FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-3122
Covanta Energy Corporation
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(Exact name of registrant as specified in its charter)
Delaware 13-5549268
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
40 Lane Road, Fairfield, NJ 07004
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(Address or principal executive office) (Zip code)
(973) 882-9000
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(Registrant's telephone number including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of each of the issuer's classes of common
stock, as of June 30, 2001; 49,813,747 shares of Common Stock, $.50 par value
per share.
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COVANTA ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED FOR THE THREE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ --------------------------
2001 2000 2001 2000
------ ------ ------ ------
(In Thousands of Dollars, Except Per Share Data)
Service revenues $ 291,061 $ 296,448 $ 151,413 $ 151,599
Electricity and steam sales 176,959 126,862 93,068 67,564
Equity in income of investees and joint ventures 12,036 7,457 7,554 4,447
Construction revenues 18,031 41,727 8,608 18,881
Other sales - net 21,003 19,950 9,525 10,321
Other - net 29,730 12,188 29,730 12,170
Net gain (loss) on sale of businesses 2,192 (634) 337
---------- ---------- ---------- ----------
Total revenues 551,012 503,998 300,235 264,982
---------- ---------- ---------- ----------
Plant operating expenses 268,778 262,351 134,585 132,728
Construction costs 29,476 44,269 22,719 22,911
Depreciation and amortization 49,934 55,753 26,157 26,886
Debt service charges 43,089 42,866 22,354 21,098
Other operating costs and expenses 29,552 14,601 17,642 8,688
Costs of goods sold 21,541 18,075 10,611 7,894
Selling, administrative and general expenses 38,632 33,625 21,545 20,758
Project development expenses 2,912 9,841 1,186 6,479
Other - net 7,163 17,406 6,413 17,361
Write-down of net assets held for sale 1,691 1,691
---------- ---------- ---------- ----------
Total costs and expenses 492,768 498,787 264,903 264,803
---------- ---------- ---------- ----------
Consolidated operating income 58,244 5,211 35,332 179
Interest expense - net (14,580) (18,216) (7,140) (9,731)
---------- ---------- ---------- ----------
Income (loss) from continuing operations before
income taxes and minority interests 43,664 (13,005) 28,192 (9,552)
Income taxes (16,764) 581 (12,106) (22)
Minority interests (3,027) (2,164) (1,628) (840)
---------- ---------- ---------- ----------
Income (loss) from continuing operations 23,873 (14,588) 14,458 (10,414)
Loss from discontinued operations (net of income tax
benefit of YTD 2000, $12,754; Qtr. 2000, $5,077) (91,799) (66,489)
---------- ---------- ---------- ----------
Net Income (Loss) 23,873 (106,387) 14,458 (76,903)
---------- ---------- ---------- ----------
Other Comprehensive Income (Loss), Net of Tax:
Foreign currency translation adjustments (net of income tax
benefit of, YTD 2001, $425; Qtr. 2001, $298) (2,089) (7,700) (1,365) (2,826)
Unrealized Gains (Losses) on Securities:
Unrealized holding losses arising during period (17)
---------- ---------- ---------- ----------
Other comprehensive income (loss) (2,089) (7,717) (1,365) (2,826)
---------- ---------- ---------- ----------
Comprehensive income (loss) $ 21,784 $ (114,104) $ 13,093 $ (79,729)
========== ========== ========== ==========
Basic Earnings Per Share:
Income (loss) from continuing operations $ 0.48 $ (0.30) $ 0.29 $ (0.21)
Income (loss) from discontinued operations (1.85) (1.34)
---------- ---------- ---------- ----------
Net Income (Loss) $ 0.48 $ (2.15) $ 0.29 $ (1.55)
========== ========== ========== ==========
Diluted Earnings Per Share:
Income (loss) from continuing operations $ 0.48 $ (0.30) $ 0.29 $ (0.21)
Income (loss) from discontinued operations (1.85) (1.34)
---------- ---------- ---------- ----------
Net Income (Loss) $ 0.48 $ (2.15) $ 0.29 $ (1.55)
========== ========== ========== ==========
See notes to condensed consolidated financial statements.
COVANTA ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2001 December 31, 2000
--------------- -------------------
(In Thousands of Dollars)
Assets
Current Assets:
Cash and cash equivalents $ 80,925 $ 80,643
Restricted cash 194,118
Restricted funds held in trust 115,919 96,280
Receivables (less allowances: 2001, $27,928 and 2000,
$19,234) 258,829 247,914
Deferred income taxes 36,482 36,514
Prepaid expenses and other current assets 102,354 77,239
Net assets held for sale 91,239 70,614
----------- -----------
Total current assets 685,748 803,322
Property, plant and equipment - net 1,935,056 1,789,430
Restricted funds held in trust 155,016 157,061
Unbilled service and other receivables 158,202 155,210
Unamortized contract acquisition costs 85,350 88,702
Goodwill and other intangible assets 18,826 14,944
Investments in and advances to investees and joint ventures 184,623 223,435
Other assets 66,572 63,347
----------- -----------
Total Assets $ 3,289,393 $ 3,295,451
=========== ===========
Liabilities and Shareholders' Equity
Liabilities:
Current Liabilities:
Current portion of long-term debt $ 42,778 $ 145,289
Current portion of project debt 102,428 99,875
Current portion of convertible subordinated debentures 85,000
Accounts payable 38,714 41,106
Federal and foreign income taxes payable 507
Accrued expenses, etc. 335,805 308,681
Deferred income 41,297 38,517
----------- -----------
Total current liabilities 646,529 633,468
Long-term debt 277,821 310,126
Project debt 1,365,257 1,290,388
Deferred income taxes 324,884 315,931
Deferred income 167,723 172,050
Other liabilities 140,934 158,992
Minority interests 47,660 34,290
Convertible subordinated debentures 63,650 148,650
----------- -----------
Total Liabilities 3,034,458 3,063,895
----------- -----------
Shareholders' Equity:
Serial cumulative convertible preferred stock, par value
$1.00 per share; authorized, 4,000,000 shares; shares
outstanding: 35,034 in 2001 and 35,582 in 2000, net of
treasury shares of 29,820 in 2001 and 2000 35 36
Common Stock, par value $.50 per share; authorized,
80,000,000 shares; shares outstanding: 49,813,747 in
2001 and 49,645,459 in 2000, net of treasury shares of
4,123,996 and 4,265,115, respectively 24,907 24,823
Capital surplus 188,207 185,681
Notes receivable from key employees for common stock issuance (1,049) (1,049)
Unearned restricted stock compensation (981)
Earned surplus 49,669 25,829
Accumulated other comprehensive income (5,853) (3,764)
----------- -----------
Total Shareholders' Equity 254,935 231,556
----------- -----------
Total Liabilities and Shareholders' Equity $ 3,289,393 $ 3,295,451
=========== ===========
See notes to condensed consolidated financial statements.
COVANTA ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SIX MONTHS ENDED YEAR ENDED
June 30, 2001 December 31, 2000
----------------------- ------------------------
SHARES AMOUNTS SHARES AMOUNTS
-------- --------- -------- ---------
(In Thousands of Dollars, Except Per Share Amounts)
Serial Cumulative Convertible Preferred Stock, Par Value
$1.00 Per Share; Authorized, 4,000,000 Shares:
Balance at beginning of period 65,402 $ 66 69,066 $ 69
Shares converted into common stock (548) (1) (3,664) (3)
---------- ---------- ---------- ----------
Total 64,854 65 65,402 66
Treasury shares (29,820) (30) (29,820) (30)
---------- ---------- ---------- ----------
Balance at end of period (aggregate involuntary
liquidation value - 2001, $706) 35,034 35 35,582 36
---------- ---------- ---------- ----------
Common Stock, Par Value $.50 Per Share;
Authorized, 80,000,000 Shares:
Balance at beginning of period 53,910,574 26,956 53,873,298 26,937
Exercise of stock options 23,898 12
Shares issued for acquisition 15,390 8
Conversion of preferred shares 3,271 1 21,886 11
---------- ---------- ---------- ----------
Total 53,937,743 26,969 53,910,574 26,956
---------- ---------- ---------- ----------
Treasury shares at beginning of period 4,265,115 2,133 4,405,103 2,203
Issuance of restricted stock (102,153) (51) (139,988) (70)
Exercise of stock options (38,966) (20)
---------- ---------- ---------- ----------
Treasury shares at end of period 4,123,996 2,062 4,265,115 2,133
---------- ---------- ---------- ----------
Balance at end of period 49,813,747 24,907 49,645,459 24,823
---------- ---------- ---------- ----------
Capital Surplus:
Balance at beginning of period 185,681 183,915
Exercise of stock options 776
Issuance of restricted stock 1,751 1,602
Shares issued for acquisition 172
Conversion of preferred shares (1) (8)
---------- ----------
Balance at end of period 188,207 185,681
---------- ----------
Notes receivable from key employees
for common stock issuance (1,049) (1,049)
---------- ----------
Unearned restricted stock compensation:
Issuance of restricted common stock (1,470)
Amortization of unearned restricted stock compensation 489
---------- ----------
Balance at end of period (981)
---------- ----------
Earned Surplus:
Balance at beginning of period 25,829 255,182
Net income (loss) 23,873 (229,285)
---------- ----------
Total 49,702 25,897
---------- ----------
Preferred dividends - per share 2001, $.9375, and
2000, $1.875 33 68
---------- ----------
Balance at end of period 49,669 25,829
---------- ----------
Cumulative Translation Adjustment - Net (5,444) (3,355)
---------- ----------
Minimum Pension Liability Adjustment (409) (409)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY $ 254,935 $ 231,556
========== ==========
See notes to condensed consolidated financial statements.
COVANTA ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
JUNE 30,
-----------------------------
2001 2000
-------- --------
(In Thousands of Dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 23,873 $ (106,387)
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by (Used in) Operating Activities of Continuing Operations:
Loss from discontinued operations 91,799
Depreciation and amortization 49,934 55,753
Deferred income taxes 8,627 (1,188)
Provision for doubtful accounts 13,923 1,184
Other 1,676 3,717
Management of Operating Assets and Liabilities:
Decrease (Increase) in Assets:
Receivables (21,189) (6,812)
Inventories 110
Other assets (37,957) (1,183)
Increase (Decrease) in Liabilities:
Accounts payable (19,521) (17,399)
Accrued expenses 30,190 (37,397)
Deferred income (8,476) (10,138)
Other liabilities (10,196) 11,885
--------- ----------
Net cash provided by (used in) operating activities of continuing operations 30,884 (16,056)
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of businesses 13,841 4,848
Proceeds from sale of property, plant, and equipment 447 3,626
Proceeds from sale of marketable securities available for sale 3,692
Investments in facilities (32,652) (17,908)
Other capital expenditures (6,060) (9,645)
Decrease in other receivables 3,212 3,501
Distributions from investees and joint ventures 20,033 5,828
Increase in investments in and advances to investees and joint ventures (14,485) (19,740)
--------- ----------
Net cash used in investing activities of continuing operations (15,664) (25,798)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings for facilities 61,605
Other new debt 15,853 1,755
Decrease (increase) in funds held in trust (17,591) 17,369
Payment of debt (205,756) (95,444)
Dividends paid (33) (34)
Decrease (Increase) in restricted cash 194,118 (177,548)
Proceeds from exercise of stock options 808
Other (2,337) (1,904)
--------- ----------
Net cash used in financing activities of continuing operations (14,938) (194,201)
--------- ----------
Net cash provided by discontinued operations 254,588
--------- ----------
Net Increase in Cash and Cash Equivalents 282 18,533
Cash and Cash Equivalents at Beginning of Period 80,643 101,020
--------- ----------
Cash and Cash Equivalents at End of Period $ 80,925 $ 119,553
========= ==========
See notes to condensed consolidated financial statements.
ITEM 1 - NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation:
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and, therefore, do not include
all information and footnotes necessary for a fair presentation of financial
position, results of operations, and cash flows in conformity with generally
accepted accounting principles. However, in the opinion of management, all
adjustments consisting of normal recurring accruals necessary for a fair
presentation of the operating results have been included in the statements.
Covanta Energy Corporation ("Covanta" or the "Company") recorded total interest
expense and total interest income of $9.5 million and $2.3 million, and $11.4
million and $1.7 million for the three-month periods ended June 30, 2001 and
2000, respectively. Total interest expense and total interest income was $20.8
million and $6.2 million, and $20.9 million and $2.7 million for the six-month
periods ended June 30, 2001 and 2000, respectively.
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities" and has identified all derivatives within its scope. 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's policy is to enter into derivatives to protect the Company against
fluctuations in interest rates and foreign currency exchange rates as they
relate to specific assets and liabilities. The Company's policy is to not enter
into derivative instruments for speculative purposes.
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 increased both assets and
liabilities recorded on the January 1, 2001 balance sheet by approximately $12.3
million. The $12.3 million relates to the Company's interest rate swap agreement
that economically fixes the interest rate on certain adjustable-rate revenue
bonds reported in Project debt. The asset and liability recorded at January 1,
2001 were decreased by $.3 million during the six months ended June 30, 2001 to
adjust for a decrease in the swap's fair value at June 30, 2001. 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.
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 result 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 three-month periods ended June 30, 2001 and 2000, the floating rates on the
swap averaged 3.05% and 4.3%, respectively. The notional amount of the swap at
June 30, 2001 and December 31, 2000 was $80.2 million and is reduced in
accordance with the scheduled repayments of the applicable revenue bonds.
Currently there are ongoing discussions surrounding the implementation and
interpretation of SFAS No. 133 by the Financial Accounting Standards Board's
Derivatives Implementation Group. The Company implemented SFAS No. 133 based on
the current rules and guidance in place as of January 1, 2001 and through June
30, 2001.
In July 2001, the Financial Accounting Standard Board ("FASB"), issued SFAS No.
141, "Business Combinations." SFAS No. 141 requires the purchase method of
accounting for business combinations initiated after June 30, 2001 and prohibits
use of the pooling-of-interests method.
In July 2001, the FASB also issued SFAS No. 142, "Goodwill and Other Intangible
Assets", which is effective January 1, 2002. SFAS No. 142 requires upon adoption
the discontinuance of goodwill amortization. In addition, the standard includes
provisions for the reclassification of certain existing recognized intangibles
as goodwill, reassessment of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out of previously reported
goodwill and the identification of reporting units for purposes of assessing
potential future impairments of goodwill. SFAS No. 142 also requires the Company
to complete a transitional goodwill impairment test six months from the date of
adoption and to evaluate for impairment the carrying value of goodwill on an
annual basis thereafter. Identifiable intangible assets will continue to be
amortized over their useful lives and reviewed for impairment in accordance with
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of."
The Company is currently assessing but has not yet determined the effect of
adoption of SFAS Nos. 141 and 142 on its financial position and results of
operations.
The accompanying financial statements for prior periods have been reclassified
as to certain amounts, including various revenues and expenses, to conform with
the 2001 presentation, which is more tailored for a stand-alone energy company.
Discontinued Operations and 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 until
December 31, 2000.
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 those businesses as net assets held for sale. 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 Italy, Spain and
Colombia. The aviation business in Italy was sold in February 2001 for
approximately $10.0 million, and the Company's interest in the aviation business
in Spain was sold in May 2001 for approximately $1.8 million. In July 2001, the
Company sold its interest in the airport privatization business in Colombia,
South America for $9.7 million and reached agreement to sell its aviation
fueling business. These non-core businesses are reported in the "Other" segment
at December 31, 2000 and for the six months ended June 30, 2001. Other noncore
businesses included in Net Assets Held for Sale are 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.
Datacom and CGS are reported in the Other segment and Energy segment,
respectively, in the six-month periods ended June 30, 2001 and 2000. The Company
expects to sell all of these remaining businesses during the next twelve months.
Revenues and loss from discontinued operations (expressed in thousands of
dollars) for the three months and six months ended June 30, 2000, were as
follows:
Six Months Three Months
Ended June 30 Ended June 30
------------- -------------
Revenues $303,049 $147,444
======== ========
Loss Before Income
Taxes and Minority Interests (104,466) (71,433)
Benefit for Income Taxes (12,754) (5,077)
Minority Interests 87 133
-------- --------
Loss from Discontinued
Operations $(91,799) $(66,489)
======== ========
Revenues and loss before income taxes from net assets held for sale (expressed
in thousands of dollars) for the three months and six months ended June 30,
2001, which are included in continuing operations in 2001, were as follows:
Six Months Three Months
Ended June 30 Ended June 30
------------- -------------
Revenues $ 52,227 $ 26,685
========= =========
Loss Before Income Taxes $ (5,128) $ (3,863)
========= =========
On January 1, 2001, the Company stopped recording depreciation and amortization
expense related to net assets held for sale, which had the effect of decreasing
the loss before income taxes by approximately $2.4 million for the six months
ended June 30, 2001. Also, in the second quarter of 2001, Covanta management
considered the status of recent offers and negotiations relating to the
Company's investment in Australian venue management businesses, and current
economic conditions, and adjusted its estimate of the proceeds to be received
from its sale and recorded an additional write-down of net assets held for sale
of $1.7 million.
Net assets held for sale (expressed in thousands of dollars) at June 30, 2001
and December 31, 2000 were as follows:
June 30, 2001 December 31, 2000
------------- -----------------
Current Assets $ 74,337 $ 73,237
Property, Plant and Equipment - net 21,623 19,939
Other Assets 59,213 73,310
Notes Payable and Current Portion of
Long-Term Debt (2,768) (28,651)
Other Current Liabilities (48,131) (52,053)
Long-Term Debt (550) (670)
Other Liabilities (12,485) (14,498)
----------- -----------
Net Assets Held for Sale $ 91,239 $ 70,614
=========== ===========
The increase in net assets held for sale during the six months ended June 30,
2001 is due mainly to the contribution of $25.0 million to an entertainment
operation to pay certain of that operation's debt in connection with the closing
of the Master Credit Facility.
Special Charges:
As a result of the Company's Board of Directors' plan to dispose of its aviation
and entertainment businesses and close its New York City headquarters, and its
plan to exit other noncore businesses, the Company incurred various expenses in
1999 which were recognized in its continuing and discontinued operations. In
addition, the Company incurred various expenses in 2000 relating to its
decisions to reorganize its development office in Hong Kong and its Energy
headquarters in New Jersey. Certain of those charges related to severance costs
for its New York City employees and Energy employees, contract termination costs
of its former Chairman and Chief Executive Officer, office closure costs, and
professional services related to the Energy reorganization, will mostly be paid
out over the next two years. The following is a summary of those costs and
related payments during the three months ended June 30, 2001 (expressed in
thousands of dollars):
AMOUNTS PAID
DURING THREE
BALANCE AT MONTHS ENDED BALANCE AT
MARCH 31, 2001 JUNE 30, 2001 JUNE 30, 2001
-------------- ------------- -------------
Severance for approximately
200 employees $ 24,500 $ 3,000 $ 21,500
Severance for approximately
80 Energy employees 8,400 3,600 4,800
Contract termination settlement 400 400
Bank fees 2,100 2,100
Office closure costs 3,500 3,500
Professional services relating to
Energy reorganization 200 200 0
------------ ----------- -----------
$ 39,100 $ 6,800 $ 32,300
============ =========== ===========
Receivables from California Utilities:
Recent events in the California energy markets affected the state's two largest
utilities and resulted in delayed payments for energy delivered by the Company's
facilities in late 2000 and early 2001. Pacific Gas & Electric Company ("PG&E")
and Southern California Edison Company ("SCE") both suspended payments under
long term power purchase agreements in the beginning of 2001. On March 26, 2001
the California Public Utilities Commission ("CPUC") approved a substantial rate
increase and directed the utilities to make payment to suppliers for current
energy deliveries. SCE has made payments for energy delivered since March 26,
2001. On April 6, 2001, PG&E filed for protection under Chapter 11 of the U.S.
Bankruptcy Code. Since that time PG&E is also in compliance with the CPUC order
and is making payments for current energy deliveries. In mid-June the CPUC
issued an order declaring as reasonable and prudent any power purchase amendment
at a certain fixed-price for a five-year term. On June 18, 2001 and July 31,
2001 the Company entered into several agreements and amendments to power
purchase agreements with SCE which contained the CPUC approved pricing for a
term of five years, to commence upon the occurrence of certain events. In
addition, in June SCE paid 10% of the outstanding receivables and agreed to a
timetable by which the remaining 90% would be paid, which outstanding amount
will earn interest. In July, the Company also entered into agreements with
similar terms with PG&E. These agreements also contain the CPUC approved price
and term, both of which are effective immediately. Unlike SCE, PG&E made no cash
payments but did agree that the amount owed to the Company will earn interest at
a rate to be determined by the Bankruptcy Court. PG&E agreed to assume the
Company's power purchase agreements and elevate the outstanding payable to
priority administrative claim status. The amount of the claim and interest will
be settled prior to the finalization of PG&E's plan of reorganization. The
Bankruptcy court approved the agreements, the power purchase agreements and the
assumption of the contracts on July 13, 2001. As of June 30, 2001, the Company's
outstanding net receivables from these two utilities totaled approximately $58.2
million (including the Company's 50% interest in several partnerships) net of
reserves of approximately $19.4 million. Of those net receivables, approximately
$13.7 million was due from PG&E. Disagreements with both SCE and PG&E still
exist regarding the valuation of the pre-March 26, 2001 receivables. Resolution
of these disagreements and payment of the receivables is likely to be received
only upon the resolution of California's energy crisis and PG&E's bankruptcy.
Therefore, the amounts received and the timeliness of payment are subject to
legal, regulatory, and legislative developments. Although this matter is not
free of doubt, the Company believes it will ultimately receive payments in full
of these receivables.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OPERATIONS
Revenues and income (loss) from continuing operations by segment for the three
months and the six months ended June 30, 2001 and 2000 (expressed in thousands
of dollars) were as follows:
Information Concerning Six Months Ended June 30, Three Months Ended June 30,
Business Segments 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------
Revenues:
Energy $ 494,833 $ 479,838 $ 270,946 $ 254,660
Other 54,609 24,160 27,719 10,322
Corporate 1,570 1,570
--------- --------- --------- ---------
Total Revenues $ 551,012 $ 503,998 $ 300,235 $ 264,982
========= ========= ========= =========
Income (loss) from Operations:
Energy $ 81,753 $ 48,957 $ 53,866 $ 35,729
Other (10,499) (11,435) (9,274) (8,824)
--------- --------- --------- ---------
Total Income from Operations 71,254 37,522 44,592 26,905
Corporate unallocated income and expenses-net (13,010) (32,311) (9,260) (26,726)
Interest-net (14,580) (18,216) (7,140) (9,731)
--------- --------- --------- ---------
Income (loss) from continuing operations before
income taxes and minority interests $ 43,664 $ (13,005) $ 28,192 $ (9,552)
========= ========= ========= =========
Quarter Ended June 30, 2001 vs. Quarter Ended June 30, 2000
Continuing Operations: Revenues for the quarter ended June 30, 2001 were $35.3
million higher than the comparable period of 2000 primarily reflecting an
increase in Other segment revenues of $17.4 million, and an increase in Energy
segment revenues of $16.3 million.
Service revenues in 2001 decreased $.2 million compared to the quarter ended
June 30, 2000. Energy service revenues in 2001 decreased $15.7 million primarily
due to a decrease of $21.3 million related to the environmental consulting
business which was sold in November 2000, partially offset by an increase of
$5.6 million due mainly to contractual annual escalation adjustments at many
plants, increased growth in the supplemental waste business and a water service
operating agreement with the city of Bessemer, Alabama, which began in October
2000. The Other segment's service revenues increased $15.6 million due to the
inclusion in continuing operations of the unsold aviation and entertainment
businesses in 2001, which were included in discontinued operations in 2000.
Electricity and steam sales revenue increased $25.5 million compared to the
second quarter of 2000, attributable mainly to our Samalpatti, India project
commencing operation, and increased production and favorable energy pricing
experienced primarily at plants in California as well as increased pricing
experienced at certain waste-to-energy plants with merchant energy capacity.
Equity in income of investees and joint ventures for the three months ended June
30, 2001 increased $3.1 million compared to the same period in 2000. The
increase is primarily attributable to the Quezon project in the Philippines,
which commenced operations in the second quarter of 2000, and net equity income
related to unsold aviation and entertainment joint ventures.
Construction revenues for the three months ended June 30, 2001 decreased $10.3
million from the comparable period in 2000. The decrease is attributable to the
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 construction of a wastewater
project in the third quarter of 2000.
Other sales - net decreased $.8 million compared to the second quarter of 2000
due mainly to decreased activity in the operations of Datacom associated with
Genicom Corporation (Genicom), its major customer.
Other revenues - net increased $17.6 million compared to the same period in
2000. Other revenues in 2001 included a $19.6 million insurance settlement and
other matters related to the Lawrence, Massachusetts facility, $5.7 million of
development fees and other matters related to the Quezon plant in the
Philippines, and insurance proceeds related to a waste wood plant. 2000 included
a $12.2 million insurance settlement related to the Lawrence facility.
Net gain on sale of businesses for the three months ended June 30, 2001 included
a gain of $0.6 million representing an adjustment on the sale of the aviation
fixed base operations, and a loss of $0.3 million on the sale of the ground
handling business in Spain.
Total costs and expenses in the second quarter of 2001 increased by $.1 million
compared to the first quarter of 2000. This increase reflects an increase in the
Other segment of $19.4 million due mainly to the inclusion of unsold aviation
and entertainment businesses in 2001, partially offset by a decrease in the
Energy segment of $1.9 million and a decrease in corporate unallocated overhead
of $17.5 million.
The Energy segment's plant operating expenses increased by $1.9 million in the
three months ended in June 30, 2001 compared to the same period of 2000.
Operating expenses increased by approximately $19.7 million primarily due to
increased fuel costs attributable to higher natural gas and oil prices, higher
generation, primarily at waste-wood plants in California, higher maintenance
costs and the commencement of operations of the Samalpatti project. This
increase was partially offset by a decrease of $17.8 million in the
environmental business, which was sold in November of 2000.
Construction costs decreased by $.2 million for the three months ended 2001
compared to the comparable period of 2000. The decrease is due to the completion
of the retrofit construction activity mandated by the Clean Air Act Amendments
of 1990 and completion of the construction of a wastewater project in the third
quarter of 2000, partially offset by an increase in the civil construction
business (which management anticipates will cease during 2002) principally
related to cost overruns on one individual project.
Depreciation and amortization expense decreased by $.7 million in the second
quarter 2001 compared to the comparable period in 2000. This decrease is
primarily related to a decrease in corporate depreciation and amortization,
which in 2000 included $2.9 million of accelerated amortization of a new data
processing system. Also, Energy's depreciation and amortization expense
increased by $2.7 million in the three months ended June 30, 2001 compared to
2000 primarily due to commencements of operations of the Samalpatti project in
2001.
Debt service charges increased by $1.3 million in the second quarter of 2001
versus the comparable period of 2000. The increase is primarily due to project
debt outstanding related to the Samalpatti project, offset by lower debt service
expense due to lower project debt related to various facilities caused by
redemption and maturity of bonds. The Energy segment had one interest rate swap
agreement outstanding that resulted in additional debt service expense of $.4
million and $.2 million for the three month periods ended June 30, 2001 and
2000, respectively.
Other operating costs and expenses for the first three months of 2001 increased
$9.0 million due to activity in the Other segment. This increase was due mainly
to the inclusion of unsold aviation and entertainment businesses in 2001, which
were included in discontinued operations in 2000. This increase was partially
offset by the effect of the sale of Applied Data Technology, Inc. (ADTI) in
2000.
Costs of goods sold for the second quarter of 2001 increased $2.7 million
compared to the second quarter of 2000 due to activity in the Other segment,
mainly increased activity and increasing product costs at Datacom.
Selling, administrative and general expenses for the second quarter of 2001
increased $.8 million compared to the same period of 2000 due mainly to the
inclusion in continuing operations of the unsold aviation and entertainment
businesses in 2001. That increase was partially offset by a decrease in
unallocated corporate overhead expenses that was fundamentally the result of a
decrease in most overhead costs due to the wind-down of the Company's New York
office. Selling, administrative and general expenses for the Energy segment
decreased $2.2 million compared to the second quarter of 2000 principally due to
the sale in November 2000 of the environmental consulting business.
Project development expenses for the three months ended June 30, 2001 decreased
by $5.3 million from the same period in 2000. The decrease is mainly due to a
decrease in overhead and other costs related to development in the Asian market.
Other expenses-net decreased $10.9 million compared to the second quarter of
2000. This decrease is due mainly to costs incurred in 2000 representing fees
and expenses incurred in connection with the waiver by certain creditors of
certain covenants and the extension of credit through July 2000, and fees and
expenses incurred in connection with financing efforts to support the
then-proposed recapitalization plan. In 2001, the effect of these 2000 costs was
partially offset by the amortization of the Company's costs in securing its
Revolving Credit and Participation Agreement (the "Agreement") in March 2001.
Such costs are being amortized over one year.
Write-down of net assets held for sale in the three months ended June 30, 2001
relates to the Company's investment in its Australian venue management business.
In the second quarter of 2001, Covanta management considered the status of
recent offers and negotiations relating to that business, and current economic
conditions, and recorded a pre-tax loss of $1.7 million.
Interest expense-net in the second quarter of 2001 decreased $2.6 million
compared to the same period of 2000. Corporate interest expense-net decreased
$1.2 million primarily due to lower average debt outstanding and lower rates on
variable-rate debt. The Energy segment's interest expense - net decreased by
$1.7 million in 2001 compared to 2000 due to lower debt outstanding caused by
payments and an increase in interest income on cash balances.
The effective tax rate for the three months ended June 30, 2001 was 42.9%
compared to (0.2%) for the same period of 2000. This increase in the effective
rate was primarily due to pretax earnings in the current year period, versus
pretax losses in the 2000 period for which certain tax benefits were not
recognized, and increased domestic income resulting in an overall higher
effective tax rate.
Discontinued Operations: In the second quarter of 2000, all aviation and
entertainment businesses were accounted for as discontinued operations while
such unsold businesses were accounted for in continuing operations in the second
quarter of 2001. In the second quarter of 2000 the loss from discontinued
operations totaled $66.5 million. The loss before interest and taxes from
discontinued operations was $70.2 million, primarily reflecting accrued net
losses of $57.8 million on the disposal of aviation and entertainment
businesses, a provision of $8.5 million for additional estimated pretax net
operating losses from July 1, 2000 through the anticipated dates of sales of
those remaining businesses, legal, accounting, consulting and overhead expenses
incurred in connection with the discontinuance of those businesses and
accelerated depreciation in connection with shortened estimated useful lives of
management information systems.
Six Months Ended June 30, 2001 vs. Six Months Ended June 30, 2000
Continuing Operations: Revenues for the six months ended June 30, 2001 were
$47.0 million higher than the comparable period of 2000 primarily reflecting an
increase in Other segment revenues of $30.4 million, and an increase in Energy
segment revenues of $15.0 million.
Service Revenues in 2001 decreased $5.4 million compared to the first half of
2000. Energy service revenues in 2001 decreased $30.7 million primarily due to a
decrease of $39.9 million related to the environmental consulting business which
was sold in November 2000, partially offset by an increase of $9.2 million due
mainly to contractual annual escalation adjustments at many plants, increases in
the supplemental waste business, and a water service operating agreement with
the city of Bessemer which began in October 2000. The Other segment's service
revenues increased $25.3 million mainly due to the inclusion in continuing
operations of $30.2 million related to unsold aviation and entertainment
businesses in 2001, which were included in discontinued operations in 2000,
partially offset by a decrease of $4.9 million due to the sale of ADTI in the
first quarter of 2000.
Electricity and steam sales revenue increased $50.1 million compared to the same
period in 2000, attributable mainly to the Samalpatti project commencing
operation and increased production and favorable energy pricing experienced
primarily at plants in California as well as increased pricing experienced at
certain waste-to-energy plants with merchant energy capacity.
Equity in income of investees and joint ventures for the six months ended June
30, 2001 increased $4.6 million compared to the same period in 2000. The
increase is primarily attributable to the Quezon project in the Philippines,
which commenced operations in the second quarter of 2000.
Construction revenues for the six months ended June 30, 2001 decreased $23.7
million from the comparable period in 2000. The decrease is attributable to the
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 construction of a wastewater
project in the third quarter of 2000.
Other sales - net increased $1.1 million compared to the first half of 2000 due
to increased activity in the operations of Datacom.
Other revenues - net increased $17.5 million compared to the same period in
2000. Other revenues in 2001 included a $19.6 million insurance settlement and
other matters related to the Lawrence, Massachusetts facility, $5.7 million of
development fees and other matters related to the Quezon plant in the
Philippines, and insurance proceeds related to a waste wood plant. 2000 included
a $12.2 million insurance settlement related to the Lawrence facility.
Net gain on sale of businesses for the six months ended June 30, 2001 included
the gain of $1.9 million on the sale of the aviation ground handling operations
at the Rome, Italy airport and a gain of $.6 million representing an adjustment
on the sale of the aviation fixed base operations, partially offset by a loss of
$.3 million on the sale of the ground handling business in Spain. The net loss
on sale of businesses in the comparable period of 2000 included a loss of $.6
million on the sale of ADTI.
Total costs and expenses in the first half of 2001 decreased by $6.0 million
compared to the first six months of 2000. This decrease reflects a decrease in
the Energy segment of $17.8 million and a decrease in corporate unallocated
overhead of $19.3 million, partially offset by an increase in the Other segment
of $31.1 million due mainly to the inclusion of unsold aviation and
entertainment businesses in 2001.
The Energy segment's plant operating expenses increased by $6.4 million in the
six months ended June 30, 2001 compared to the same period of 2000. Operating
expenses increased by approximately $39.8 million primarily due to increased
fuel costs attributable to higher natural gas and oil prices, higher generation,
primarily at waste-wood plants in California, the effect of increased provisions
for doubtful accounts of approximately $8.0 million related mainly to
receivables from California utilities (see Liquidity/Cash Flow below) and the
commencement of operations at the Samalpatti project. This increase was
partially offset by a decrease of $33.4 million in the environmental business,
which was sold in November of 2000.
Construction costs decreased by $14.8 million for the six months ended 2001
compared to the comparable period of 2000. The decrease is due to the completion
of the retrofit construction activity mandated by the Clean Air Act Amendments
of 1990, and completion of the construction of a wastewater project in the third
quarter of 2000, partially offset by an increase in the civil construction
business (which management anticipates will cease in early 2002) principally
related to cost overruns on one individual project.
Depreciation and amortization expense decreased by $5.8 million in the first
half of 2001 compared to the comparable period in 2000. This decrease is
primarily related to a decrease of $7.1 million in corporate and other segment
depreciation and amortization, which in 2000 included $5.7 million of
accelerated amortization of a new data processing system. Also, Energy's
depreciation and amortization expense increased by $1.3 million in the six
months ended June 30, 2001 compared to 2000 primarily due to commencement of
operation of the Samalpatti project in 2001, partially offset by the effect of
accelerated depreciation in 2000 related to certain air pollution control
equipment being replaced in connection with the Clean Air Act Amendments of
1990.
Debt service charges increased by $.2 million in the first half of 2001 compared
to the comparable period of 2000. The increase is primarily due to project debt
outstanding related to the Samalpatti project, partially offset by lower debt
service expense due to lower project debt related to various facilities cause by
redemption and maturity of bonds. The Energy segment had one interest rate swap
agreement outstanding that resulted in additional debt service expense of $.9
million and $.6 million for the six month periods ended June 30, 2001 and 2000,
respectively.
Other operating costs and expenses for the first six months of 2001 increased
$15.0 million due to activity in the Other segment. This increase was due mainly
to the inclusion of unsold aviation and entertainment businesses in 2001, which
were included in discontinued operations in 2000. This increase was partially
offset by the effect of the sale of ADTI in 2000.
Costs of goods sold for the first half of 2001 increased $3.5 million compared
to the first half of 2000 due to activity in Other segment, mainly increased
activity and increasing product costs at Datacom.
Selling, administrative and general expenses for the first six months of 2001
increased $5.0 million compared to the same period of 2001 due mainly to the
inclusion in continuing operations of the unsold aviation and entertainment
businesses in 2001. That increase was partially offset by a decrease in
unallocated corporate overhead expenses that was fundamentally the result of a
decrease in most overhead costs due to the wind-down of the Company's New York
office. Selling, administrative and general expenses for the Energy segment
decreased $4.0 million compared to the first half of 2000 principally due to the
sale in November 2000 of the environmental consulting business.
Project development expenses in the six months ended June 30, 2001 decreased by
$6.9 million from the same period in 2000. The decrease is mainly due to a
decrease in overhead and other costs related to development in Asian market.
Other expenses-net decreased $10.2 million compared to the first half of 2000.
This increase is due mainly to costs incurred in 2000 representing fees and
expenses incurred in connection with the waiver by certain creditors of certain
covenants and the extension of credit through July 2000, and fees and expenses
incurred in connection with financing efforts to support the then-proposed
recapitalization plan. In 2001, the effect of these 2000 costs was partially
offset by the amortization of the Company's costs in securing its Revolving
Credit and Participation Agreement (the "Agreement") in March 2001. Such costs
are being amortized over one year.
Write-down of net assets held for sale in the six months ended June 30, 2001
relates to the Company's investment in its Australian venue management business.
In the second quarter of 2001, Covanta management considered the status of
recent offers and negotiations relating to that business, and current economic
conditions, and recorded a pre-tax loss of $1.7 million.
Interest expense-net in the first half of 2001 decreased $3.6 million compared
to the same period of 2000. Corporate interest expense-net decreased $4.0
million primarily due to lower average debt outstanding and lower rates on
variable-rate debt, and an increase in interest income on cash balances. The
Energy segment's interest expense - net decreased by $.8 million in 2001
compared to 2000 due mainly to interest income on cash balances partially offset
by interest on debt associated with the Quezon project, which became operational
in the second quarter of 2000. This debt was fully paid in March 2001. These
decreases were partially offset by the Other segment's interest expense-net
which increased $1.2 million due to the inclusion in continuing operations of
the unsold aviation and entertainment businesses in 2001.
The effective tax rate for the six months ended June 30, 2001 was 38.4% compared
to 4.5% for the same period of 2000. This increase in the effective rate was
primarily due to pretax earnings in the current year period, versus pretax
losses in the 2000 period for which certain tax benefits were not recognized,
and increased domestic income resulting in an overall higher effective tax rate.
Discontinued Operations: In the first half of 2000 the loss from discontinued
operations totaled $91.8 million. The loss before interest and taxes from
discontinued operations was $102.1 million, primarily reflecting accrued net
losses on the disposal of aviation and entertainment businesses, a provision for
additional estimated pretax net operating losses from July 1, 2000 through the
anticipated dates of sales of those remaining businesses legal, accounting,
consulting and overhead expenses incurred in connection with the discontinuance
of those businesses, and accelerated depreciation in connection with shortened
estimated useful lives of management information systems.
Property, plant and equipment - net increased $145.6 million during the first
six months of 2001 due mainly to the consolidation of two energy project
companies that were previously accounted for under the equity method.
CAPITAL INVESTMENTS AND COMMITMENTS
For the six months ended June 30, 2001, capital investments amounted to $38.7
million, virtually all of which related to Energy.
At June 30, 2001, capital commitments amounted to $10.1 million for normal
replacement and growth in Energy and $.1 million for Corporate and Other
operations. Other capital commitments for Energy as of June 30, 2001 amounted to
approximately $12.2 million. This amount includes a commitment to pay, in 2008,
$10.6 million for a service contract extension at an energy facility. In
addition, this amount includes $1.6 million for an oil-fired project in India.
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 $119.0
million. 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 $89.7 million
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 $47.6 million on December 23,
2002. In addition, as of June 30, 2001, the Company had guaranteed $3.3 million
of senior secured term debt of an affiliate and principal tenant (the NHL Ottawa
Senators) of this customer. Further, Covanta is obligated to purchase $19.8
million 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 material adverse
effect on Covanta's Consolidated Financial Statements.
LIQUIDITY/CASH FLOW
Net cash provided by operating activities of continuing operations for the six
months ended June 30, 2001 was $30.9 million compared to $16.1 million in cash
used by operating activities in the first half of 2000, resulting in an increase
of $47.0 million. This increase primarily reflects an increase in net income
from continuing operations of $38.5 million, an increase in accrued expenses of
$67.6 million and increases in deferred income taxes and provisions for doubtful
accounts of $9.8 million and $12.7 million, respectively. These increases were
partially offset by increases in other assets and receivables of $36.8 million
and $14.4 million, respectively, and a decrease in other liabilities of $22.1
million.
Net cash used in investing activities of continuing operations was $10.1 million
lower than the comparable period of 2000 primarily relating to an increase in
distributions from investees and joint ventures of $14.2 million, an increase in
proceeds from sales of businesses of $9.0 million, and a decrease in investments
in and advances to investees and joint ventures of $5.3 million. These decreases
in cash used in investing activities were partially offset by an increase in
investments in facilities of $14.7 million.
Net cash used in financing activities of continuing operations for the first
half of 2001 was $14.9 million compared to cash used in financing activities of
$194.2 million in the first half of 2000. This decrease in cash used of $179.3
million is due primarily to a decrease in restricted cash of $194.1 (used to
repay debt) in the 2001 period and an increase in restricted cash of $177.5
million in the 2000 period. This net increase in cash provided was partially
offset by a decrease in outstanding debt of $157.8 million, and an increase in
funds held in trust of $35.0 million.
In addition, cash provided by discontinued operations in the six months of 2000
totaled $254.6 million representing mainly proceeds from the sales of
Entertainment businesses partially offset by operating losses of discontinued
businesses.
During the first six months of 2001, the Company sold its aviation ground
handling business in Rome, Italy for approximately $10.0 million and its
interest in the aviation business in Spain for approximately $1.8 million. In
July 2001, the Company sold its interest in the airport privatization business
in Colombia, South America for $9.7 million.
In connection with several of the sales of its noncore businesses, 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 with respect to liabilities arising before and, in some cases,
after the consummation of the sale.
At June 30, 2001, the Company had approximately $88 million in cash and cash
equivalents, of which $7 million related to net assets held for sale. In
addition, as previously reported, the Company entered into a credit facility on
March 14, 2001, which is more fully described below.
The Company's revolving credit and participation agreement (the "Master Credit
Facility"), which matures on May 31, 2002 and is secured by substantially all of
the Company's assets, provides the Company with a credit line of approximately
$146 million, including a subfacility that may only be used to provide certain
letters of credit that would potentially be required to be posted by the Company
in the event that the Company's long-term debt rating were downgraded to below
investment grade. As of June 30, letters of credit have been issued in the
ordinary course for the Company's benefit using up most of the available line
other than the subfacility. The Company does not expect to need other letters of
credit to be issued under the main facility. The Master Credit Facility also
provides for the coordinated administration of certain letters of credit issued
in the normal course of business to secure performance under certain energy
contracts (totaling $206 million), letters of credit issued to secure
obligations relating to the Entertainment businesses (totaling $274 million)
largely with respect to the Anaheim and Corel projects described above under
"Capital Investments and Commitments," letters of credit issued in connection
with the Company's insurance program (totaling $40 million) and letters of
credit used for general corporate purposes (totaling $127 million). Of these
letters of credit, approximately $190 million secure indebtedness included in
the Company's balance sheet and $238 million relate to other obligations that
are reflected in the notes to the financial statements. The balance relates
principally to the Company's obligation under Energy contracts to pay damages
should the Company commit a material performance default. The Company believes
it is unlikely that such material defaults will occur.
Under the Master Credit Facility, the Company may make continued investments in
existing and, to a more limited extent, new energy projects when funds are
available and no other restrictions apply. The Company's ability to make
investments in new energy projects is subject to several covenants including
those relating to the Company's cash position, net worth and compliance with
leverage and interest coverage tests. The Company does not have any current
plans to make newly identified investment commitments in 2001 in order to
support the Company's cash position and liquidity. However, it does not expect
any substantial impact on the Company's anticipated business results in the
current year or in 2002 as a result of these decisions.
The Company believes that it has sufficient sources of liquidity to fund its
operations and its intended capital investments through funds from normal
operations, continued asset sales and access to capital markets. The Company
expects to complete the sale of its aviation fueling business within the next
two months and its other remaining non-core businesses in the next twelve
months. As previously disclosed, the Company executed a definitive agreement for
sale of the aviation fueling business in July 2001. The successful completion of
the sales processes for non-core assets and the actual amounts received 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.
Recent events in the California energy markets affected the state's two largest
utilities and resulted in delayed payment for energy delivered by the Company's
facilities in late 2000 and early 2001. Pacific Gas & Electric Company (PG&E)
and Southern California Edison Company ("SCE") both suspended payments under
long term power purchase agreements in the beginning of 2001. On March 26, 2001
the California Public Utilities Commission ("CPUC") approved a substantial rate
increase and directed the utilities to make payments to suppliers for current
energy deliveries. SCE has made payments for energy delivered since March 26,
2001. On April 6, 2001, PG&E filed for protection under Chapter 11 of the U.S.
Bankruptcy Code. Since that time PG&E is also in compliance with the CPUC order
and is making payments for current energy deliveries. In mid-June the CPUC
issued an order declaring as reasonable and prudent any power purchase amendment
at a certain fixed-price for a five-year term. On June 18, 2001 and July 31,
2001 the Company entered into several agreements and amendments to power
purchase agreements with SCE which contained the CPUC approved pricing for a
term of five years, to commence upon the occurrence of certain events. In
addition, in June SCE paid 10% of the outstanding receivables and agreed to a
timetable by which the remaining 90% would be paid, which outstanding amount
will earn interest. In July, the Company also entered into agreements with
similar terms with PG&E. These agreements also contain the CPUC approved price
and term, both of which are effective immediately. Unlike SCE, PG&E made no cash
payments but did agree that the amount owed to the Company will earn interest at
a rate to be determined by the Bankruptcy Court. PG&E agreed to assume the
Company's power purchase agreements and elevate the outstanding payable to
priority administrative claim status. The amount of the claim and interest will
be settled prior to the finalization of PG&E's plan of reorganization. The
Bankruptcy court approved the agreements, the power purchase agreements and the
assumption of the contracts on July 13, 2001. As of June 30, 2001, the Company's
outstanding net receivables from these two utilities totaled approximately $58.2
million (including the Company's 50% interest in several partnerships) net of
reserves of approximately $19.4 million. Of those net receivables, approximately
$13.7 million was due from PG&E. Disagreements with both SCE and PG&E still
exist regarding the valuation of the pre-March 26, 2001 receivables. Resolution
of these disagreements and payment of the receivables is likely to be received
only upon the resolution of California's energy crisis and PG&E's bankruptcy.
Therefore, the amounts received and the timeliness of payment are subject to
legal, regulatory, and legislative developments. Although this matter is not
free of doubt, the Company believes it will ultimately receive payments in full
of these receivables.
Under the 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 non-core
asset sales are significantly delayed beyond the dates now contemplated.
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 capital markets, asset sales and through scheduling the incurrence of
expenditures.
Further, to date the Company has been able to work with its creditors for
certain obligations relating to the financing of its California assets to assure
compliance with related project finance 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 or for other unforeseen reasons.
The Company has commenced preliminary discussions with its banks to replace
and/or extend the Master Credit Facility, which currently expires May 31, 2002.
In conjunction with these efforts, the Company has begun to take steps to reduce
the amount of letters of credit outstanding. Once a new facility is obtained,
such facility will have to provide for such letters of credit that remain
outstanding as of the termination date of the current Master Credit Facility.
The Company has filed a universal shelf registration statement on July 17, 2001
in the amount of $350 million. Once the registration statement is effective, the
Company expects to have additional flexibility to effectuate a transaction, or
transactions, in the public capital markets, that could provide for the
refinancing or extinguishment of existing obligations that mature over the next
several years, as well as to provide additional liquidity for both working
capital purposes and for investments in electric power generation growth
projects.
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.
PART II - OTHER INFORMATION
ITEM 1. 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 the Resource Conservation
and Recovery Act (RCRA). Although the Company's operations are
occasionally subject to proceedings and orders pertaining to emissions
into the environment and other environmental violations, 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. In addition, with respect to its aviation
fueling business (which the Company has not yet divested), the Company
and/or certain subsidiaries have been advised by various authorities
that they are responsible for investigation, remediation and/or
corrective action 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 such matter to seek fair and reasonable solutions.
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) On June 8, 2001, we received from the United States Environmental
Protection Agency (EPA) a "General Notice Letter" pursuant to CERCLA,
naming Ogden Martin Systems of Haverhill, Inc. as one of 2000 named
PRPs with respect to the Beede Waste Oil Superfund Site, Plaistow, New
Hampshire. EPA alleges that the Haverhill facility disposed
approximately 45,000 gallons of waste oil at the Site, a former
recycling facility. The total volume of waste allegedly disposed by all
PRPs at the Site is estimated by EPA as approximately 14,519,232
gallons. EPA's letter states that, to date, the costs of response
actions completed or underway at the Site total approximately
$14,900,000, exclusive of interest. EPA has invited all named PRPs to
participate in settlement discussions with respect to their alleged
liability at the Site. As a result of uncertainties regarding the
source and scope of contamination, the large number of PRPs and the
varying degrees of responsibility among various classes of potentially
responsible parties, our share of liability, if any, cannot be
determined at this time.
(ii) On April 9, 2001, Ogden Ground Services, Inc. and "Ogden
Aviation", together with approximately 250 other parties, were named by
the County Attorney of Metropolitan Dade County, Florida as PRPs,
pursuant to CERCLA, RCRA and state law, with respect to an
environmental cleanup that is underway at Miami International Airport.
A total of 17 PRPs, not including the Ogden entities, already have
been sued by the County in this matter. The County Attorney alleges
that, as a result of releases of hazardous substances, petroleum, and
other wastes to soil, surface water, and groundwater at the Airport,
the County has expended over $200,000,000 in response and
investigation costs and expects to spend an additional $250,000,000 to
complete necessary response actions. The County has invited all named
PRPs who are not parties to the litigation to participate in
settlement discussions with respect to their alleged liability at the
Site. As a result of uncertainties regarding the source and scope of
contamination, the large number of PRPs and the varying degrees of
responsibility among various classes of potentially responsible
parties, our share of liability, if any, cannot be determined at this
time.
(iii) On December 26, 2000, I. Schumann & Co. named us, 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 our subsidiary related entities,
damages for breach of contract and judgment declaring that we and our
named subsidiaries are responsible for certain future remediation
costs. The plaintiff is seeking response costs in excess of $3,000,000
and unspecified damages from us. The Company believes it has valid
defenses and has moved to dismiss the complaint.
(iv) On May 25, 2000 the California Regional Water Quality Control
Board, Central Valley Region (the "Board"), issued a cleanup and
abatement order to Pacific-Ultrapower Chinese Station ("Chinese
Station"), a general partnership in which one of our subsidiaries owns
50% and which operates a wood-burning power plant located in
Jamestown, California. This order arises from the use as fill
material, by Chinese Station's neighboring property owner, of boiler
bottom ash generated by Chinese Station. The order was issued jointly
to Chinese Station and to the neighboring property owner as
co-respondents. As required by the order, Chinese Station prepared an
environmental site assessment and a clean closure work plan for the
removal of the material, procured required permits, and conducted
removal activities. The Board, by letter dated June 14, 2001, has
alleged that as a result of time delays in completing the cleanup,
respondents have a potential civil liability, as of that date, of
$975,000. This matter remains under investigation by the Board and
other state agencies with respect to alleged civil and criminal
violations associated with the management of the material. Chinese
Station believes it has valid defenses, and has filed a petition for
review of the order.
(v) On January 4, 2000 and January 21, 2000, United Air Lines, Inc.
("United") and American Airlines, Inc. ("American"), respectively,
named Ogden New York Services, Inc. ("Ogden New York"), in two separate
lawsuits filed in the Supreme Court of the State of New York. The
lawsuits seek judgment declaring that Ogden New York is responsible for
petroleum contamination at airport terminals formerly or currently
leased by United and American at New York's Kennedy International
Airport. These cases have been consolidated for joint trial. Both
United and American allege that Ogden New York negligently caused
discharges of petroleum at the airport and that Ogden New York is
obligated to indemnify the airlines pursuant to the Fuel Services
Agreements between Ogden New York and the respective airline. United
and American further allege that Ogden New York is liable under New
York's Navigation Law, which imposes liability on persons responsible
for discharges of petroleum, and under common law theories of indemnity
and contribution.
The United complaint is asserted against Ogden New York, American,
Delta Air Lines, Inc., Northwest Airlines Corporation and American
Eagle Airlines, Inc. United is seeking $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 New York and the airline defendants are
responsible for all or a portion of future costs that United may incur.
The American complaint, which is asserted against both Ogden New
York and United, sets forth essentially the same legal basis for
liability as the United complaint. American is seeking reimbursement of
all or a portion of $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 New York
State Department of Environmental Conservation. The estimate of those
sums alleged in the complaint is $70,000,000.
We dispute the allegations and believe that the damages sought are
overstated in view of the Airlines' responsibility for the alleged
contamination and that we have other defenses under our respective
leases and permits with the Port Authority of New York and New Jersey.
(vi) On December 23, 1999 Allied Services, Inc. ("Allied") 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 at a reclamation facility known as the
Swope Oil and Chemical Company Site, and that contamination migrated
from the Swope Oil Site. Third-party plaintiffs seek contribution and
indemnification from Allied and over 90 other third-party defendants
for costs incurred and to be incurred for cleanup. 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, our share of liability, if any, cannot
be determined at this time.
(vii) 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. We will
continue to contest its alleged liability on appeal.
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders of Covanta Energy Corporation
was held on May 23, 2001
(b) Name of Each other Director whose
Name of Each Director Elected Term of Office Continued
----------------------------- ------------------------
Anthony J. Bolland George L. Farr
Scott G. Mackin Jeffrey F. Friedman
Craig G. Matthews Helmut F.O. Volcker
Robert E. Smith Norman G. Einspruch
Homer A. Neal
Joseph A. Tato
Robert R. Womack
(c) (i) Proposal 1: Election four directors for a three year term.
Name Votes For Votes Withheld
---- --------- --------------
Anthony J. Bolland 40,734,453 2,631,622
Scott G. Mackin 40,468,575 2,897,500
Craig G. Matthews 40,708,184 2,657,891
Robert E. Smith 40,457,900 2,908,175
(ii) Proposal 2: Ratification of the selection of Deloitte & Touche
LLP as independent public accountants of the corporation and
its subsidiaries for the year 2001:
For Against Abstain
--- ------- -------
43,133,641 178,415 54,019
(iii) Proposal 3: Proposal submitted by a shareholder copying the
Board to obtain prior shareholder approval for all future
agreements that provide compensation for senior executive if
there is a change-in-control of the Company:
For Against Abstain
--- ------- -------
11,054,541 21,596,854 2,352,740
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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.*
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 the Company and Bankers
Trust Company, dated as of June 1, 1987, and Offering
Memorandum dated June 12, 1987, relating to U.S. $85
million 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 5-3/4% Convertible Subordinated Debentures Due
2002.*
4.3 Indenture dated as of March 1, 1992 from the Company to
Wells Fargo Bank Minnesota, National Association, as
Trustee (as successor in such capacity to The Bank of New
York, Trustee), relating to U.S. $100 million principal
amount of 9 1/4% Debentures Due 2022.*
4.4 Amended and Restated Rights Agreement between the Company
and The Bank of New York, dated as of September 28,
2000.*
10.0 Material Contracts
10.1 Employment Agreements
(a) Employment Agreement between the Company and Edward W.
Moneypenny dated as of January 22, 2001 (filed herewith as
Exhibit 10.1(a)).
11 Detail of Computation of Earnings per Share Applicable to Common
Stock (filed herewith as Exhibit 11)
* INCORPORATED BY REFERENCE AS SET FORTH IN THE EXHIBIT INDEX OF THIS
QUARTERLY REPORT ON FORM 10-Q.
(b) Reports on Form 8-K
Form 8-K Current Reports filed on May 16, 2001, May 17, 2001, June 14,
2001, and July 17, 2001 are incorporated herein by reference.
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COVANTA ENERGY CORPORATION
(Registrant)
Date: August 14, 2001 By: /s/ EDWARD W. MONEYPENNY
----------------------------------
Edward W. Moneypenny
Executive Vice President
and Chief Financial Officer
Date: August 14, 2001 By: /s/ WILLIAM J. METZGER
---------------------------------
William J. Metzger
Vice President and
Chief Accounting Officer
EXHIBIT INDEX
-------------
EXHIBIT NO. DESCRIPTION OF DOCUMENT FILING INFORMATION
- ----------- ----------------------- ------------------
3 Articles of Incorporation and By-Laws.
3.1 (a) The Company's Restated Certificate of Filed as Exhibit (3)(a) to the Company's Form 10-K for
Incorporation as amended. the fiscal year ended December 31, 1988 and
incorporated herein by reference.
(b) Certificate of Ownership and Merger, Merging Filed as Exhibit 3.1(b) to the Company's Form 10-K for
Ogden-Covanta, Inc., into Ogden Corporation, dated the fiscal year ended December 31, 2000 and
March 7, 2001. incorporated herein by reference.
3.2 The Company's By-Laws as amended. Filed as Exhibit 3.2 to the Company's Form 10-Q for
the quarterly period ended March 31, 1998 and
incorporated herein by reference.
4 Instruments Defining Rights of Security Holders.
4.1 Fiscal Agency Agreement between the Company and Filed as Exhibits (C)(3) and (C)(4) to the Company's
Bankers Trust Company, dated as of June 1, 1987 and Form 8-K filed with the Securities and Exchange
Offering Memorandum dated June 12, 1987, relating Commission on July 7, 1987 and incorporated herein by
to U.S. $85 million 6% Convertible Subordinated reference.
Debentures Due 2002.
4.2 Fiscal Agency Agreement between the Company and Filed as Exhibit (4) to the Company's Form S-3
Bankers Trust Company, dated as of October 15, Registration Statement filed with the Securities and
1987, and Offering Memorandum, dated October 15, Exchange Commission on December 4, 1987, Registration
1987, relating to U.S. $75 million 5-3/4% No. 33-18875, and incorporated herein by reference.
Convertible Subordinated Debentures Due 2002.
4.3 Indenture dated as of March 1, 1992 from the Filed as Exhibit (4)(C) to the Company's Form 10-K for
Company to Wells Fargo Bank Minnesota, National the fiscal year ended December 31, 1991 and
Association, as Trustee (as successor in such incorporated herein by reference.
capacity to The Bank of New York, Trustee),
relating to U.S. $100 million 9-1/4% Debentures Due
2022.
4.4 Amended and Restated Rights Agreement between the Filed as Exhibit 1 to Amendment No. 1 to the Company's
Company and The Bank of New York, dated as of Form 8-A filed with the Securities and Exchange
September 28, 2000. Commission on September 29, 2000 and incorporated
herein by reference.
10 Material Contracts.
10.1 Employment Agreements.
(a) Employment Agreement between the Company Filed herewith as Exhibit 10.1(a).
and Edward W. Moneypenny dated as of
January 22, 2001.
11 Detail of Computation of Earnings Per Share Filed herewith as Exhibit 11.
Applicable to Common Stock.