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 September 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
incorporation or organization) Identification Number)
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 September 30, 2001; 49,827,129 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 NINE MONTHS ENDED FOR THE THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------------
2001 2000 2001 2000
------ ------ ------ ------
(In Thousands of Dollars, Except Per Share Data)
Service revenues $ 437,910 $ 439,725 $ 146,849 $ 143,277
Electricity and steam sales 266,299 203,836 89,340 76,974
Equity in income of investees and joint ventures 19,528 15,814 7,492 8,357
Construction revenues 36,953 55,569 18,922 13,842
Other sales - net 29,063 32,647 8,060 12,697
Other - net 29,773 12,188 43
Net gain (loss) on sale of businesses 3,872 (1,044) 1,680 (410)
-------- -------- -------- --------
Total revenues 823,398 758,735 272,386 254,737
-------- -------- -------- --------
Plant operating expenses 399,784 396,634 131,006 134,283
Construction costs 48,041 62,989 18,565 18,720
Depreciation and amortization 74,985 83,325 25,051 27,572
Debt service charges 65,014 64,499 21,925 21,633
Other operating costs and expenses 48,833 17,270 19,281 2,669
Costs of goods sold 34,081 28,558 12,540 10,483
Selling, administrative and general expenses 54,761 51,998 16,129 18,373
Project development expenses 4,580 16,408 1,668 6,567
Other - net 12,812 22,706 5,649 5,300
Writedown of net assets held for sale 20,408 18,717
-------- -------- -------- --------
Total costs and expenses 763,299 744,387 270,531 245,600
-------- -------- -------- --------
Consolidated operating income 60,099 14,348 1,855 9,137
Interest expense (net of interest income of $7,363, $6,239,
$1,207 and $3,563, respectively) (21,867) (26,089) (7,287) (7,873)
-------- -------- -------- --------
Income (loss) from continuing operations before
income taxes and minority interests 38,232 (11,741) (5,432) 1,264
Income taxes (15,793) 3,003 971 2,422
Minority interests (4,728) (3,149) (1,701) (985)
-------- -------- -------- --------
Income (loss) from continuing operations 17,711 (11,887) (6,162) 2,701
Loss on disposal of discontinued operations, including
provision for operating losses during phase-out
period of $62,375 and $48,656, respectively
(net of income tax benefit of YTD 2000, $29,272;
Qtr. 2000, $16,518) (128,871) (37,072)
-------- -------- -------- --------
Net Income (Loss) 17,711 (140,758) (6,162) (34,371)
-------- -------- -------- --------
Other Comprehensive Income (Loss), Net of Tax:
Foreign currency translation adjustments (net of income tax
benefit of, YTD 2001, $585; Qtr. 2001, $160) (2,230) (6,272) (141) 1,428
Less: Reclassification adjustment for translation adjustments
included in loss from discontinued operations 25,332 25,332
Unrealized holding losses arising during period (295) (278)
-------- -------- -------- --------
Other comprehensive income (loss) (2,230) 18,765 (141) 26,482
-------- -------- -------- --------
Comprehensive income (loss) $ 15,481 $(121,993) $ (6,303) $ (7,889)
======== ======== ======== ========
Basic Earnings Per Share:
Income (loss) from continuing operations $ 0.36 $ (0.24) $ (0.12) $ 0.05
Income (loss) from discontinued operations (2.60) (0.75)
-------- -------- -------- --------
Net Income (Loss) $ 0.36 $ (2.84) $ (0.12) $ (0.70)
======== ======== ======== ========
Diluted Earnings Per Share:
Income (loss) from continuing operations $ 0.35 $ (0.24) $ (0.12) $ 0.05
Income (loss) from discontinued operations (2.60) (0.75)
-------- -------- -------- --------
Net Income (Loss) $ 0.35 $ (2.84) $ (0.12) $ (0.70)
======== ======== ======== ========
See notes to condensed consolidated financial statements.
COVANTA ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2001 December 31, 2000
------------------ -----------------
(In Thousands Of Dollars)
Assets
Current Assets:
Cash and cash equivalents $ 61,271 $ 80,643
Restricted cash 194,118
Restricted funds held in trust 132,606 96,280
Receivables (less allowances: 2001, $28,390 and 2000,
$19,234) 273,419 247,914
Deferred income taxes 43,509 36,514
Prepaid expenses and other current assets 98,313 77,239
Net assets held for sale 76,989 70,614
----------- -----------
Total current assets 686,107 803,322
Property, plant and equipment - net 1,925,312 1,789,430
Restricted funds held in trust 155,607 157,061
Unbilled service and other receivables 157,953 155,210
Unamortized contract acquisition costs 84,001 88,702
Goodwill and other intangible assets 17,531 14,944
Investments in and advances to investees and joint ventures 187,562 223,435
Other assets 66,305 63,347
----------- -----------
Total Assets $ 3,280,378 $ 3,295,451
=========== ===========
Liabilities and Shareholders' Equity
Liabilities:
Current Liabilities:
Current portion of long-term debt $ 36,717 $ 145,289
Current portion of project debt 105,766 99,875
Current portion of convertible subordinated debentures 85,000
Accounts payable 40,417 41,106
Federal and foreign income taxes payable 432
Accrued expenses, etc. 342,794 308,681
Deferred income 43,333 38,517
----------- -----------
Total current liabilities 654,459 633,468
Long-term debt 277,370 310,126
Project debt 1,350,427 1,290,388
Deferred income taxes 334,748 315,931
Deferred income 164,944 172,050
Other liabilities 147,413 158,992
Minority interests 38,451 34,290
Convertible subordinated debentures 63,650 148,650
----------- -----------
Total Liabilities 3,031,462 3,063,895
=========== ===========
Shareholders' Equity:
Serial cumulative convertible preferred stock, par value
$1.00 per share; authorized, 4,000,000 shares; shares
outstanding: 34,810 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: 49,827,129 in
2001 and 49,645,459 in 2000, net of treasury shares of
4,111,950 and 4,265,115, respectively 24,914 24,823
Capital surplus 188,374 185,681
Notes receivable from key employees for common stock issuance (1,049) (1,049)
Unearned restricted stock compensation (855)
Earned surplus 43,491 25,829
Accumulated other comprehensive loss (5,994) (3,764)
----------- -----------
Total Shareholders' Equity 248,916 231,556
----------- -----------
Total Liabilities and Shareholders' Equity $ 3,280,378 $ 3,295,451
=========== ===========
See notes to condensed consolidated financial statements.
COVANTA ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED YEAR ENDED
September 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 (772) (1) (3,664) (3)
---------- --------- ---------- ---------
Total 64,630 65 65,402 66
Treasury shares (29,820) (30) (29,820) (30)
---------- --------- ---------- ---------
Balance at end of period (aggregate involuntary
liquidation value 2001, $701) 34,810 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 4,607 2 21,886 11
---------- --------- ---------- ---------
Total 53,939,079 26,970 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 (114,199) (57) (139,988) (70)
Exercise of stock options (38,966) (20)
---------- --------- ---------- ---------
Treasury shares at end of period 4,111,950 2,056 4,265,115 2,133
---------- --------- ---------- ---------
Balance at end of period 49,827,129 24,914 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 1,918 1,602
Shares issued for acquisition 172
Conversion of preferred shares (1) (8)
--------- ---------
Balance at end of period 188,374 185,681
--------- ---------
Notes receivable from key employees
for common stock issuance (1,049) (1,049)
--------- ---------
Unearned restricted stock compensation:
Issuance of restricted common stock (1,567)
Amortization of unearned restricted stock compensation 712
--------- ---------
Balance at end of period (855)
--------- ---------
Earned Surplus:
Balance at beginning of period 25,829 255,182
Net income (loss) 17,711 (229,285)
--------- ---------
Total 43,540 25,897
--------- ---------
Preferred dividends per share 2001, $1.40625, and
2000, $1.875 49 68
--------- ---------
Balance at end of period 43,491 25,829
--------- ---------
Cumulative Translation Adjustment Net (5,585) (3,355)
--------- ---------
Minimum Pension Liability Adjustment (409) (409)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY $ 248,916 $ 231,556
========= =========
See notes to condensed consolidated financial statements.
COVANTA ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
2001 2000
---------- ----------
(In Thousands Of Dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 17,711 $(140,758)
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by (Used in) Operating Activities of Continuing Operations:
Loss on disposal of discontinued operations 128,871
Depreciation and amortization 74,985 83,325
Deferred income taxes 5,266 (561)
Provision for doubtful accounts 16,756 1,805
Other 15,041 (6,992)
Management of Operating Assets and Liabilities:
Decrease (Increase) in Assets:
Receivables (38,337) (2,996)
Inventories (972)
Other assets (34,917) 792
Increase (Decrease) in Liabilities:
Accounts payable (9,669) (19,366)
Accrued expenses 13,156 (81,508)
Deferred income (11,507) (14,814)
Other liabilities 5,070 958
--------- ---------
Net cash provided by (used in) operating activities of continuing
operations 53,555 (52,216)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of businesses 22,045 4,577
Proceeds from sale of property, plant, and equipment 932 6,233
Proceeds from sale of marketable securities available for sale 3,650
Investments in facilities (53,304) (24,169)
Other capital expenditures (5,449) (16,685)
Decrease in other receivables 3,212 3,625
Distributions from investees and joint ventures 24,257 7,793
Increase in investments in and advances to investees and joint ventures (14,485) (27,979)
--------- ---------
Net cash used in investing activities of continuing operations (22,792) (42,955)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing for facilities 94,975
Other new debt 16,306
Increase in funds held in trust (34,912) (3,745)
Payment of debt (223,991) (136,215)
Dividends paid (49) (50)
Decrease (Increase) in restricted cash 194,118 (147,950)
Proceeds from exercise of stock options 808
Other (2,415) (3,199)
--------- ---------
Net cash used in financing activities of continuing operations (50,135) (196,184)
--------- ---------
Net cash provided by discontinued operations 249,850
--------- ---------
Net Decrease in Cash and Cash Equivalents (19,372) (41,505)
Cash and Cash Equivalents at Beginning of Period 80,643 101,020
--------- ---------
Cash and Cash Equivalents at End of Period $ 61,271 $ 59,515
========= =========
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 accounting
principles generally accepted in the United States of America. 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.
On January 1, 2001, Covanta Energy Corporation, ("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 increased by $4.1 million during the nine months ended September 30,
2001 to adjust for an increase in the swap's fair value to $16.4 million at
September 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 September 30, 2001 and 2000, the floating rates on
the swap averaged 2.04% and 3.87%, respectively. The notional amount of the swap
at September 30, 2001 and December 31, 2000 was $80.2 million and is reduced in
accordance with the scheduled repayments of the applicable revenue bonds.
The Company implemented SFAS No. 133 based on the current rules and guidance in
place as of January 1, 2001 and has applied the guidance issued since then by
the Financial Accounting Standards Board's Derivative Implementation Group.
In June 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. The adoption of SFAS No. 141 had no
impact on the Company's financial position and results of operation.
In June 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."
Also, in June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations", which is effective for the Company on January 1, 2003.
SFAS No. 143 requires that a liability for asset retirement obligations be
recognized in the period in which it is incurred if it can be reasonably
estimated. It also requires such costs to be capitalized as part of the related
asset and amortized over such asset's remaining useful life.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which is effective January 1, 2003. SFAS No. 144
replaces SFAS No. 121 and establishes accounting and reporting standards for
long-lived assets to be disposed of by sale. This SFAS applies to all long-lived
assets, including discontinued operations. SFAS No. 144 requires that those
assets be measured at lower of carrying amount or fair value less costs to sell.
It also broadens the reporting of discontinued operations to include all
components of an entity with operations that can be distinguished from the rest
of the entity that will be eliminated from the ongoing operations of the entity
in a disposal transaction.
The Company is currently assessing but has not yet determined the effect of
adoption of SFAS Nos. 142, 143 and 144 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; the Company's aviation
fueling business; and the Company's interests in aviation businesses in Spain
and Colombia. The Company's aviation ground handling operations at the Rome
airport in Italy were sold in February 2001 for approximately $10.0 million, and
the Company's interest in the aviation cargo operations 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 cargo operations fueling
business. In November 2001, the Company disposed of Datacom Custom
Manufacturing, Inc. ("Datacom"), a contract manufacturing company located in
Mexico, by transferring the stock of Datacom to the purchaser, in return for a
payment to the purchaser of $200,000, plus a contingent note receivable. For the
next three years, the Company will receive 50% of Datacom's cash flow. The
amount of the contingent payment is capped at $7,500,000. These non-core
businesses are reported in the "Other" segment at December 31, 2000 and for the
nine months ended September 30, 2001. Another non-core business included in Net
Assets Held for Sale is Compania General de Sondeos, S.A. ("CGS"), an
environmental and infrastructure company in Spain. CGS is reported in the Energy
segment in the nine-month periods ended September 30, 2001 and 2000. The Company
expects to dispose 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 nine months ended September 30, 2000, were as
follows:
Nine Months Three Months
Ended September 30 Ended September 30
------------------ ------------------
Revenues $ 365,546 $ 62,498
=========== ===========
Loss Before Income
Taxes and Minority
Interests $ (158,053) (53,587)
Benefit for Income Taxes (29,272) (16,518)
Minority Interests 90 3
----------- -----------
Loss from Discontinued
Operations $ (128,871) $ (37,072)
=========== ===========
Revenues and loss before income taxes from net assets held for sale (expressed
in thousands of dollars) for the three months and nine months ended September
30, 2001, which are included in continuing operations in 2001, were as follows:
Nine Months Three Months
Ended September 30 Ended September 30
------------------ ------------------
Revenues $ 78,495 $ 26,268
=========== ===========
Loss Before Income Taxes $ (27,730) $ (22,602)
=========== ===========
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 $3.5 million for the nine months
ended September 30, 2001. Also, in the second and third quarters of 2001,
Covanta management considered current economic conditions, and the status of
recent offers and negotiations relating to the Company's investments in
Australian venue management businesses, Datacom and CGS. In the third quarter,
the Company hired financial advisors to market Datacom for sale. A limited
number of offers were received, and the Company concluded that it would not
realize the book value of Datacom in a sale. Therefore the Company recorded a
write-down of net assets held for sale of $16.8 million related to Datacom. It
also recorded write-downs of net assets held for sale of $1.7 million in the
second quarter and $1.9 million in the third quarter for the Australian venue
management business and CGS, respectively.
Net assets held for sale (expressed in thousands of dollars) at September 30,
2001 and December 31, 2000 were as follows:
September 30, 2001 December 31, 2000
------------------ -----------------
Current Assets $ 57,557 $ 73,237
Property, Plant and Equipment - net 21,421 19,939
Other Assets 47,752 73,310
Notes Payable and Current Portion of
Long-Term Debt (2,096) (28,651)
Other Current Liabilities (44,397) (52,053)
Long-Term Debt (63) (670)
Other Liabilities (3,185) (14,498)
----------- -----------
Net Assets Held for Sale $ 76,989 $ 70,614
=========== ===========
The increase in net assets held for sale during the nine months ended September
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, offset partially by the write-downs and sales
referred to above (see Liquidity/Cash Flow below).
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 September 30, 2001 (expressed in
thousands of dollars):
AMOUNTS PAID ADJUSTMENTS
DURING THREE DURING THREE
BALANCE AT MONTHS ENDED MONTHS ENDED BALANCE AT
JUNE 30, 2001 SEPT. 30, 2001 SEPT. 30, 2001 SEPT. 30, 2001
------------- -------------- -------------- --------------
Severance for 217 New York employees $ 21,500 $ (2,600) $ 18,900
Severance for 80 Energy employees 4,800 (1,700) 3,100
Contract termination settlement 400 400
Bank fees 2,100 (700) $ (1,400)
Office closure costs 3,500 (600) 2,900
---------- ----------- ---------- ----------
$ 32,300 $ (5,600) $ (1,400) $ 25,300
========== ========== ========== ==========
Of the New York employees, 24 employees were terminated during 1999;
139 employees were terminated during 2000; 11 employees were terminated in 2001
through September 30, 2001. As of September 30, 2001 the Company expected to
terminate the remaining 43 employees after the remaining Aviation businesses are
sold.
On July 17, 2001 the Company announced that it had reached a definitive
agreement to sell its aviation fueling business to Allied Holdings Corporation,
an affiliate of Tampa Pipeline Corporation. The agreement is subject to closing
conditions including the receipt of third party consents and approvals
(including the approval of the Port Authority of New York and New Jersey (the
"Port Authority"). The transaction was initially expected to close no later
than about October 15. However, given the impact of the events of September 11,
2001 on the aviation industry and the Port Authority, the sale is likely to be
separated into two components: one component would involve the Port Authority
(the Port Authority component), and the other component would relate to the
balance of the sale (the non-Port Authority component). The non-Port Authority
component is expected to close on or before December 31, 2001 (subject to the
receipt of approvals). No closing date has been set for the Port Authority
component pending Port Authority approval of the sale.
All 80 of the Energy employees have been terminated during 2001.
During the three months ended September 30, 2001, it was determined that the
remaining accrual for bank fees of $1.4 million was not necessary and was
reversed.
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 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
events relating to improvements in SCE's financial condition. 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.
The agreements with SCE contemplated the passage of legislation by the
California State Legislature or other actions that would trigger payment to the
Company. In late October SCE reached a settlement of a lawsuit brought against
the CPUC concerning the CPUC's failure to allow SCE to pass cost increases
through to its ratepayers. The settlement achieved the same goals as the
proposed legislation which was to provide a path for SCE to achieve
creditworthiness. The SCE Agreements are not impacted by the settlement except
for the timing of the payment of past due amounts and the start of the fixed
price period for energy sales. The Company is in discussions with SCE regarding
the timing issues. The settlement was approved by the Federal Court. A consumer
group has requested a stay pending an appeal.
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.
On October 30, 2001, the Company transferred $14.9 million of the outstanding
PG&E receivables for $13.4 million to a financial institution. Of this amount,
$8.5 million (which related to receivables not subject to pricing disputes with
PG&E) was paid in immediate cash. The balance, $4.9 million (which related to
receivables to which there are pricing disputes) was placed in escrow until the
resolution of those disputes or the conclusion of the PG&E bankruptcy. The
remaining $1.5 million represents the 10% discount charged by the financial
institution.
Disagreements with both SCE and PG&E exist regarding the valuation of the
pre-March 26, 2001 receivables. Resolution of these disagreements and payment
of the receivables is likely to occur only upon the restoration of SCE to
creditworthiness, the resolution of the pricing issues by the CPUC and in the
case of PG&E, the resolution of the PG&E bankruptcy. Although this matter is
not free of doubt, the Company believes it will ultimately receive payments in
full of the net amount of these receivables.
Earnings Per Share:
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2001 2000
------------------------------------------------------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
(In thousands, except per share amounts)
Income (loss) from
continuing operations $ (6,162) $ 2,701
Less: preferred stock dividend 16 16
--------- ---------
Basic Earnings (Loss) Per Share (6,178) 49,703 $ (0.12) 2,685 49,544 $ 0.05
------- -------
Effect of Dilutive Securities:
Stock options (A) 68
Restricted stock (A) 81
Convertible preferred stock (A) (A)
6% convertible debentures (A) (A)
5 3/4% convertible debentures (A) (A)
------------------------ -----------------------
Diluted Earnings (Loss) Per Share $ (6,178) 49,703 $ (0.12) $ 2,685 49,693 $ 0.05
-------------------------------------- ---------------------------------------
(A) Antidilutive
Note:
Basic earnings per common share was computed by dividing net income (loss),
reduced by preferred stock dividend requirements, by the weighted average
number of shares of common stock outstanding during each period.
Diluted earnings per common share was computed on the assumption that all
convertible debentures, convertible preferred stock, restricted stock and stock
options converted or exercised during each period, or outstanding at the end of
each period were converted at the beginning of each period or the date of
issuance or grant, if dilutive. This computation provides for the elimination of
related convertible debenture interest and preferred dividends.
Outstanding stock options to purchase common stock with an exercise price
greater than the average market price of common stock were not included in the
computation of diluted earnings per share. The balance of such options was
2,614,000 and 5,378,000 for the quarters ended September 30, 2001 and 2000,
respectively. Shares of common stock to be issued, assuming conversion of
convertible preferred stock, the 6% convertible debentures, the 5 3/4%
convertible debentures, stock options and unvested restricted stock issued to
employees and directors were not included in computation of diluted earnings per
share if to do so would have been antidilutive. The common shares excluded from
the calculation were 209,000 and 217,000 for conversion of preferred stock in
the quarters ended September 30, 2001 and 2000, respectively;2,175,000 for the
quarters ended September 30, 2001 and 2000 for the 6% debentures; 1,524,000 for
the quarters ended September 30, 2001 and 2000 for the 5 3/4% debentures:
161,000 for the quarter ended September 30, 2001 for stock options; and 117,000
for unvested restricted stock in the quarter ended September 30, 2001.
Earnings Per Share:
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2001 2000
------------------------------------------------------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
(In thousands, except per share amounts)
Income (loss) from
continuing operations $ 17,711 $ (11,887)
Less: preferred stock dividend 49 50
--------- ---------
Basic Earnings (Loss) Per Share 17,662 49,659 $ 0.36 (11,937) 49,525 $ (0.24)
------- -------
Effect of Dilutive Securities:
Stock options 169 (A)
Restricted stock 70 (A)
Convertible preferred stock 49 141 (A)
6% convertible debentures (A) (A)
5 3/4% convertible debentures (A) (A)
------------------------ -----------------------
Diluted Earnings (Loss) Per Share $ 17,711 50,039 $ 0.35 $ (11,937) 49,525 $ (0.24)
-------------------------------------- ---------------------------------------
(B) Antidilutive
Note:
Basic earnings per common share was computed by dividing net income (loss),
reduced by preferred stock dividend requirements, by the weighted average number
of shares of common stock outstanding during each period.
Diluted earnings per common share was computed on the assumption that all
convertible debentures, convertible preferred stock, restricted stock and stock
options converted or exercised during each period, or outstanding at the end of
each period were converted at the beginning of each period or the date of
issuance or grant, if dilutive. This computation provides for the elimination of
related convertible debenture interest and preferred dividends.
Outstanding stock options to purchase common stock with an exercise price
greater than the average market price of common stock were not included in the
computation of diluted earnings per share. The balance of such options was
2,589,000 and 6,060,000 for the nine months ended September 30, 2001 and 2000,
respectively. Shares of common stock to be issued, assuming conversion of
convertible preferred stock, the 6% convertible debentures, the 5 3/4%
convertible debentures, stock options, and unvested restricted stock issued to
employees and directors were not included in computations of diluted earnings
per share if to do so would have been antidilutive. The common shares excluded
from the calculation were 70,000 and 222,000 for conversion of preferred stock
for the nine months ended September 30, 2001 and 2000, respectively; 2,175,000
for the nine months ended September 30, 2001 and 2000 for the 6% debentures;
1,524,000 for the nine months ended September 30, 2001 and 2000 for the 5 3/4%
debentures; 54,000 and 30,000 for the nine months ended September 30, 2001 and
2000, respectively, for stock options; and 39,000 and 75,000 for unvested
restricted stock for the nine months ended September 30, 2001 and 2000,
respectively.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Revenues and income (loss) from continuing operations by segment for the three
months and the nine months ended September 30, 2001 and 2000 (expressed in
thousands of dollars) were as follows:
Information Concerning Nine Months Ended September 30, Three Months Ended September 30,
Business Segments 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------
Revenues:
Energy $ 742,328 $ 722,084 $ 247,495 $ 242,246
Other 79,500 36,651 24,891 12,491
Corporate 1,570 0 0 0
--------- --------- --------- ---------
Total Revenues $ 823,398 $ 758,735 $ 272,386 $ 254,737
========= ========= ========= =========
Income (loss) from Operations:
Energy $ 120,316 $ 74,810 $ 38,563 $ 25,853
Other (36,980) (15,654) (26,481) (4,219)
--------- --------- --------- ---------
Total Income from Operations 83,336 59,156 12,082 21,634
Corporate unallocated income
and expenses-net (23,237) (44,808) (10,227) (12,497)
Interest-net (21,867) (26,089) (7,287) (7,873)
--------- --------- --------- ---------
Income (loss) from continuing
operations before income
taxes and minority interests $ 38,232 $ (11,741) $ (5,432) $ 1,264
========= ========= ========= =========
Quarter Ended September 30, 2001 vs. Quarter Ended September 30, 2000
Continuing Operations: Revenues for the quarter ended September 30, 2001 were
$17.6 million higher than the comparable period of 2000 primarily reflecting an
increase in Other segment revenues of $12.4 million, and an increase in Energy
segment revenues of $5.2 million.
Service revenues in 2001 increased $3.6 million compared to the quarter ended
September 30, 2000. Energy service revenues in 2001 decreased $11.0 million
primarily due to a decrease of $19.5 million related to the environmental
consulting business which was sold in November 2000, partially offset by an
increase of $8.5 million due mainly to contractual annual escalation adjustments
at many plants, increased growth in the supplemental waste business, increased
Dual Sand System sales and a water service operating agreement with the City of
Bessemer, Alabama, which began in October 2000. The Other segment's service
revenues increased $14.6 million due primarily 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 $12.4 million compared to the
third quarter of 2000, attributable mainly to our Samalpatti, India project
commencing operation in the second quarter of 2001, partially offset by lower
energy pricing experienced primarily at plants in California.
Equity in income of investees and joint ventures for the three months ended
September 30, 2001 decreased $.9 million compared to the same period in 2000.
The decrease is primarily attributable to lower energy pricing at joint ventures
in California, partially offset by an increase at our Quezon project in the
Philippines due to operating efficiencies, and net equity income related to
unsold aviation and entertainment joint ventures.
Construction revenues for the three months ended September 30, 2001 increased
$5.1 million from the comparable period in 2000. The increase is attributable to
the commencement of construction of a water desalination project in Tampa,
Florida in the second quarter of 2001, partially offset by 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 $4.6 million compared to the third quarter of 2000
due mainly to decreased activity in the operations of Datacom associated with
Genicom Corporation (Genicom), its major customer. Datacom was sold in November
2001.
There was no significant other revenues - net in the third quarters of 2001 and
2000.
Net gain on sale of businesses for the three months ended September 30, 2001
included a gain of $1.4 million on the sale of the Company's interest in the
airport privatization business in Colombia, South America. The three months
ended September 30, 2000 included an adjustment to the loss on the sale of
Applied Data Technology, Inc. ("ADTI") of $.4 million.
Total costs and expenses in the third quarter of 2001 increased by $24.9 million
compared to the third quarter of 2000. This increase reflects an increase in the
Other segment of $35.6 million due mainly to the inclusion of unsold aviation
and entertainment businesses in 2001, partially offset by a decrease in the
Energy segment of $7.5 million and a decrease in corporate unallocated overhead
of $2.7 million.
The Energy segment's plant operating expenses decreased by $3.3 million in the
three months ended September 30, 2001 compared to the same period of 2000.
Operating expenses decreased by $14.2 million in the environmental business,
which was sold in November of 2000, partially offset by an increase due to the
commencement of operations of the Samalpatti project and the commencement of
operations at a wastewater project.
Construction costs decreased by $.2 million for the three months ended September
30, 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, completion of the construction of a wastewater project in
the third quarter of 2000, and a decrease in the civil construction business
(which management anticipates will cease during 2002), partially offset by an
increase due to the commencement of construction of the water desalination
project.
Depreciation and amortization expense decreased by $2.5 million in the third
quarter 2001 compared to the comparable period in 2000. This decrease is
primarily related to a $3.4 million decrease in corporate and other 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 $.8 million in the three months ended
September 30, 2001 compared to 2000 primarily due to the commencement of
operations of the Samalpatti project in 2001.
Debt service charges increased by $.3 million in the third 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 $.6
million and $.3 million for the three month periods ended September 30, 2001 and
2000, respectively.
Other operating costs and expenses for the third quarter of 2001 increased $16.6
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.
Costs of goods sold for the third quarter of 2001 increased $2.1 million
compared to the third quarter of 2000 due to activity in the Other segment,
mainly increased product costs at Datacom.
Selling, administrative and general expenses for the third quarter of 2001
decreased $2.2 million compared to the same period of 2000 due mainly to 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, partially offset by the inclusion in continuing
operations of the unsold aviation and entertainment businesses in 2001. Selling,
administrative and general expenses for the Energy segment decreased $2.2
million compared to the third quarter of 2000 principally due to the sale in
November 2000 of the environmental consulting business.
Project development expenses for the three months ended September 30, 2001
decreased by $4.9 million from the same period in 2000. The decrease is mainly
due to a decrease in overhead and other costs related to development in the
Asian market.
Other expenses-net increased $.3 million compared to the third quarter of 2000.
This increase is due mainly to costs incurred in 2001 representing 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. In 2000, Other expenses - net represented fees and
expenses incurred in connection with the waiver by certain creditors of certain
covenants and the extension of credit through November 2000, and fees and
expenses incurred in connection with financing efforts to support the
then-proposed recapitalization plan.
Write-down of net assets held for sale in the three months ended September 30,
2001 relates to the Company's investments in Datacom and CGS. In the third
quarter of 2001, Covanta management considered the status of recent offers and
negotiations leading to the sale of Datacom in November 2001 and the anticipated
disposal of CGS, and recorded a total pre-tax loss of $18.7 million of which
$16.8 million related to Datacom and $1.9 million related to CGS.
Interest expense-net in the third quarter of 2001 decreased $.6 million
compared to the same period of 2000. Corporate interest expense-net increased
$1.6 million primarily due to lower interest income on proceeds from the sale of
businesses included in discontinued operations in 2000, partially offset by
lower average debt outstanding and lower interest rates on variable-rate debt.
The Energy segment's interest expense - net decreased by $1.9 million in 2001
compared to 2000 due to lower debt outstanding caused mainly by payments on debt
associated with the Quezon project and an increase in interest income on cash
balances.
The effective tax rate for the three months ended September 30, 2001 was a 17.9%
benefit compared to a (191.6)% provision for the same period of 2000. This
increase in the effective rate resulting in tax benefits was primarily due to
the greater extent in 2001 to which pretax losses generated tax benefits.
Discontinued Operations: In the third 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 third
quarter of 2001. In the third quarter of 2000 the loss from discontinued
operations totaled $37.1 million. The loss before interest and taxes from
discontinued operations was $52.4 million, primarily reflecting accrued net
losses of $44.5 million on the disposal of aviation and entertainment
businesses, and a provision of $8.5 million for additional estimated pretax net
operating losses from October 1, 2000 through the anticipated dates of sales of
those remaining businesses. Results of operations from those businesses were
substantially offset by 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.
Nine Months Ended September 30, 2001 vs. Nine Months Ended September 30, 2000
Continuing Operations: Revenues for the nine months ended September 30, 2001
were $64.7 million higher than the comparable period of 2000 primarily
reflecting an increase in Other segment revenues of $42.8 million, and an
increase in Energy segment revenues of $20.2 million.
Service Revenues in 2001 decreased $1.8 million compared to the first nine
months of 2000. Energy service revenues in 2001 decreased $41.7 million
primarily due to a decrease of $59.4 million related to the environmental
consulting business which was sold in November 2000, partially offset by an
increase of $17.7 million due mainly to contractual annual escalation
adjustments at many plants, increases in the supplemental waste business,
increased Dual Sand System sales and a water service operating agreement with
the City of Bessemer which began in October 2000. The Other segment's service
revenues increased $39.9 million mainly due to the inclusion in continuing
operations of $44.9 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 $62.5 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 nine months ended
September 30, 2001 increased $3.7 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, partially offset by a
decrease at a joint venture due to lower contractual energy rates.
Construction revenues for the nine months ended September 30, 2001 decreased
$18.6 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, partially offset by the commencement of
the water desalination project.
Other sales - net decreased $3.6 million compared to the first three quarters of
2000 due to decreased activity in the operations of Datacom.
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 nine months ended September 30, 2001
included the gain of $1.9 million on the sale of the aviation ground handling
operations at the Rome, Italy airport, a gain of $.8 million representing an
adjustment on the sale of the aviation fixed base operations, and a gain of $1.4
million on the sale of the Company's interest in the airport privatization
business in Colombia, South America 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 $1.0 million on
the sale of ADTI.
Total costs and expenses in the first nine months of 2001 increased by $18.9
million compared to the first nine months of 2000. This increase reflects an
increase in the Other segment of $65.7 million due mainly to the inclusion of
unsold aviation and entertainment businesses in 2001 partially offset by a
decrease in the Energy segment of $25.3 million and a decrease in corporate
unallocated overhead of $21.5 million.
The Energy segment's plant operating expenses increased by $3.2 million in the
nine months ended September 30, 2001 compared to the same period of 2000.
Operating expenses increased 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), the commencement of operations at the
Samalpatti project and the commencement of operations at a wastewater project.
These increases were partially offset by a decrease of $47.5 million in the
environmental business, which was sold in November 2000.
Construction costs decreased by $14.9 million for the nine 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, completion of the construction of a wastewater project in the third
quarter of 2000, and a decrease in the civil construction business (which
management anticipates will cease in 2002), partially offset by an increase due
to the commencement of construction of a water desalination project.
Depreciation and amortization expense decreased by $8.3 million in the first
three quarters of 2001 compared to the comparable period in 2000. This decrease
is primarily related to a $9.8 million decrease in corporate and other segment
depreciation and amortization, which in 2000 included $8.6 million of
accelerated amortization of a new data processing system. Also, Energy's
depreciation and amortization expense increased by $2.1 million in the nine
months ended September 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 $.5 million in the first three quarters 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 $1.5 million and $.8 million for the nine month periods ended
September 30, 2001 and 2000, respectively.
Other operating costs and expenses for the first nine months of 2001 increased
$31.6 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 three quarters of 2001 increased $5.5 million
compared to the three quarters of 2000 due to activity in Other segment, mainly
increased product costs at Datacom.
Selling, administrative and general expenses for the first nine months of 2001
increased $2.8 million compared to the same period of 2001. This increase is 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 $6.2 million compared to the first nine months of 2000
principally due to the sale in November 2000 of the environmental consulting
business.
Project development expenses in the nine months ended September 30, 2001
decreased by $11.8 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 $9.9 million compared to the first three quarters
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 November 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 nine months ended September 30,
2001 relates to the Company's investments in its Australian venue management
business, Datacom and CGS. In the second and third quarters of 2001, Covanta
management considered the status of recent offers and negotiations leading to
the sale of Datacom in November 2001 and the anticipated disposal of CGS and the
Australian venue management business, and recorded pre-tax losses of $20.4
million.
Interest expense-net in the first nine months of 2001 decreased $4.2 million
compared to the same period of 2000. Corporate interest expense-net decreased
$2.3 million primarily due to lower average debt outstanding and lower rates on
variable-rate debt, partially offset by a decrease in interest income on cash
balances. The Energy segment's interest expense - net decreased by $3.2 million
in 2001 compared to 2000 due mainly to interest income on cash balances and a
decrease in interest expense caused mainly by payments on debt associated with
the Quezon project. This debt was fully paid in March 2001. These decreases were
partially offset by the Other segment's interest expense-net which increased
$1.3 million due to the inclusion in continuing operations of the unsold
aviation and entertainment businesses in 2001.
The effective tax rate for the nine months ended September 30, 2001 was 41.3%
compared to 25.6% 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 in the current year resulting in an
overall higher effective tax rate.
Discontinued Operations: In the first three quarters of 2000 the loss from
discontinued operations totaled $128.9 million. The loss before interest and
taxes from discontinued operations was $154.5 million, primarily reflecting
accrued net losses of $102.3 million on the disposal of aviation and
entertainment businesses, a provision of $8.5 million for additional estimated
pretax net operating losses from October 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 $135.9 million during the first
nine 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 nine months ended September 30, 2001, capital investments amounted to
$58.7 million, virtually all of which related to Energy.
At September 30, 2001, capital commitments amounted to $9.9 million for normal
replacement and growth in Energy. Other capital commitments for Energy as of
September 30, 2001 amounted to approximately $12.9 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 $2.3 million for an
oil-fired project in India which commenced operations in September 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 September 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. 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 also the reimbursement party on a
$26 million letter of credit relating to a lease transaction for that facility.
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 $86.1 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 $45.7 million on December 23,
2002. The Company expects that both series of debt will be refinanced for an
additional 5 years upon terms substantially similar to those currently in
effect. In addition, as of September 30, 2001, the Company had guaranteed $3.2
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
$19.0 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.
Of these commitments, approximately $119 million are secured by letters of
credit. The Company is also exploring alternatives for disposing of these
operations along with the related obligations.
The Company is engaged in ongoing investigation and remediation actions with
respect to seven airports where it provides aviation fueling services on a
cost-plus basis pursuant to contracts with individual airlines, consortia of
airlines and operators of airports. The Company estimates the costs of those
ongoing actions will be approximately $4,000,000 (over several years), and that
airlines, airports and others will reimburse it for substantially all these
costs. To date, the Company's right to reimbursement for remedial costs has been
challenged successfully in one prior case in which the court found that the
cost-plus contract in question did not provide for recovery of costs resulting
from the Company's own negligence. Except in that instance, and in one other,
the Company has not been alleged to have acted with negligence.
LIQUIDITY/CASH FLOW
Net cash provided by operating activities of continuing operations for the nine
months ended September 30, 2001 was $53.6 million compared to $52.2 million in
cash used by operating activities in the first half of 2000, resulting in an
increase of $105.8 million. This increase primarily reflects an increase in net
income from continuing operations of $29.6 million, a decrease in accounts
payable and accrued expenses of $9.7 million and $94.7 million and increases in
deferred income taxes, provisions for doubtful accounts and other of $5.8
million, $15.0 million, and $22.3 million, respectively. These increases were
partially offset by increases in receivables and other assets of $35.3 million
and $35.7 million, respectively.
Net cash used in investing activities of continuing operations was $20.2 million
lower than the comparable period of 2000 primarily relating to an increase in
distributions from investees and joint ventures of $16.5 million, an increase in
proceeds from sales of businesses of $17.5 million, and a decrease in
investments in and advances to investees and joint ventures of $13.5 million.
These decreases in cash used in investing activities were partially offset by an
increase in investments in facilities of $29.1 million.
Net cash used in financing activities of continuing operations for the first
three quarters of 2001 was $50.1 million compared to cash used in financing
activities of $196.2 million in the first three quarters of 2000. This decrease
in cash used of $146.0 million is due primarily to a decrease in restricted cash
of $194.1 million (used to repay debt) in the 2001 period and an increase in
restricted cash of $148.0 million in the 2000 period. This net increase in cash
provided was partially offset by a decrease in outstanding debt of $166.4
million, and an increase in funds held in trust of $31.2 million.
In addition, cash provided by discontinued operations in the nine months of 2000
totaled $249.9 million representing mainly proceeds from the sales of
Entertainment businesses partially offset by operating losses of discontinued
businesses.
During the first nine months of 2001, the Company sold a) its aviation ground
handling business in Rome, Italy for gross proceeds of approximately $10.0
million, b) its interest in the aviation business in Spain for approximately
$1.8 million; and c) 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 September 30, 2001, the Company had approximately $69.1 million in cash and
cash equivalents, of which $7.9 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 September 30, 2001, 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 $208 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 $195 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. These
letters of credit can be drawn upon if the Company defaults on the obligations
secured by the letter of credit or fails to provide replacement letters of
credit as the current ones expire. The balance relates principally to the
Company's obligation under Energy contracts to pay damages. The Company believes
it is unlikely that such material defaults will occur.
On September 28, 2001, the Company amended its Master Credit Facility with its
lenders. The amendments to the agreement include adjustments to financial
covenants until December 31, 2001 to reflect changes in the schedule of payments
for the past energy sales to California utilities and the timing of the
Company's remaining non-core asset sales, the Company's agreement not to make
investments in newly identified independent power projects until maturity of the
facility in May 2002, and requisite approval of at least 8 banks holding more
than 60% of the aggregate revolving loan exposure held by the 32 banks in the
bank group as a condition to the issuance of letters of credit the Company might
be required to deliver were its credit rating reduced below investment grade.
The financial covenants of the Master Credit Facility include the following:
Minimum Debt Service Coverage Ratio - This is the ratio of the (a) the sum of
Consolidated Operating Income (as shown in our Consolidated Statement of
Income), plus LOC Fees (defined in the Master Credit Facility as letter of
credit, fees, commitment fees and amortization of agency and termination fees)
to the extent included in Operating Income, and Minority Interest (as shown on
our consolidated statement of income) to (b) the total interest expense on our
indebtedness, plus LOC Fees, less interest income of the Company. For this
purpose, indebtedness does not include indebtedness with respect to which
recourse is limited to the assets financed with the proceeds of such
indebtedness or the equity securities of the borrower ("project debt" as shown
on the balance sheet). The numerator of this ratio is referred to as "Adjusted
EBIT." The Master Credit Facility provides that this ratio must not be less than
the following:
Fiscal Quarter Ending:
March 31, 2001 0.53 : 1.00
June 30, 2001 1.00 : 1.00
September 30, 2001 1.34 : 1.00
December 31, 2001 1.41 : 1.00
March 31, 2002 1.73 : 1.00
Maximum Leverage Ratio - This is the ratio of the Company's net indebtedness to
Adjusted EBIT for the four quarters then ended. For this purpose, net
indebtedness is the Company's obligations for borrowed money plus deferred
purchase price, if any, recorded on its consolidated balance sheet (which was
zero at December 31, 2000), less cash and domestic cash equivalents, less the
Convertible Debentures, less Project Debt. The Master Credit Facility provides
that this ratio must exceed the following:
Fiscal Quarter Ending:
March 31, 2001 7.86 : 1.00
June 30, 2001 3.41 : 1.00
September 30, 2001 2.58 : 1.00
December 31, 2001 2.29 : 1.00
March 31, 2002 2.00 : 1.00
Consolidated Net Worth - This is the sum of capital stock, capital surplus and
earned surplus as shown on the Company's consolidated balance sheet. The Master
Credit Facility provides that for the first quarter of 2001, consolidated net
worth must exceed the amount of consolidated net worth shown on the Company's
consolidated balance sheet as of December 31, 2000. For each succeeding quarter,
the permitted minimum net worth is increased by 75% of the Company's
consolidated net income (but not net loss) for such quarter.
On August 15, 2001, the Company disclosed in its Quarterly Report on Form 10-Q
for the period ended June 30, 2001, that it 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 funds from operations, continued asset sales and
access to the capital markets will be adequate for these purposes during 2002.
However, access to these sources may not be available on a timely basis, and the
Company may need to obtain additional short-term borrowing from its current
lenders. The Company is developing a financing plan which it believes will be
acceptable by its lenders for these purposes but there are no assurances that
the lenders will agree.
The Company is targeting to complete the sale of a portion of its aviation
fueling business by December 31, 2001 and the remaining portion of its aviation
fueling business and the remaining non-core businesses in the next twelve
months. As previously noted, 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.
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 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
events relating to improvements in SCE's financial condition. 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.
The agreements with SCE contemplated the passage of legislation by the
California State Legislature or other actions that would trigger payment to the
Company. In late October SCE reached a settlement of a lawsuit brought against
the CPUC concerning the CPUC's failure to allow SCE to pass cost increases
through to its ratepayers. The settlement achieved the same goals as the
proposed legislation which was to provide a path for SCE to achieve
creditworthiness. The SCE Agreements are not impacted by the settlement except
for the timing of the payment of past due amounts and the start of the fixed
price period for energy sales. The Company is in discussions with SCE regarding
the timing issues. The settlement was approved by the Federal Court. A consumer
group has requested a stay pending an appeal.
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.
On October 30, 2001, the Company transferred $14.9 million of the outstanding
PG&E receivables for $13.4 million to a financial institution. Of this amount,
$8.5 million (which related to receivables not subject to pricing disputes with
PG&E) was paid in immediate cash. The balance, $4.9 million (which related to
receivables to which there are pricing disputes) was placed in escrow until the
resolution of those disputes or the conclusion of the PG&E bankruptcy. The
remaining $1.5 million represents the 10% discount charged by the financial
institution.
Disagreements with both SCE and PG&E exist regarding the valuation of the
pre-March 26, 2001 receivables. Resolution of these disagreements and payment of
the receivables is likely to occur only upon the restoration of SCE to
creditworthiness, the resolution of the pricing issues by the CPUC and in the
case of PG&E, the resolution of the PG&E bankruptcy. Although this matter is not
free of doubt, the Company believes it will ultimately receive payments in full
of the net amount of these receivables.
Under its Master Credit Facility, the Company agreed to meet budgeted cash
flows. The Company's ability to meet these tests has been adversely affected due
to the late payment of receivables for California power sales and the delays in
completion of non-core asset sales. As a result of these business conditions,
the Company has requested and received amendments to its financial covenants
under the Master Credit Facility through December 31, 2001. At this time, the
Company expects that it will require amendments to the financial covenants
regarding the Company's cash usage and its net worth to remain in compliance
with the terms of the Master Credit Facility. Although amendments to the
Company's financial covenants are not assured, it believes that it will be able
to construct a plan that will be accepted by the lender banks and thereby be
able to obtain the required amendments to allow the Company to conduct its
operations in the ordinary course of business. Such plan could involve further
rescheduling of expenditures, accessing capital markets (either private or
public) and other strategic alternatives.
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 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 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has not entered into derivative financial instruments, as defined
by SFAS No. 133, for trading purposes. All such derivatives are entered into for
other than trading purposes. At December 31, 2000 the Company had entered into
only one such derivative (see below).
Interest Rate Risk
The Company has long-term debt and project debt outstanding that subject the
Company to the risk of increased interest expense due to rising market interest
rates. Of the Company's total long-term debt, approximately $260,000,000 was
floating rate at December 31, 2000, of which $113.7 million was paid off in
March 2001. Of the project debt, $406.5 million was floating rate at December 31
2000. However, of that floating rate project debt, $139 million related to
waste-to-energy projects where, because of their contractual structure, interest
rate risk is borne by our client communities since debt service is passed
through to those clients. Although the Company has from time to time entered
into financial instruments to reduce the impact of changes in interest rates,
the Company had only one interest rate swap outstanding at December 31, 2000 in
the notional amounts of $80,220,000 related to floating rate project debt. Gains
and losses on this swap are for the account of the client community. The Company
does not typically hedge its interest rate exposure on its debt.
Foreign Currency Exchange Rate Risk
The Company has investments in Energy projects in various foreign countries,
including the Philippines, China, India, Thailand, and Bangladesh, and to a much
lesser degree, Italy and Spain. The Company does not enter into currency
transactions to hedge its exposure to fluctuations in currency exchange rates.
Instead the Company attempts to mitigate its currency risks by structuring its
project contracts so that its revenues and fuel costs are denominated in U.S.
dollars, or so that its revenues are indexed to or "linked" to the U.S. dollar.
This leads the Company to treat the U.S. dollar as the functional currency at
most of its international projects. Therefore, only local operating expenses are
exposed to currency risks. However, at projects where the functional currency is
other than the U.S. dollar, exchange fluctuations generally also have the effect
of increasing or decreasing the foreign currency translation adjustment included
in the Company' stockholders' equity on its balance sheet. At December 31, 2001,
the Company had recorded a $3.4 million loss in cumulative net translation
adjustments. The cumulative translation adjustments will be reflected in
earnings and cash flows only when the related projects are disposed of.
Certain exceptions to this exist. At December 31, 2000, the Company has
$11,400,000 of project debt denominated in Thai Baht in connection with the
Sahacogen project in Thailand. Exchange rate fluctuations related
to this debt are recorded as adjustments to the recorded amount of the debt and
as foreign currency gains and losses included in net income. This is the only
debt on the Company's balance sheet that is denominated in a foreign currency.
Commodity Price Risk
The Company has not entered into futures, forward contracts, swaps and options
to hedge purchase and sale commitments, fuel requirements, inventories or other
commodities. The Company attempts to mitigate the risk of market fluctuations of
energy and fuel by structuring contracts related to its Energy projects as fixed
price contracts to that energy sales and fuel costs are "locked in" for the same
term. Certain power sales agreements related to domestic projects provide for
energy sales prices linked to the "avoided costs" of producing such energy and,
therefore, fluctuate with various economic factors. The Company is exposed to
commodity price risk at those projects. At other plants, fuel costs are
contractually included in our electricity revenues, or fuel is provided by our
customers. Also, at most of our waste-to-energy facilities, commodity price risk
is mitigated in that either most commodity costs used in the operation of those
facilities are borne by our client communities, or our service revenues are
adjusted to reflect fluctuations in various price indices which are indicative
of, in part, changes in prices of natural gas, electricity, auxiliary fuel, and
the cost of certain commodities used in the operation of those facilities.
Generally, the Company is protected against fluctuations in the cost of waste
disposal (i.e., "tip fees") through long-term disposal contracts at its
waste-to-energy facilities. At three owned waste-to-energy facilities,
differing amounts of waste disposal capacity are not subject to long-term
contracts and, therefore, the Company is exposed to the risk of fluctuations in
tip fees.
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.
The Company may be identified, along with other entities, as being
among parties potentially responsible for contribution for costs
associated with the correction and remediation of environmental
contamination at disposal sites subject to CERCLA and/or analogous
state laws. In certain instances the Company may be exposed to joint
and several liability for remedial action or damages. The Company's
ultimate liability in connection with such environmental claims will
depend on many factors, including its volumetric share of waste, the
total cost of remediation, the financial viability of other companies
that also sent waste to a given site and, in the case of divested
operations, its contractual arrangement with the purchaser of such
operations.
The Company is engaged in ongoing investigation and remediation actions
with respect to seven airports where it provides aviation fueling
services on a cost-plus basis pursuant to contracts with individual
airlines, consortia of airlines and operators of airports. The Company
estimates the costs of those ongoing actions (determined as of October
1, 2001) will be about $4,000,000, and that airlines, airports and
others will reimburse it for substantially all of these costs. To date,
the Company's right to reimbursement for remedial costs has been
challenged successfully in one prior case in which the court found that
the cost-plus contract in question did not provide for recovery of
costs resulting from the Company's own negligence. Except in that
instance, and in the United/American litigation noted below, the
Company has not been alleged to have acted with negligence.
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 ("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 expects to issue its proposed
remedy for the Site by December 31, 2001, and has indicated that its
proposed remedy will cost approximately $46,000,000. EPA has invited
all named PRPs to participate in settlement discussions with respect to
their alleged liability at the Site. On August 7, 2001, we responded to
EPA's General Notice Letter by stating our willingness to participate
in settlement discussions along with other PRPs. 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"
(collectively "Ogden"), 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. An
Interim Joint Defense Group has been formed among PRPs, including Ogden
entities. As a result of uncertainties regarding the source and scope
of the contamination, the large number of PRPs and the varying degrees
of responsibility among various classes of potentially responsible
parties, 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 sought 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 sought response costs in excess of
$3,000,000 and unspecified damages from us. The Company moved to
dismiss the Complaint, and on August 9, 2001, the magistrate judge
recommended to the Court that the Company's motion be denied in part
and granted in part. The Company has settled this case without the
Company owing any payment to the plaintiff. On November 1, 2001,
plaintiff filed with the Court a Stipulation of Dismissal With
Prejudice.
(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. On November 2,
2001, Chinese Station submitted its Clean Closure Report to the Board.
The Board, by letter dated June 14, 2001, has alleged 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 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(a) First Amendment to Revolving Credit and Participation
Agreement, dated as of July 30, 2001, among the Company,
the Subsidiaries listed on the signature pages thereof as
Borrowers, the Loan Parties listed therein, Bank of
America, N.A., as Administrative Agent, and Deutsche Bank
AG, New York Branch, as Documentation Agent, transmitted
herewith as Exhibit 10.1(a).
10.1(b) Second Amendment to Revolving Credit and Participation
Agreement, dated as of August 31, 2001, among the
Company, the Subsidiaries listed on the signature pages
thereof as Borrowers, the Loan Parties listed therein,
Bank of America, N.A., as Administrative Agent, and
Deutsche Bank AG, New York Branch, as Documentation
Agent, transmitted herewith as Exhibit 10.1(b).
* 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 July 17, 2001, August 15, 2001,
August 21, 2001, and August 28, 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: November 14, 2001 By: /s/ EDWARD W. MONEYPENNY
----------------------------------
Edward W. Moneypenny
Executive Vice President
and Chief Financial Officer
Date: November 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.
10.1(a) First Amendment to Revolving Credit and Filed herewith as Exhibit 10.1(a).
Participation Agreement, dated as of July 30, 2001,
among the Company, the Subsidiaries listed on the
signature pages thereof as Borrowers, the Loan
Parties listed therein, Bank of America, N.A., as
Administrative Agent, and Deutsche Bank AG, New York
Branch, as Documentation Agent, transmitted herewith
as Exhibit 10.1(a).
10.1(b) Second Amendment to Revolving Credit and Filed herewith as Exhibit 10.1(b).
Participation Agreement, dated as of August 31,
2001, among the Company, the Subsidiaries listed on
the signature pages thereof as Borrowers, the Loan
Parties listed therein, Bank of America, N.A., as
Administrative Agent, and Deutsche Bank AG, New York
Branch, as Documentation Agent, transmitted herewith
as Exhibit 10.1(b).