale of Grizzly Nature Center
($4,200) and a casino in Aruba
($2,500); unrecoverable
contract acquisition costs
($6,500) 13,200 13,200
Abandonment of Entertainment
expansion:
Casino facilities in South Africa 7,300 7,300
Accelerated amortization of
new data processing system 500 1,800 2,300
------- ------- --------
Total $81,100 $57,900 $139,000
======= ======= ========
In 2000, for continuing operations, bank fees, recapitalization plan expenses,
professional services fees relating to the recapitalization plan and sales of
businesses, and Energy's severance costs, office closure costs, professional
services expenses and writedown of impaired assets are included in Other
expense-net, workers' compensation expenses are included in Other operating
costs and expenses, the writeoff of the aircraft lease prepayments is included
in selling, administrative and general expenses, and accelerated amortization of
the new data processing system is included in depreciation and amortization in
the accompanying 2000 Statement of Consolidated Income and Comprehensive Income.
In 1999, for continuing operations, severance accruals, the provision for
contract termination settlement, the write-down of noncore businesses, and the
provisions relating to Datacom receivables are included in selling,
administrative and general expenses, a provision relating to Datacom's inventory
is included in costs of goods sold, and accelerated amortization of the new data
processing system is included in depreciation and amortization in the
accompanying 1999 Statement of Consolidated Income and Comprehensive Income.
The amount accrued for severance is based upon the Company's written severance
policy and the positions eliminated. The accrued severance does not include any
portion of the employees' salaries through their severance dates. Based upon
current severance dates and the severance accrual remaining at December 31,
2000, the Company expects to pay these amounts largely in 2001.
The amount accrued for the contract termination costs of the Company's former
Chairman and Chief Executive Officer is based upon a settlement agreement
reached in December 1999. Pursuant to the settlement agreement, in 1999 the
Company forgave demand notes dated August 1999 in the face amount of
approximately $1,800,000, and with the exception of certain insurance benefits,
paid the remaining amounts in 2000.
23. Income Taxes
The components of the provision for income taxes (expressed in thousands of
dollars) were as follows:
2000 1999 1998
- --------------------------------------------------------------------------------
Current:
Federal $ (470) $ 4,552 $(1,354)
State 2,558 4,108 3,191
Foreign 1,631 1,367 900
--------- -------- -------
Total current 3,719 10,027 2,737
--------- -------- -------
Deferred:
Federal (36,844) (13,809) 17,459
State (1,024) (3,543) 1,436
Foreign 408 (75)
--------- -------- -------
Total deferred (37,868) (16,944) 18,820
--------- -------- -------
Total provision (benefit) for
income taxes $ (34,149) $ (6,917) $21,557
========= ======== =======
The provision for income taxes (expressed in thousands of dollars) varied from
the Federal statutory income tax rate due to the following:
2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------
Percent Percent Percent
of Income of Income of Income
Amount Before Amount Before Amount Before
of Tax Taxes of Tax Taxes of Tax Taxes
- -----------------------------------------------------------------------------------------------------------------
Taxes at statutory rate $(40,246) 35.0% $(12,961) 35.0% $22,074 35.0%
State income taxes, net of
federal tax benefit 997 (.9) 367 (1.0) 3,007 4.8
Taxes on foreign earnings (2,101) 1.8 (3,469) 9.3 (2,384) (3.8)
Amortization of goodwill 651 (1.7) 691 1.1
Write-down of goodwill (1,729) 1.5 10,795 (29.1)
Energy credits (2,338) 6.3 (2,511) (3.9)
Valuation allowance 7,000 (6.1)
Other--net 1,930 (1.6) 38 (.1) 680 1.0
-------- ------- --------- ------- -------- ------
Provision (benefit) for
income taxes $(34,149) 29.7% $ (6,917) 18.7% $ 21,557 34.2%
======== ======= ========= ======= ======== ======
The components of the net deferred income tax liability (expressed in thousands
of dollars) as of December 31, 2000 and 1999, were as follows:
2000 1999
- ------------------------------------------------------------------------------
Deferred Tax Assets:
Deferred income $ 877 $ 7,234
Accrued expenses 82,399 89,140
Other liabilities 48,986 32,834
Assets held for sale 26,734
Net operating losses 13,683
Valuation allowance (7,000)
Investment tax credits 21,133 7,042
Alternative minimum tax credits 28,212 32,298
-------- --------
Total deferred tax assets 215,024 168,548
-------- --------
Deferred Tax Liabilities:
Unbilled accounts receivable 40,723 51,088
Property, plant, and equipment 416,213 430,867
Other 37,505 31,216
-------- --------
Total deferred tax liabilities 494,441 513,171
-------- --------
Net deferred tax liability $279,417 $344,623
======== ========
Deferred tax assets and liabilities (expressed in thousands of dollars) are
presented as follows in the accompanying balance sheets:
2000 1999
- -----------------------------------------------------------------------------
Net deferred tax liability--noncurrent $315,931 $380,812
Less net deferred tax asset--current (36,514) (36,189)
-------- --------
Net deferred tax liability $279,417 $344,623
======== ========
At December 31, 2000, for Federal income tax purposes, the Company had net
operating loss carryforwards of approximately $39,094,000 which will expire in
2020, investment and energy tax credit carryforwards of approximately
$21,133,000, which will expire in 2006 through 2009, and alternative minimum tax
credit carryforwards of approximately $28,212,000, which have no expiration
date. Deferred Federal income taxes have been reduced by these amounts.
24. Leases
Total rental expense amounted to $63,117,000, $54,301,000, and $42,331,000 (net
of sublease income of $4,193,000, $5,242,000 and $3,398,000) for 2000, 1999 and
1998, respectively. Principal leases are for leaseholds, sale and leaseback
arrangements on waste-to-energy facilities, trucks and automobiles, and
machinery and equipment. Some of these operating leases have renewal options.
The following is a schedule (expressed in thousands of dollars), by year, of
future minimum rental payments required under operating leases that have initial
or remaining noncancelable lease terms in excess of one year as of December 31,
2000:
2001 $ 49,109
2002 47,386
2003 46,136
2004 34,232
2005 35,519
Later years 401,187
---------
Total $ 613,569
=========
These future minimum rental payment obligations include $423,930,000 of future
nonrecourse rental payments that relate to energy facilities of which
$268,744,000 are supported by third-party commitments to provide sufficient
service revenues to meet such obligations. The remaining $155,186,000 related to
a waste-to-energy facility at which the Company serves as operator and directly
markets one half of the facility's disposal capacity. This facility currently
generates sufficient revenues from short- and medium-term contracts to meet
rental payments. The Company anticipates renewing the short- and medium-term
contracts or entering into new contracts to generate sufficient revenues to meet
those remaining future rental payments. Also included are $32,172,000 of
nonrecourse rental payments relating to an energy facility operated by a
special-purpose subsidiary, which are supported by contractual power purchase
obligations of a third party and which are expected to provide sufficient
revenues to make the rent payments. These nonrecourse rental payments (in
thousands of dollars) are due as follows:
2001 $ 35,824
2002 36,298
2003 36,474
2004 25,908
2005 26,027
Later years 295,571
---------
Total $ 456,102
=========
25. Earnings Per Share
Basic earnings per share was computed by dividing net income (loss), reduced by
preferred stock dividend requirements, by the weighted average of the number of
shares of common stock outstanding during each year.
Diluted earnings per share was computed on the assumption that all convertible
debentures, convertible preferred stock, restricted stock, and stock options
converted or exercised during each year or outstanding at the end of each year
were converted at the beginning of each year or at the date of issuance or
grant, if dilutive. This computation provided for the elimination of related
convertible debenture interest and preferred dividends.
The reconciliation of the income and common shares included in the computation
of basic earnings per common share and diluted earnings per common share for
years ended December 31, 2000, 1999 and 1998, is as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Income Shares Per-Share Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ----- ----------- ------------- ------ ----------- ------------- ------
Income (loss)
from continuing
operations $(85,621,000) $(36,290,000) $37,248,000
Less: preferred
stock dividend 68,000 137,000 144,000
------------ ------------ -----------
Basic Earnings
(Loss)Per Share (85,689,000) 49,534,000 $ (1.73) (36,427,000) 49,235,000 $ (0.74) 37,104,000 49,836,000 $0.74
======= ======= =====
Effect of
Dilutive
Securities:
Stock options (A) (A) 807,000
Restricted
stock (A)
Convertible
Preferred
stock (A) (A) 144,000 257,000
6%
convertible
debentures (A) (A) (A)
5 3/4%
convertible
debentures (A) (A) (A)
------------ ---------- ------------ ---------- ----------- -------
Diluted
Earnings (Loss)
Per Share $(85,689,000) 49,534,000 $ (1.73) $(36,427,000) 49,235,000 $(0.74) $37,248,000 50,900,000 $0.73
============ ========== ======= ============ ========== ====== =========== ========== =====
(A) Antidilutive
Outstanding stock options to purchase common stock with an exercise price
greater than the average market price of common stock were not included in the
computation of diluted earnings per share. The balance of such options was
3,249,000 in 2000, 2,954,000 in 1999, and 75,000 in 1998. Shares of common stock
to be issued, assuming conversion of convertible preferred shares, the 6%
convertible debentures, and the 5 3/4% convertible debentures, and unvested
restricted stock issued to employees were not included in computations of
diluted earnings per share if to do so would have been antidilutive. The common
shares excluded from the calculation were 2,175,000 in 2000, 1999 and 1998 for
the 6% convertible debentures; 1,524,000 in 2000, 1999 and 1998 for the 5 3/4%
convertible debentures; 49,000 and 308,000 in 2000 and 1999, respectively for
stock options; 220,000 and 245,000 in 2000 and 1999, respectively for
convertible preferred stock and 76,000 in 2000 for unvested restricted stock
issued to employees.
26. Commitments and Contingent Liabilities
Covanta and certain of its subsidiaries have issued or are party to performance
bonds and guarantees and related contractual obligations undertaken mainly
pursuant to agreements to construct and operate certain energy, entertainment
and other facilities. In the normal course of business, they are involved in
legal proceedings in which damages and other remedies are sought. Management
does not expect that these contractual obligations, legal proceedings, or any
other contingent obligations incurred in the normal course of business will have
a material adverse effect on Covanta's Consolidated Financial Statements.
The Company did not include certain of its operations at either the Arrowhead
Pond in Anaheim, California or the Corel Centre near Ottawa, Canada as part of
the sale of its Food and Beverage/Venue Management business in 2000. The Company
manages the Arrowhead Pond under a long-term contract. As part of that contract,
the Company is a party, along with the City of Anaheim, to a reimbursement
agreement in connection with a letter of credit in the amount of approximately
$119,000,000. Under the reimbursement agreement, the Company is responsible for
draws, if any, under the letter of credit caused by the Company's failure to
perform its duties under its management contract at that venue which include its
obligation to pay shortfalls, if any, if net revenues of the venue are
insufficient to pay debt service underlying the venue. The Company is exploring
alternatives for disposing of these operations along with the reimbursement
agreement and related obligations.
During 1994, a subsidiary of Covanta entered into a 30-year facility management
contract at the Corel Centre, pursuant to which it agreed to advance funds to a
customer, and if necessary, to assist the customer's refinancing of senior
secured debt incurred in connection with the construction of the facility.
Covanta is obligated to purchase such senior debt in the amount of $90,500,000
on December 23, 2002, if the debt is not refinanced prior to that time. Covanta
is also required to repurchase the outstanding amount of certain subordinated
secured debt of such customer in the amount of $48,000,000 on December 23, 2002.
In addition, on December 31, 2000, the Company had guaranteed $3,300,000 of
senior secured term debt of an affiliate and principal tenant (the NHL Ottawa
Senators) of this customer. Further, Covanta is obligated to purchase
$20,000,000 of the tenant's secured subordinated indebtedness on January 29,
2004, if such indebtedness has not been repaid or refinanced prior to that time.
The Company is also exploring alternatives for disposing of these operations
along with the related obligations.
Management does not expect that these arrangements will have a material adverse
effect on Covanta's Consolidated Financial Statements.
At December 31, 2000, capital commitments for continuing operations amounted to
$13,200,000 for normal replacement and growth in Energy and $100,000 for
Corporate and Other operations. Other capital commitments for Energy as of
December 31, 2000 amounted to approximately $29,100,000. This amount includes a
commitment to pay, in 2008, $10,600,000 for a service contract extension at an
energy facility. In addition, this amount includes $15,400,000 for two oil-fired
projects in India; $2,900,000 for additional equity commitments related to
Energy's interest in a coal-fired power project in the Philippines; and $200,000
for a mass-burn waste-to-energy facility in Italy. Funding for the remaining
mandatory equity contributions to the coal-fired power project in The
Philippines is being provided through bank credit facilities, which were repaid
in March 2001.
27. Information Concerning Business Segments
As of September 29, 1999, the Company adopted a plan to discontinue the
operations of its Aviation and Entertainment segments. As a result of that
decision, the operations of those businesses are reflected as discontinued
operations. At December 31, 2000, the remaining assets and liabilities of those
businesses are now reflected in the Other segment. The Company now has two
reportable segments, Energy and Other.
Covanta's Energy segment seeks to develop, own or operate energy generating
facilities in the United States and abroad that utilize a variety of fuels, as
well as water and wastewater facilities that will similarly serve communities on
a long-term basis. The Energy segment also includes environmental consulting and
engineering, and construction and infrastructure activities which are being sold
and discontinued, respectively.
The Other segment is primarily comprised of noncore businesses of the Company
and in 2000 includes those Aviation and Entertainment businesses yet to be sold.
Covanta has substantially completed the disposition of its non-core businesses
through 1998, principally through the sale of the remaining Facility Services
operations (New York Region) which provided facility management, maintenance,
janitorial and manufacturing support services; and the sale of the Charlotte,
North Carolina, Binghamton, New York and Core Ireland operations of Datacom; and
in 2000, principally through the sales of Applied Data Technology, Inc.
("ADTI"), located in San Diego, California, a supplier of air combat maneuvering
instrumentation systems and after-action reporting and display systems; its Food
and Beverage/Venue Management operations; its Themed Parks and Attractions
business; its Aviation Ground Services and Fixed Based Operations businesses;
and its airport privatization businesses in Argentina and the Dominican
Republic.
Revenues and income from continuing operations, Energy and Other segments and
Corporate, (expressed in thousands of dollars) for the year ended December 31,
2000, 1999 and 1998 were as follows:
2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------
Revenues:
Energy $ 970,258 $ 944,304 $ 831,294
Other 49,744 78,251 92,542
Corporate 5,138 1,317
---------- ---------- ----------
Total Revenues $1,020,002 $1,027,693 $ 925,153
========== ========== ==========
Income (Loss) from Operations:
Energy $ 83,584 $ 67,607 $ 119,764
Other (including writedown of assets held for sale in 2000) (103,458) (22,731) (4,893)
---------- ---------- ----------
Total income (loss) from operations (19,874) 44,876 114,871
Corporate unallocated income and expenses - net 59,768 51,210 32,201
Interest - net 35,347 30,697 19,812
---------- ---------- ----------
Income (Loss) from Continuing Operations Before
Income Taxes and Minority Interest and the Cumulative
Effect of Change in Accounting Principle $ (114,989) $ (37,031) $ 62,858
========== ========== ==========
Covanta's revenues include $46,927,000, $59,887,000, and $62,148,000 from the
United States government contracts for the years ended December 31, 2000, 1999
and 1998, respectively.
Total revenues by segment reflect sales to unaffiliated customers. In computing
income from operations, none of the following have been added or deducted:
unallocated corporate expenses, nonoperating interest expense, interest income
and income taxes.
A summary (expressed in thousands of dollars) of identifiable assets,
depreciation and amortization, and capital additions of continuing operations
for the years ended December 31, 2000, 1999, and 1998 is as follows:
Identifiable Depreciation and Capital
Assets Amortization Additions
- ---------------------------------------------------------------------------------------------
2000
Energy $2,923,324 $ 95,898 $ 54,225
Other 84,584 1,482 693
Corporate 287,543 12,945 47
---------- -------- ---------
Consolidated $3,295,451 $110,325 $ 54,965
========== ======== =========
1999
Energy $3,010,723 $ 93,300 $ 64,655
Other 51,440 2,007 735
Corporate 95,790 6,163 407
---------- -------- ---------
Consolidated $3,157,953 $101,470 $ 65,797
========== ======== =========
1998
Energy $2,858,816 $ 84,712 $ 32,237
Other 72,680 1,909 2,051
Corporate 260,332 2,263 2,234
---------- -------- ---------
Consolidated $3,191,828 $ 88,884 $ 36,522
========== ======== =========
Covanta's areas of operations are principally in the United States. Operations
outside of the United States are primarily in Asia, Latin America and Europe. No
single foreign country or geographic area is significant to the consolidated
operations. A summary of revenues and identifiable assets by geographic area for
the years ended December 31, 2000, 1999, and 1998 (expressed in thousands of
dollars) is as follows:
2000 1999 1998
- -------------------------------------------------------------------------------------
Revenues:
United States $890,045 $ 926,040 $ 855,424
Asia 112,109 82,240 47,344
Latin America 12,037 11,891 11,602
Europe 5,811 7,522 10,783
---------- ---------- ---------
Total $1,020,002 $1,027,693 $ 925,153
========== ========== =========
Identifiable Assets:
United States $3,087,906 $ 2,748,839 $2,979,825
Asia 176,150 399,136 200,913
Latin America 9,419 2,784 890
Europe 10,910 7,194 10,200
Other 11,066
---------- ---------- ---------
Total $3,295,451 $ 3,157,953 $3,191,828
========== =========== ==========
28. Supplemental Disclosure of Cash Flow Information
(Expressed in thousands of dollars) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------
Cash Paid for Interest and Income Taxes:
Interest (net of amounts capitalized) $131,647 $147,597 $131,178
Income taxes paid (refunded) (13,842) 22,278 14,419
Noncash Investing and Financing Activities:
Conversion of preferred shares for common shares 3 4 2
Acquisition of property, plant,
and equipment for debt 21,660
Detail of Entities Acquired:
Fair value of assets acquired 165,829 900
Liabilities assumed (106,393)
Net cash paid for acquisitions 59,436 900
29. Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of SFAS No. 107, "Disclosures About
Fair Value of Financial Instruments." The estimated fair-value amounts have been
determined using available market information and appropriate valuation
methodologies. However, considerable judgment is necessarily required in
interpreting market data to develop estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts that
Covanta would realize in a current market exchange.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
For cash and cash equivalents, restricted cash, and marketable securities, the
carrying value of these amounts is a reasonable estimate of their fair value.
The fair value of long-term unbilled receivables is estimated by using a
discount rate that approximates the current rate for comparable notes. The fair
value of non-current receivables is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to such
borrowers based on the remaining maturities, consideration of credit risks, and
other business issues pertaining to such receivables. The fair value of
restricted funds held in trust is based on quoted market prices of the
investments held by the trustee. Other assets, consisting primarily of insurance
and escrow deposits, and other miscellaneous financial instruments used in the
ordinary course of business are valued based on quoted market prices or other
appropriate valuation techniques.
Fair values for debt were determined based on interest rates that are currently
available to the Company for issuance of debt with similar terms and remaining
maturities for debt issues that are not traded on quoted market prices. With
respect to convertible subordinated debentures, fair values are based on quoted
market prices. The fair value of project debt is estimated based on quoted
market prices for the same or similar issues. Other liabilities are valued by
discounting the future stream of payments using the incremental borrowing rate
of the Company. The fair value of the Company's interest rate swap agreements is
the estimated amount the Company would receive or pay to terminate the agreement
based on the net present value of the future cash flows as defined in the
agreement. The fair value of Covanta financial guarantees provided on behalf of
customers (see Note 26) are valued by discounting the future stream of payments
using the incremental borrowing rate of the Company.
The fair-value estimates presented herein are based on pertinent information
available to management as of December 31, 2000 and 1999. Although management is
not aware of any factors that would significantly affect the estimated
fair-value amounts, such amounts have not been comprehensively revalued for
purposes of these financial statements since that date, and current estimates of
fair value may differ significantly from the amounts presented herein.
The estimated fair value (expressed in thousands of dollars) of financial
instruments at December 31, 2000 and 1999, is summarized as follows:
2000 1999
- ----------------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- ----------------------------------------------------------------------------------------------------------------------
Assets:
Cash and cash equivalents $ 80,643 $ 80,643 $101,020 $101,020
Restricted cash 194,118 194,118
Marketable securities 213 213 6,777 6,777
Receivables 403,124 408,096 453,508 445,627
Restricted funds 253,341 236,163 270,446 233,319
Other assets 317 317 310 310
Liabilities:
Debt 455,415 486,753 458,760 485,634
Convertible subordinated debentures 148,650 130,045 148,650 123,275
Project debt 1,390,263 1,362,017 1,471,215 1,487,025
Other liabilities 3,000 2,817 1,838 1,838
Off Balance-Sheet Financial Instruments:
Unrealized gains on interest rate swap agreements 4
Unrealized losses on interest rate swap agreements 12,263 8,913
Guarantees 5,213 7,449
30. Receivables from California Utilities
During 2000, events affecting the energy market in California impacted the
creditworthiness of the two California utilities to whom the Company sells
power. These events have resulted in these utilities delaying payment for power
they have purchased from the Company. As of December 31, 2000, the Company had
outstanding receivables from these two utilities of approximately $41,500,000
(including the Company's 50% interest in several partnerships) against which the
Company had recorded a reserve of approximately $7,000,000. As of March 7, 2001,
the Company had received payments from one of these utilities of approximately
$8,000,000. On March 27, 2001 the California Public Utilities Commission
approved a substantial rate increase and directed that the utilities begin
paying timely for power purchases commencing April 2001. The Company therefore
believes it will begin receiving current payment for power sales beginning in
April. Although the matter is not free of doubt, the Company believes it will
ultimately receive payment of the outstanding receivables.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Covanta Energy Corporation:
We have audited the accompanying consolidated balance sheets of Covanta Energy
Corporation (formerly Ogden Corporation) and subsidiaries (the "Company") as of
December 31, 2000 and 1999, and the related statements of consolidated income
and comprehensive income, shareholders' equity, and consolidated cash flows for
each of the three years in the period ended December 31, 2000. Our audits also
included the financial statement schedules listed in the Index at Item 14. These
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 2000
and 1999, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
As discussed in Note 1 to the financial statements, the Company changed its
method of accounting for the costs of start-up activities in 1999.
Deloitte & Touche LLP
New York, New York
March 27, 2001
Covanta Energy Corporation and Subsidiaries
REPORT OF MANAGEMENT
Covanta's management is responsible for the information and representations
contained in this annual report. Management believes that the financial
statements have been prepared in conformity with accounting principles generally
accepted in the United States of America appropriate in the circumstances to
reflect in all material respects the substance of events and transactions that
should be included and that the other information in the annual report is
consistent with those statements. In preparing the financial statements,
management makes informed judgments and estimates of the expected effects of
events and transactions currently being accounted for.
In meeting its responsibility for the reliability of the financial statements,
management depends on the Corporation's internal control structure. This
structure is designed to provide reasonable assurance that assets are
safeguarded and transactions are executed in accordance with management's
authorization and recorded properly to permit the preparation of financial
statements in accordance with accounting principles generally accepted in the
United States of America. In designing control procedures, management recognizes
that errors or irregularities may nevertheless occur. Also, estimates and
judgments are required to assess and balance the relative cost and expected
benefits of such controls. Management believes that the Corporation's internal
control structure provides reasonable assurance that errors or irregularities
that could be material to the financial statements are prevented and would be
detected within a timely period by employees in the normal course of performing
their assigned functions.
The Board of Directors pursues its oversight role for these financial statements
through the Audit Committee, which is composed, solely of nonaffiliated
directors. The Audit Committee, in this oversight role, meets periodically with
management to monitor their responsibilities. The Audit Committee also meets
periodically with the independent auditors and the internal auditors, both of
whom have free access to the Audit Committee without management present.
The independent auditors elected by the shareholders express an opinion on our
financial statements. Their opinion is based on procedures they consider to be
sufficient to enable them to reach a conclusion as to the fairness of the
presentation of the financial statements.
Scott G. Mackin Edward W. Moneypenny
President and Chief Executive Officer Executive Vice President
Chief Financial Officer
Covanta Energy Corporation and Subsidiaries
QUARTERLY RESULTS OF OPERATIONS
2000 Quarter Ended March 31 June 30 Sept. 30 Dec. 31
- -----------------------------------------------------------------------------------------------------------------
(In thousands of dollars, except per-share amounts)
Total revenues from continuing
operations.................................. $239,016 $264,982 $254,737 $261,267
-------- -------- -------- --------
Gross profit................................ $ 43,074 $ 65,875 $ 61,010 $ 54,710
-------- -------- -------- --------
Income (loss) from continuing operations.... $ (4,174) $(10,414) $ 2,701 $(73,734)
Income (loss) from discontinued operations.. (25,310) (66,489) (37,072) (14,793)
-------- -------- -------- --------
Net income (loss)........................... $(29,484) $(76,903) $(34,371) $(88,527)
======== ======== ======== ========
Basic earnings (loss) per common share:
Income (loss) from continuing operations.... $ (0.08) $ (0.21) $ 0.05 $ (1.49)
Income (loss) from discontinued operations.. (0.51) (1.34) (0.75) (0.30)
-------- -------- -------- --------
Total....................................... $ (0.59) $ (1.55) $ (0.70) $ (1.79)
======== ======== ======== ========
Diluted earnings (loss) per common share:
Income (loss) from continuing operations.... $ (0.08) $ (0.21) $ 0.05 $ (1.49)
Income (loss) from discontinued operations.. (0.51) (1.34) (0.75) (0.30)
-------- -------- -------- --------
Total....................................... $ (0.59) $ (1.55) $ (0.70) $ (1.79)
======== ======== ======== ========
1999 Quarter Ended March 31 June 30 Sept. 30 Dec. 31
- -----------------------------------------------------------------------------------------------------------------
(In thousands of dollars, except per-share amounts)
Total revenues from continuing operations... $238,294 $268,882 $259,051 $ 261,466
-------- -------- -------- ---------
Gross profit................................ $ 55,740 $ 79,985 $ 61,061 $ 27,497
-------- -------- -------- ---------
Income (loss) from continuing operations
before cumulative effect of change in
accounting principle........................ $ 4,059 $ 16,268 $ 8,353 $ (64,970)
Income (loss) from discontinued operations.. 6,462 8,724 (16,069) (40,968)
Cumulative effect of change in accounting
principle................................... (3,820)
-------- -------- -------- ---------
Net income (loss)........................... $ 6,701 $ 24,992 $ (7,716) $(105,938)
======== ======== ======== =========
Basic earnings (loss) per common share:
Income (loss) from continuing operations
before cumulative effect of change in
accounting principle........................ $ 0.08 $ 0.33 $ 0.17 $ (1.31)
Income (loss) from discontinued operations.. 0.13 0.18 (0.33) (0.83)
Cumulative effect of change in accounting
principle................................... (0.08)
-------- -------- -------- ---------
Total....................................... $ 0.13 $ 0.51 $ (0.16) $ (2.14)
======== ======== ======== =========
Diluted earnings (loss) per common share:
Income (loss) from continuing operations
before cumulative effect of change in
accounting principle........................ $ 0.08 $ 0.33 $ 0.17 $ (1.31)
Income (loss) from discontinued operations.. 0.13 0.17 (0.33) (0.83)
Cumulative effect of change in accounting
principle................................... (0.08)
-------- -------- -------- ---------
Total....................................... $ 0.13 $ 0.50 $ (0.16) $ (2.14)
======== ======== ======== =========
SCHEDULE II
ITEM 14.(a)2). FINANCIAL STATEMENT SCHEDULES
COVANTA ENERGY CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 2000
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS
-------------------------------
BALANCE AT CHARGED TO
BEGINNING CHARGED TO COSTS OTHER BALANCE AT
DESCRIPTION OF PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
- ---------------------------------------------------------------------------------------------------------------------------------
ALLOWANCES DEDUCTED IN THE BALANCE SHEET
FROM THE ASSETS TO WHICH THEY APPLY:
DOUBTFUL RECEIVABLES - CURRENT $17,942,000 $15,598,000 $ 1,272,000(B) $15,578,000 (A) $19,234,000
-----------------------------------------------------------------------------------
TOTAL $17,942,000 $15,598,000 $ 1,272,000 $15,578,000 $19,234,000
===================================================================================
ALLOWANCES NOT DEDUCTED:
RESERVES RELATING TO TAX INDEMNIFICATION
AND OTHER CONTINGENCIES IN CONNECTION
WITH THE SALE OF LIMITED PARTNERSHIP
INTERESTS IN AND RELATED TAX BENEFITS
OF A WASTE-TO-ENERGY FACILITY $ 300,000 $ 300,000
-----------------------------------------------------------------------------------
TOTAL $ 300,000 $ 300,000
===================================================================================
NOTES:
(A) WRITE-OFFS OF RECEIVABLES CONSIDERED UNCOLLECTIBLE.
(B) TRANSFER FROM OTHER ACCOUNTS
SCHEDULE II
ITEM 14.(a)2). FINANCIAL STATEMENT SCHEDULES
COVANTA ENERGY CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1999
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS
-------------------------------
BALANCE AT CHARGED TO
BEGINNING CHARGED TO COSTS OTHER BALANCE AT
DESCRIPTION OF PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
- ---------------------------------------------------------------------------------------------------------------------------------
ALLOWANCES DEDUCTED IN THE BALANCE SHEET
FROM THE ASSETS TO WHICH THEY APPLY:
DOUBTFUL RECEIVABLES-CURRENT $18,135,000 $ 5,130,000 $ 3,468,000 (E) $ 2,094,000 (A) $17,942,000
6,697,000 (C)
DEFERRED CHARGES ON PROJECTS 13,070,000 13,070,000 (D)
-----------------------------------------------------------------------------------
TOTAL $31,205,000 $ 5,130,000 $ 3,468,000 $ 21,861,000 $17,942,000
===================================================================================
ALLOWANCES NOT DEDUCTED:
PROVISION FOR RESTRUCTURING $ 274,000 $ 274,000 (C)
RESERVES RELATING TO TAX INDEMNIFICATION
AND OTHER CONTINGENCIES IN CONNECTION
WITH THE SALE OF LIMITED PARTNERSHIP
INTERESTS IN AND RELATED TAX BENEFITS
OF A WASTE-TO-ENERGY FACILITY 300,000 $ 300,000
OTHER 1,850,000 1,850,000 (B)
-----------------------------------------------------------------------------------
TOTAL $ 2,424,000 $ 2,124,000 $ 300,000
===================================================================================
(A) WRITE-OFFS OF RECEIVABLES CONSIDERED UNCOLLECTIBLE.
(B) PAYMENTS CHARGED TO ALLOWANCES.
(C) REVERSAL OF PROVISIONS NO LONGER REQUIRED.
(D) WRITE-OFF OF DEFERRED CHARGES.
(E) TRANSFER FROM OTHER ACCOUNTS.
SCHEDULE II
ITEM 14.(a)2). FINANCIAL STATEMENT SCHEDULES
COVANTA ENERGY CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1998
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS
-------------------------------
BALANCE AT CHARGED TO
BEGINNING CHARGED TO COSTS OTHER BALANCE AT
DESCRIPTION OF PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
- ---------------------------------------------------------------------------------------------------------------------------------
ALLOWANCES DEDUCTED IN THE BALANCE SHEET
FROM THE ASSETS TO WHICH THEY APPLY:
DOUBTFUL RECEIVABLES-CURRENT $14,643,000 $ 7,336,000 $ 3,318,000 (A) $18,135,000
526,000 (E)
DOUBTFUL RECEIVABLES-NONCURRENT 3,000,000 3,000,000 (A)
DEFERRED CHARGES ON PROJECTS 10,741,000 2,609,000 280,000 (D) 13,070,000
-----------------------------------------------------------------------------------
TOTAL $28,384,000 $ 9,945,000 $ 7,124,000 $31,205,000
===================================================================================
ALLOWANCES NOT DEDUCTED:
ESTIMATED COST OF DISPOSAL OF ASSETS $ 296,000 $ 296,000 (B)
PROVISION FOR RESTRUCTURING 1,141,000 867,000 (B) $ 274,000
RESERVES RELATING TO TAX INDEMNIFICATION
AND OTHER CONTINGENCIES IN CONNECTION
WITH THE SALE OF LIMITED PARTNERSHIP
INTERESTS IN AND RELATED TAX BENEFITS OF A
WASTE-TO-ENERGY FACILITY 3,000,000 2,700,000 (C) 300,000
OTHER 3,979,000 $ 100,000 1,223,000 (B) 1,850,000
1,006,000 (C)
-----------------------------------------------------------------------------------
TOTAL $ 8,416,000 $ 100,000 $ 6,092,000 $ 2,424,000
===================================================================================
NOTES:
(A) WRITE-OFFS OF RECEIVABLES CONSIDERED UNCOLLECTIBLE.
(B) PAYMENTS CHARGED TO ALLOWANCES.
(C) REVERSAL OF PROVISIONS NO LONGER REQUIRED.
(D) WRITEOFF OF DEFERRED CHARGES.
(E) TRANSFER TO OTHER ACCOUNTS.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF COVANTA
-------------------------------------------
Pursuant to General Instruction G (3), the information regarding
directors called for by this item is hereby incorporated by reference from
Covanta's 2001 Proxy Statement to be filed with the Securities and Exchange
Commission. The information regarding officers called for by this item is
included at the end of Part I of this document under the heading "Executive
Officers of Covanta."
Item 11. EXECUTIVE COMPENSATION
----------------------
Pursuant to General Instruction G (3), the information called for by
this item is hereby incorporated by reference from Covanta's 2001 Proxy
Statement to be filed with the Securities and Exchange Commission.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
Pursuant to General Instruction G (3), the information called for by
this item is hereby incorporated by reference from Covanta's 2001 Proxy
Statement to be filed with the Securities and Exchange Commission.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Pursuant to General Instruction G (3), the information called for by
this item is hereby incorporated by reference from Covanta's 2001 Proxy
Statement to be filed with the Securities and Exchange Commission.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Listed below are the documents filed as a part of this report:
1) All financial statements: see Index to financial statements,
see Part II, Item 8.
2) Financial statement schedules: see Index to financial statements,
see Part II, Item 8.
(b) During the fourth quarter of 2000 a Form 8-K Report was filed on
October 2, 2000 and on November 16, 2000, each under Item 5, Other
Events, and Item 7, Financial Statements, Pro Forma Financial
Information, and Exhibits, and are each incorporated herein by
reference.
(c) Those exhibits required to be filed by Item 601 of Regulation S-K:
EXHIBITS
--------
3.0 Articles of Incorporation and By-laws.
3.1 (a) The Company's Restated Certificate of Incorporation as
amended.*
(b) Certificate of Ownership and Merger, Merging Ogden-Covanta,
Inc. into Ogden Corporation, dated March 7, 2001, transmitted
herewith as Exhibit 3.1(b).
3.2 The Company's By-Laws, as amended through April 8, 1998.*
4.0 Instruments Defining Rights of Security Holders.
4.1 Fiscal Agency Agreement between Covanta and Bankers Trust
Company, dated as of June 1, 1987, and Offering Memorandum dated
June 12, 1987, relating to U.S. $85 million Ogden 6% Convertible
Subordinated Debentures, Due 2002.*
4.2 Fiscal Agency Agreement between the Company and Bankers Trust
Company, dated as of October 15, 1987, and Offering Memorandum,
dated October 15, 1987, relating to U.S. $75 million Ogden 5-3/4%
Convertible Subordinated Debentures, Due 2002.*
4.3 Indenture dated as of March 1, 1992 from the Company Corporation
to Wells Fargo Bank Minnesota, National Association, as Trustee
(as successor in such capacity to The Bank of New York, Trustee),
relating to the Company's $100 million debt offering.*
10.0 Material Contracts
10.1 (a) U.S. $95 million Term Loan and Letter of Credit and
Reimbursement Agreement among the Company, the Deutsche Bank AG,
New York Branch and the signatory Banks thereto, dated March 26,
1997.*
(b) Revolving Credit and Participation Agreement, dated as of
March 14, 2001, among the Company, the Lenders listed therein,
Bank of America, NA, as Administrative Agent, Co-Arranger and
Co-Book Runner and Deutsche Bank AG, New York Branch, as
Documentation Agent, Co-Arranger and Co-Book Runner, transmitted
herewith as Exhibit 10.1(b).
10.2 Amended and Restated Rights Agreement between the Company and the
Bank of New York, dated as of September 28, 2000.*
10.3 Executive Compensation Plans and Agreements.
(a) Ogden Corporation 1990 Stock Option Plan as Amended and
Restated as of January 19, 1994.*
(i) Amendment adopted and effective as of September 18, 1997.*
(b) Ogden Corporation 1999 Stock Incentive Plan Amended and
Restated as of January 1, 2000.*
(c) Ogden Energy Select Plan, dated January 1, 2000, transmitted
herewith as Exhibit 10.3(e).
(d) (i) Ogden Corporation Restricted Stock Plan and Restricted
Stock Agreement.*
(ii) Ogden Corporation Restricted Stock Plan for
Non-Employee Directors and Restricted Stock Agreement.*
(e) Ogden Corporation Profit Sharing Plan as Amended and Restated
effective as of January 1, 1995.*
(f) Ogden Corporation Core Executive Benefit Program.*
(g) Ogden Projects Pension Plan.*
(h) Ogden Projects Profit Sharing Plan.*
(i) Ogden Projects Supplemental Pension and Profit Sharing
Plans.*
(j) Ogden Projects Core Executive Benefit Program.*
(k) (i) Form of Amended Ogden Projects, Inc. Profit Sharing
Plan, effective as of January 1, 1994.*
(ii) Form of Amended Ogden Projects, Inc. Pension Plan,
effective as of January 1, 1994.*
(l) Ogden Executive Performance Incentive Plan.*
(m) Ogden Key Management Incentive Plan.*
10.4 Employment Agreements
(a) Employment Agreement between the Company and Lynde H. Coit
dated March 1, 1999.*
(b) Employment Agreement between Scott G. Mackin, Executive Vice
President and the Company dated as of October 1, 1998.*
(c) Employment Agreement between Jeffrey R. Horowitz and Covanta
Energy Group, Inc., dated May 1, 1999, transmitted herewith as
Exhibit 10.4(c).
(d) Employment Agreement between Paul B. Clements and Covanta
Energy Group, Inc., dated May 1, 1999, transmitted herewith as
Exhibit 10.4(d).
(e) Employment Agreement between Covanta Energy Group, Inc. and
Bruce W. Stone dated May 1, 1999.*
(f) Employment Agreement between the Company and Raymond E.
Dombrowski, Jr., Senior Vice President and Chief Financial
Officer, dated as of September 21, 1998.*
11 Not Applicable.
12 Not Applicable.
13 Not Applicable.
16 Not Applicable.
18 Not Applicable.
21 Subsidiaries of Covanta. Transmitted herewith as Exhibit 21.
22 Not Applicable.
23 Independent Auditors Consent. Transmitted herewith as Exhibit 23.
24 Not Applicable.
* INCORPORATED BY REFERENCE AS SET FORTH IN THE EXHIBIT INDEX OF THIS ANNUAL
REPORT ON FORM 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COVANTA CORPORATION
DATE: MARCH 14, 2001
By /S/ SCOTT G. MACKIN
-------------------
Scott G. Mackin
President and Chief
Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints jointly and severally, Scott G. Mackin
and William J. Metzger, or either of them as his or her true and lawful
attorneys-in-fact and agents, will full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to this Report to Form 10-K, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated.
SIGNATURE TITLE DATE
/S/ Scott G. Mackin
- -------------------------
SCOTT G. MACKIN President, Chief Executive March 14, 2001
Officer and Director
/S/ Edward W. Moneypenny
- -------------------------
EDWARD W. MONEYPENNY Executive Vice President and March 14, 2001
Chief Financial Officer
/S/ William J Metzger
- -------------------------
WILLIAM J. METZGER Vice President and Chief March 14, 2001
Accounting Officer
/S/ Anthony J. Bolland
- -------------------------
ANTHONY J. BOLLAND Director March 14, 2001
/S/ Norman G. Einspruch
- -------------------------
NORMAN G. EINSPRUCH Director March 14, 2001
/S/ George L. Farr
- -------------------------
GEORGE L. FARR Director March 14, 2001
/S/ Jeffrey P. Friedman
- -------------------------
JEFFREY P. FRIEDMAN Director March 14, 2001
/S/ Judith D. Moyers
- -------------------------
JUDITH D. MOYERS Director March 14, 2001
/S/ Homer A. Neal
- -------------------------
HOMER A. NEAL Director March 14, 2001
/S/ Robert E. Smith
- -------------------------
ROBERT E. SMITH Director March 14, 2001
/S/ Joseph A. Tato
- -------------------------
JOSEPH A. TATO Director March 14, 2001
/S/ Helmut F.O. Volcker
- -------------------------
HELMUT F.O. VOLCKER Director March 14, 2001
/S/ Robert R. Womack
- -------------------------
ROBERT R. WOMACK Director March 14, 2001