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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2001
COMMISSION FILE NO. 001-15065
AZURIX CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0589114
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
333 CLAY STREET
SUITE 1000
HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (713) 646-6001
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No X
Note: The Company is not subject to the filing requirements of the
Securities Exchange Act of 1934. This quarterly report is filed pursuant to
contractual obligations imposed on the Company by an Indenture, dated as of
February 18, 2000, under which the Company is the issuer of certain debt.
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
TITLE OF CLASS OUTSTANDING AT JULY 31, 2001
Common Stock 3
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AZURIX CORP.
INDEX
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income (Loss) for the three months and six months ended
June 30, 2000 and 2001 (unaudited)........................................................... 2
Consolidated Balance Sheets as of December 31, 2000 and June 30, 2001 (unaudited).............. 3
Consolidated Statements of Cash Flows for the six months ended
June 30, 2000 and 2001 (unaudited)........................................................... 4
Notes to the Consolidated Financial Statements (unaudited)..................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................... 16
Information Regarding Forward-Looking Statements.................................................. 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K......................................................... 17
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AZURIX CORP.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(IN MILLIONS)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2000 2001 2000 2001
-------- -------- -------- --------
Operating revenues ............................................... $ 189.2 $ 176.4 $ 383.8 $ 350.3
Operating expenses:
Operations and maintenance .................................... 91.4 87.0 174.0 176.1
General and administrative .................................... 34.8 31.8 71.3 74.7
Depreciation and amortization ................................. 30.9 32.3 62.5 63.2
------- ------- ------- -------
Total operating expenses .................................. 157.1 151.1 307.8 314.0
------- ------- ------- -------
Operating income ................................................. 32.1 25.3 76.0 36.3
------- ------- ------- -------
Other income (expense):
Equity in earnings of unconsolidated affiliates ............... 2.3 0.8 3.2 2.1
Interest income ............................................... 6.2 3.6 17.0 7.1
Interest expense .............................................. (36.1) (35.5) (75.0) (73.2)
------- ------- ------- -------
Income (Loss) before minority interest, income taxes and
cumulative effect of change in accounting principle ........... 4.5 (5.8) 21.2 (27.7)
------- ------- ------- -------
Minority interest ................................................ (0.6) (0.2) (1.2) (0.2)
Income tax expense ............................................... 2.1 2.3 8.0 0.3
------- ------- ------- -------
Income (Loss) before cumulative effect of change in
accounting principle .......................................... 3.0 (7.9) 14.4 (27.8)
------- ------- ------- -------
Cumulative effect of change of accounting principle, net
of tax expense of $0.6 ........................................ -- -- -- 1.5
------- ------- ------- -------
Net income (loss) ................................................ $ 3.0 $ (7.9) $ 14.4 $ (26.3)
======= ======= ======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
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AZURIX CORP.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
ASSETS
DECEMBER 31, JUNE 30,
2000 2001
------------ ---------
(UNAUDITED)
Current assets:
Cash and cash equivalents ............................................... $ 30.0 $ 24.7
Restricted cash and cash equivalents .................................... 108.0 131.2
Trade receivables (net of allowance for doubtful accounts
of $66.9 and $79.2, respectively) .................................... 128.9 114.9
Unbilled receivables .................................................... 42.0 41.3
Other ................................................................... 75.2 91.2
-------- --------
Total current assets ............................................ 384.1 403.3
-------- --------
Property, plant and equipment, at cost .................................... 2,691.7 2,637.7
Less accumulated depreciation ............................................. (228.2) (250.9)
-------- --------
Property, plant and equipment, net .............................. 2,463.5 2,386.8
-------- --------
Investments in and advances to unconsolidated affiliates .................. 60.5 68.0
Concession intangibles, net ............................................... 86.4 84.9
Goodwill, net ............................................................. 971.4 910.0
Other assets .............................................................. 135.5 163.3
-------- --------
Total Assets .................................................... $4,101.4 $4,016.3
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accruals ........................................... $ 275.9 $ 215.2
Deferred income ......................................................... 43.3 32.0
Accrued taxes ........................................................... 9.4 14.4
Short-term debt ......................................................... 298.7 384.7
Current maturities of long-term debt .................................... 80.7 100.5
Current maturities of long-term debt - affiliates ....................... 109.2 --
-------- --------
Total current liabilities ....................................... 817.2 746.8
-------- --------
Long-term debt ............................................................ 1,346.1 1,292.1
Long-term debt - affiliates ............................................... 118.6 121.4
Deferred income taxes ..................................................... 457.8 438.2
Other long-term liabilities ............................................... 32.9 27.9
-------- --------
Total liabilities ............................................... 2,772.6 2,626.4
-------- --------
Commitments and contingencies (Note 7)
Minority interest ......................................................... 4.6 4.7
Mandatorily redeemable preferred stock .................................... -- 185.8
Stockholders' equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized .......... -- --
Common stock, $0.01 par value, 500,000,000 shares authorized,
2 shares and 3 shares issued and outstanding, respectively .......... -- --
Additional paid-in capital .............................................. 1,974.8 1,979.7
Retained deficit ........................................................ (443.1) (475.2)
Unearned compensation ................................................... (0.2) --
Accumulated other comprehensive loss .................................... (207.3) (305.1)
-------- --------
Total stockholders' equity ...................................... 1,324.2 1,199.4
-------- --------
Total Liabilities and Stockholders' Equity ...................... $4,101.4 $4,016.3
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
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AZURIX CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-------------------
2000 2001
------- -------
Operating Activities:
Net income (loss) ............................................................ $ 14.4 $ (26.3)
Adjustments to reconcile net income (loss) to cash provided by (used in)
operating activities:
Depreciation and amortization ............................................ 62.5 63.2
Accretion and amortization of debt expenses .............................. 2.8 2.4
Deferred income taxes .................................................... 1.3 (7.5)
Equity in earnings of unconsolidated affiliates .......................... (3.2) (2.1)
Minority interest ........................................................ (1.2) (0.2)
Cumulative effect of change in accounting principle ...................... -- (1.5)
Changes in operating assets and liabilities:
Increase in trade receivables and other current assets ................ (40.3) (4.0)
Decrease in current liabilities, excluding debt ....................... (1.9) (65.9)
Increase in other assets .............................................. (1.8) (15.7)
Decrease in other long-term liabilities ............................... (0.9) (3.5)
------- -------
Net cash provided by (used in) operating activities .............................. 31.7 (61.1)
------- -------
Investing Activities:
Capital expenditures ......................................................... (153.2) (102.6)
Investments in and advances to unconsolidated affiliates ..................... (2.6) (4.1)
Business acquisitions, net of cash acquired .................................. (15.2) --
Other ........................................................................ (45.5) (28.4)
------- -------
Net cash used in investing activities ............................................ (216.5) (135.1)
------- -------
Financing Activities:
Proceeds from long-term borrowings ........................................... 583.4 176.1
Repayments of long-term borrowings ........................................... (557.3) (121.5)
Net proceeds from (repayments of) short-term borrowings ...................... (287.1) 56.5
Withdrawal from restricted cash and cash equivalents account ................. 394.0 --
Advances from affiliates, net of repayments .................................. 53.9 80.1
Cash received in merger ...................................................... -- 330.8
Payment for cancelled common stock ........................................... -- (325.8)
Issuance of common stock and capital contributed ............................. 0.3 0.6
------- -------
Net cash provided by financing activities ........................................ 187.2 196.8
------- -------
Effect of exchange rate changes on cash .......................................... (5.4) (5.9)
------- -------
Change in cash and cash equivalents .............................................. (3.0) (5.3)
------- -------
Cash and cash equivalents, beginning of period ................................... 27.2 30.0
------- -------
Cash and cash equivalents, end of period ......................................... $ 24.2 $ 24.7
======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
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AZURIX CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated interim financial statements and disclosures
are unaudited and have been prepared by Azurix Corp. pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, these
statements reflect all normal recurring adjustments necessary for a fair
presentation, in all material respects, of the results for the interim periods.
The results of operations for the periods ended June 30, 2001 are not
necessarily indicative of results to be expected for the full year. Certain
information and notes normally included in financial statements, prepared in
accordance with generally accepted accounting principles, have been condensed or
omitted pursuant to such rules and regulations, although Azurix believes that
the disclosures are adequate to make the information presented not misleading.
These consolidated interim financial statements should be read in conjunction
with the financial statements and the notes thereto included in Azurix's Annual
Report on Form 10-K for the year ended December 31, 2000.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain reclassifications have been made in the 2000 amounts to conform with
the 2001 presentation.
"Azurix" is used from time to time herein as a collective reference to
Azurix Corp. and its subsidiaries and affiliates.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
This statement modifies existing generally accepted accounting principles
related to the amortization and impairment of goodwill and other intangible
assets. Upon adoption of the new standard, goodwill, including goodwill
associated with equity method investments, will no longer be amortized. In
addition, goodwill, other than goodwill associated with equity method
investments, must be assessed at least annually for impairment using a
fair-value based approach. The provisions of this statement are required to be
adopted as of the beginning of the first fiscal year after December 15, 2001.
Companies that have a December 31 fiscal year-end, such as Azurix, may not early
adopt the provisions of the statement. Impairment losses that arise due to the
initial application of this statement are to be reported as a cumulative effect
of change in accounting principle. Azurix has not completed an analysis of the
impact of implementing the provisions of this statement.
NOTE 2 - MERGER
On March 16, 2001, shareholders of Azurix Corp. approved and adopted the
Agreement and Plan of Merger by and among Enron Corp., Enron BW Corp., a wholly
owned indirect subsidiary of Enron, and Azurix dated as of December 15, 2000.
The merger was consummated on March 16, 2001, at which time Enron BW Corp. was
merged into Azurix with Azurix being the surviving corporation.
Under the Agreement and Plan of Merger, each issued and outstanding share
of Azurix Corp. common stock, other than those shares held by Atlantic Water
Trust, Enron Corp., Enron BW Corp., Azurix and any of their wholly owned
subsidiaries, was cancelled and converted into the right to receive $8.375 per
share. On the date of the merger, Enron BW Corp. had $325.9 million of cash that
was used to pay consideration to the public shareholders whose shares were
cancelled. As a result of the merger and effective on the merger date, Azurix
Corp. had three shares of common stock outstanding and Azurix Corp. common stock
ceased to be publicly held.
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AZURIX CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
Pursuant to the terms of the Agreement and Plan of Merger, on March 16,
2001, all Azurix stock options and unvested restricted stock outstanding were
cancelled. Holders of the options received a cash payment, less applicable
withholding taxes, for both vested and unvested options, based on the excess of
$8.375 over the exercise price per share. Holders of unvested restricted stock
received a cash payment of $8.375 per share, less applicable withholding taxes.
These payments resulted in Azurix recognizing a pre-tax charge of approximately
$4.3 million in the first quarter of 2001.
In addition, under the Agreement and Plan of Merger, Azurix Corp. retired
$180 million of borrowings outstanding on March 16, 2001 under the Enron credit
agreement through the issuance to Enron of 11% cumulative mandatorily redeemable
preferred stock with an initial liquidation preference of $180 million. The
preferred stock may not be redeemed by Azurix Corp. prior to the date that all
of its senior notes due 2007 and 2010 have been redeemed. The preferred stock
must be redeemed on or before the second anniversary of the date that the senior
notes are no longer outstanding. Dividends will accrue, but will not be paid
until all of its senior notes have been redeemed. Accrued dividends at June 30,
2001 totaled $5.8 million.
The definitive proxy statement that Azurix mailed to its shareholders in
connection with the merger stated that Enron does not view Azurix as a core
strategic asset. Azurix is currently pursuing the disposal of certain of its
assets, specifically including Azurix North America Corp. Azurix has not
committed to a plan to sell these assets, and a sale would occur only if
favorable prices for those assets can be obtained. Such asset disposals, should
they occur, may result in Azurix incurring losses in future periods.
NOTE 3 - DEBT
DEBT MATURITIES
Azurix's short-term debt, net of restricted cash which secures such debt,
was $262.2 million as of June 30, 2001. In addition, it had approximately $129.0
million of long-term debt and $102.8 million of long-term debt with affiliates
that mature before the end of 2004. Included in these amounts are the Wessex
committed bank facilities and the Azurix Europe credit facility which mature in
April 2002 and May 2002, respectively. These two facilities along with existing
cash, cash flows from operations and uncommitted bank facilities are Azurix's
primary sources of liquidity. Azurix anticipates that it will need to renew,
refinance or replace these borrowings and credit facilities before they mature.
Azurix cannot assure that such additional capital needed to replace maturing
borrowings and credit facilities can be obtained at reasonable costs, and if
Azurix is not successful in these efforts, it will need to raise capital through
other means, which may include disposing of assets.
LONG-TERM DEBT
In March 2001, Wessex Water exchanged $141.9 million face value of its fixed
interest rate U.K. pound sterling denominated senior unsecured bonds with an
equal face value amount of variable rate bonds. The bonds that were redeemed
bore an interest rate of 5.875% payable annually. The newly issued variable rate
bonds carry the same terms as the old bonds except for interest rate and
interest payment frequency. The interest rate on the variable rate bonds upon
issuance and at June 30, 2001 was 5.875%. For each rating notch downgrade or
upgrade, the interest rate increases by 0.25% or decreases by 0.125%,
respectively. If the rating of the variable rate bonds falls below investment
grade, the interest rate will increase by 1%. The maximum interest rate on the
variable rate bonds is 7.375%, and interest is payable semi-annually.
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AZURIX CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
In June 2001, Wessex Water entered into an additional pound sterling
denominated loan with the European Investment Bank with a face value on the date
of the loan of $105.4 million. The interest rate is based on the London
interbank offered rate adjusted for a variable margin which cannot exceed plus
0.15%. The variable margin at June 30, 2001 results in an interest rate of the
London interbank offered rate less 0.14%. The loan is payable in full in June
2011. The proceeds were used to repay outstanding borrowings under Wessex
Water's committed bank credit facilities.
LONG-TERM DEBT - AFFILIATES
In July 2001, Azurix Europe entered into an amended and restated agreement
with a subsidiary of a shareholder that extended to July 2003 the term of a loan
that previously matured in December 2001. The face value of the loan at June 30,
2001 was $102.8 million and was classified on the Consolidated Balance Sheet at
June 30, 2001 as "Long-term debt - affiliates."
NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes and interest expense is as follows:
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
----------------------------
2000 2001
--------- ----------
(IN MILLIONS)
Income taxes.................................................... $ 5.8 $ 7.0
Interest expense (net of amounts capitalized)................... 57.1 80.7
</Table>
NON-CASH TRANSACTION
In March 2001, Azurix Corp. retired $180 million of borrowings outstanding
on March 16, 2001 under the Enron credit agreement through the issuance to Enron
of 11% cumulative mandatorily redeemable preferred stock with an initial
liquidation preference of $180 million (see Note 2).
NOTE 5 - RELATED PARTY TRANSACTION
During 2000, Azurix entered into an agreement to provide future water supply
and water management services for a period of approximately 25 years to a power
project being developed by a subsidiary of Enron. During the first quarter of
2001, this agreement was terminated in connection with Enron's sale of the
project.
NOTE 6 - STOCKHOLDERS' EQUITY
In December 2000, Azurix Corp. entered into an Agreement and Plan of Merger
by and among Enron Corp., Enron BW Corp., a wholly owned indirect subsidiary of
Enron, and Azurix. The merger was consummated on March 16, 2001, and Azurix
Corp. was the surviving corporation (see Note 2). As a result of the merger and
effective on the merger date, Azurix Corp. cancelled the 78,536,532 shares held
by Atlantic Water Trust and issued two shares to Atlantic Water Trust and one
share to an Enron subsidiary. The remaining 38,919,149 shares outstanding
immediately before the merger, which were held by the public, were cancelled and
converted into the right to receive $8.375 per share. Share data for all periods
presented herein has been adjusted to give effect to the cancellation of
pre-merger shares and re-issuance of shares.
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AZURIX CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
NOTE 7 - COMMITMENTS AND CONTINGENCIES
LITIGATION
Azurix is involved in various claims and lawsuits, the significant items of
which are discussed below. Although no assurances can be given, Azurix believes,
after considering appropriate reserves that have been established and except
where noted below, that the ultimate resolution of such items will not have a
material adverse effect on its financial position or results of operations.
On November 1, 1999, Synagro Technologies, Inc. filed a lawsuit against
Azurix styled Synagro Technologies, Inc. v. Azurix Corp. in the 270th Judicial
District Court of Harris County, Texas. The lawsuit relates to various
agreements between the parties regarding potential business transactions and the
possible acquisition by Azurix of two subsidiaries of Waste Management, Inc.
commonly called BioGro. On May 9, 2000, Synagro filed its First Amended Petition
in the District Court seeking (i) damages in excess of $57 million resulting
from the alleged breach by Azurix to purchase up to $23 million of Synagro
convertible preferred stock and (ii) unspecified damages resulting from Azurix's
alleged breach of confidentiality and standstill agreements. Synagro further
amended its complaint on June 13, 2001 to include a claim for fraud. On August
4, 2000, Azurix filed its First Amended Answer and Counterclaim (i) denying all
of the material allegations contained in Synagro's First Amended Petition and
(ii) seeking damages in excess of $175 million for misrepresentations by Synagro
that induced Azurix to agree to restrictions on its ability to purchase BioGro
and to enter into negotiations with Synagro and Synagro's interference with
Azurix's acquisition of BioGro. The parties have agreed to a trial date in
September 2001. Azurix intends to continue to vigorously defend itself against
Synagro's claims and to continue to pursue its claims for damages resulting from
Synagro's conduct regarding BioGro. Although no assurances can be given, Azurix
believes that the ultimate resolution of this litigation will not have a
material adverse effect on its financial position or results of operations.
On October 6, 2000, a lawsuit was filed in the United States District Court
for the Southern District of Texas, Houston Division, by Irving Rosenzweig, on
behalf of himself and others similarly situated, against Azurix Corp., Enron
Corp. and certain of their officers and directors. Several similar actions
subsequently were filed in the same court and have been consolidated under the
name In re Azurix Corp. Securities Litigation. These are a purported class
action filed on behalf of those persons who purchased the common stock of Azurix
during the period from June 9, 1999, the date of Azurix's initial public
offering, through and including August 8, 2000. The suit generally alleges that
the defendants violated Sections 11, 12(a) and 15 of the Securities Act of 1933,
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5.
The plaintiffs contend that the defendants issued and disseminated materially
false and misleading information to the plaintiffs and the investing public in
connection with Azurix's initial public offering and during the class period.
The plaintiffs seek rescissory and/or compensatory damages, interest and costs,
including attorneys' and experts' fees. The plaintiffs also seek extraordinary
and/or injunctive relief, including attaching, impounding, imposing a
constructive trust upon or otherwise restricting the proceeds of defendants'
trading activities or their other assets so as to assure that plaintiffs have an
effective remedy. These lawsuits are subject to the Private Securities
Litigations Reform Act of 1995. Azurix intends to defend these cases vigorously.
On June 12, 2001, the defendants filed motions to dismiss these actions for
failure to state a claim on which relief could be granted. At this early stage
of the litigation, it is not possible to estimate potential damages, if any. If
liability were established, an unfavorable judgment or settlement could have a
material adverse effect on Azurix's financial position and results of
operations.
On October 27, 2000, a lawsuit was filed in the Court of Chancery in the
State of Delaware, New Castle County, by Thomas Turberg against Azurix Corp.,
Enron Corp. and certain of their officers and directors. The suit is a purported
class action filed on behalf of Azurix's public shareholders for the purpose of
enjoining a transaction
8
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AZURIX CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
proposed by Enron for taking Azurix private at a price of $7.00 for each of
Azurix's publicly held shares. The letter from Enron making this proposal and
the related press release issued by Azurix were filed with the Securities and
Exchange Commission on October 27, 2000, as exhibits to Azurix's Current Report
on Form 8-K. The suit generally alleged that the buy-out price of $7.00 per
share was unconscionable and unfair and grossly inadequate and that the
defendants have breached their duties of loyalty and care with respect to
Azurix's public shareholders. The plaintiff sought a judgment (i) enjoining the
acquisition under the terms proposed in the letter; (ii) to the extent the
transaction is consummated prior to a final judgment, rescinding the transaction
or awarding rescissory damages to the class; (iii) directing that the defendants
account to the plaintiff and the class for all damages caused to them and
account for all profits and any special benefits obtained by the defendants as a
result of their alleged unlawful conduct; (iv) awarding to the plaintiff the
costs and disbursements of the lawsuit, including a reasonable allowance for
attorney fees and expenses; and (v) granting such other and further relief as
the court deems appropriate. Six similar actions were subsequently filed in the
Court of Chancery in the State of Delaware, New Castle County and all Delaware
actions have been consolidated into a single action. In addition, a similar
action was filed in the 55th Judicial District Court of Harris County, Texas.
Certain of the actions filed in the Delaware court have added Atlantic Water
Trust as a defendant. On December 13, 2000, the parties to the litigation
executed a Memorandum of Understanding that settled both the Delaware and Texas
actions in principle. Under the proposed settlement, the defendants acknowledged
that the prosecution of the litigation was a material factor in causing Enron to
increase the merger consideration from $7.00 to $8.375 per share. The proposed
settlement provides that the defendants will not oppose plaintiffs' application
for attorneys' fees and expenses up to $2.25 million, which Azurix has agreed to
pay. The proposed settlement is subject to the execution of definitive
settlement documents, confirmatory discovery, and court approval.
Issues regarding water quality or quantity have arisen in various areas
served by Azurix Buenos Aires. Azurix believes these episodes for the most part
are due to failures by the Province to deliver infrastructure that it committed
to deliver under the concession contract. In a few instances, customers of
Azurix Buenos Aires have filed claims for damages due to allegedly inadequate
water quality. Although to date these claims have not been for material amounts,
other claims regarding quality or quantity may be filed in the future, the
amount of which Azurix cannot predict. Azurix would defend any such claims
vigorously, if made, and would seek to have the Province of Buenos Aires brought
in as a defendant and reimbursement from the Province for any liability, if
assessed. Because no material claims have been asserted to date, Azurix is not
in a position to assess the likelihood of assertion or of Azurix Buenos Aires
prevailing on those claims.
REGULATION
Azurix is subject to extensive federal, foreign, state and local
environmental laws and regulations. Azurix anticipates future changes in, or
decisions affecting, regulatory regimes that will serve to expand or tighten
regulatory controls. Some of these changes or decisions could have a material
adverse effect on its financial position and results of operations.
Azurix believes that the provincial government of Buenos Aires has failed to
permit Azurix Buenos Aires to charge rates in accordance with the tariff set by
the concession contract and to deliver infrastructure and other assets as
required by the concession contract, thereby affecting its ability to raise
capital and to serve its customers. Negotiations with the province thus far have
failed to result in resolution of disputed items, despite oral assurances from
provincial officials to Azurix Buenos Aires management that various matters
would be resolved by the end of 2000, including allowing Azurix to charge rates
at levels consistent with the concession contract. In addition, during the last
week of December 2000, some prominent officials in the Province publicly
advocated canceling the concession. Azurix does not believe the Province has
grounds for cancellation without compensation and is vigorously challenging the
Province's actions and will continue to do so; however, the lack of resolution
on rates by
9
11
AZURIX CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
December 31, 2000, and a shift in the political environment during the last week
of 2000 caused Azurix to revise its expectation of future cash flows from this
concession, including collection rates from customers, and to evaluate the
recoverability of related tax assets. Accordingly, in the fourth quarter of
2000, Azurix wrote down the carrying value of the concession intangible and
related property, plant and equipment to its fair value. In addition, it also
recorded an increase in bad debt expense provision and recorded a valuation
allowance against its Argentine tax loss carryforwards.
On February 15, 2001, the Province and Azurix Buenos Aires entered into a
Memorandum of Understanding regarding a variety of issues between them. The
Memorandum of Understanding, among other things, set an investment program for
2001 at a lower level than previously required and established a framework for
negotiating issues associated with tariff levels and the remaining capital
program. There is no assurance, however, that these negotiations will result in
a resolution satisfactory to Azurix or the Province.
NOTE 8 - COMPREHENSIVE LOSS
Comprehensive loss includes the following for the periods indicated:
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--- ------------- -----------------
2000 2001 2000 2001
------ ------ ------- -------
(IN MILLIONS)
Net income (loss) ............................................... $ 3.0 $ (7.9) $ 14.4 $ (26.3)
Other comprehensive loss, net of tax:
Foreign currency translation adjustment ....................... (80.5) (12.6) (102.2) (97.8)
Derivative instruments:
Deferred gain on derivative instruments associated
with hedges of future cash flows ........................ -- 2.2 -- 0.4
Recognition in earnings of previously deferred
losses related to derivative instruments used as
cash flow hedges ........................................ -- 0.1 -- 0.1
Cumulative effect of change in accounting principle ........... -- -- -- (0.5)
Unrealized gain (loss) on available for sale securities ....... -- 0.2 (0.6) --
------ ------ ------- -------
Comprehensive loss .............................................. $(77.5) $(18.0) $ (88.4) $(124.1)
====== ====== ======= =======
</Table>
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AZURIX CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
NOTE 9 - DERIVATIVE INSTRUMENTS
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which was subsequently amended by Statement of
Financial Accounting Standards No. 137 and No. 138. Statement of Financial
Accounting Standards No. 133, as amended, must be applied to all derivative
instruments and certain derivative instruments embedded in hybrid instruments
and requires that such instruments be recorded in the balance sheet either as an
asset or liability measured at their fair value through earnings, with special
accounting allowed for certain qualifying hedges. Azurix adopted Statement of
Financial Accounting Standards No. 133, as amended, as of January 1, 2001. Due
to its adoption, Azurix recognized an after-tax non-cash gain of approximately
$1.5 million in earnings ($2.1 million, pre-tax) and an after-tax non-cash loss
in "Accumulated other comprehensive loss," a component of stockholders' equity,
of approximately $0.5 million ($0.7 million, pre-tax), both from the cumulative
effect of a change in accounting principle.
Azurix is exposed to market risks, particularly changes in U.S. and
international interest rates and changes in currency exchange rates as measured
against the functional currencies in which it operates. Azurix engages in
hedging programs aimed at limiting the impact of significant and sudden
fluctuations, but there can be no assurance that such an approach will be
successful. Factors that could impact the effectiveness of its hedging programs
include the accuracy of revenue forecasts, volatility of the currency and
interest rate markets and the availability of hedging instruments. Azurix
utilizes swap contracts to manage interest rate risk. Currency exchange rate
risk is the result of transactions that are denominated in a currency other than
the functional currencies in which Azurix operates. The primary purpose of
Azurix's foreign currency hedging activities is to manage the volatility
associated with currency exchange rates. Azurix manages these risks by utilizing
derivative financial instruments for non-trading purposes. Azurix enters into
currency or interest rate contracts for the sole purpose of hedging an existing
or anticipated exposure, not for speculation.
Azurix holds derivative instruments which qualify as cash flow hedges. These
cash flow hedges are intended to provide protection against variability in cash
flows due to an associated variable risk. Azurix also holds derivative
instruments which do not meet the criteria in Statement of Financial Accounting
Standards No. 133 for hedge accounting, but provide Azurix with an economic
hedge of an associated risk. In addition, Azurix Corp. issued U.K. pound
sterling denominated debt to hedge its exposure to currency exchange risk of a
portion of its net investment in Wessex which has the U.K. pound sterling as its
functional currency.
An estimated net loss of $0.6 million of the "Accumulated other
comprehensive loss" balance at June 30, 2001, related to cash flow hedges that
existed at January 1, 2001, is expected to be reclassified to earnings within
the next six months. An estimated net loss of $0.4 million of the "Accumulated
other comprehensive loss" balance at June 30, 2001, related to all cash flow
hedges, is expected to be reclassified to earnings within the next twelve
months. Amounts are reclassified from "Accumulated other comprehensive loss" to
earnings to offset the income statement impact of the associated hedge risk.
Azurix had no material ineffectiveness in its cash flow hedges for the three
months and six months ended June 30, 2001. Azurix has recognized other
comprehensive income, net of tax, of $0.3 million related to its hedge of
currency exchange risk of a portion of its net investment in Wessex for the six
months ended June 30, 2001, primarily all of which was recognized in the first
quarter of 2001. The maximum amount of time over which cash flow exposure in
forecasted transactions are hedged is approximately eight years.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the information
contained in the Consolidated Financial Statements of Azurix and related notes
thereto, contained herein, as well as the Consolidated Financial Statements of
Azurix and related notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in Azurix's Annual
Report on Form 10-K for the year ended December 31, 2000.
MERGER
On March 16, 2001, shareholders of Azurix Corp. approved and adopted the
Agreement and Plan of Merger by and among Enron Corp., Enron BW Corp., a wholly
owned indirect subsidiary of Enron, and Azurix dated as of December 15, 2000.
The merger was consummated on March 16, 2001, at which time Enron BW Corp. was
merged into Azurix with Azurix being the surviving corporation.
Under the Agreement and Plan of Merger, each issued and outstanding share
of Azurix Corp. common stock, other than those shares held by Atlantic Water
Trust, Enron Corp., Enron BW Corp., Azurix and any of their wholly owned
subsidiaries, was cancelled and converted into the right to receive $8.375 per
share. On the date of the merger, Enron BW Corp. had $325.9 million of cash that
was used to pay consideration to the public shareholders whose shares were
cancelled. As a result of the merger and effective on the merger date, Azurix
Corp. had three shares of common stock outstanding and Azurix Corp. common stock
ceased to be publicly held.
Pursuant to the terms of the Agreement and Plan of Merger, on March 16,
2001, all Azurix stock options and unvested restricted stock outstanding were
cancelled. Holders of the options received a cash payment, less applicable
withholding taxes, for both vested and unvested options, based on the excess of
$8.375 over the exercise price per share. Holders of unvested restricted stock
received a cash payment of $8.375 per share, less applicable withholding taxes.
These payments resulted in Azurix recognizing a pre-tax charge of approximately
$4.3 million in the first quarter of 2001.
In addition, under the Agreement and Plan of Merger, Azurix Corp. retired
$180 million of borrowings outstanding on March 16, 2001 under the Enron credit
agreement through the issuance to Enron of 11% cumulative mandatorily redeemable
preferred stock with an initial liquidation preference of $180 million. The
preferred stock may not be redeemed by Azurix Corp. prior to the date that all
of its senior notes due 2007 and 2010 have been redeemed. The preferred stock
must be redeemed on or before the second anniversary of the date that the senior
notes are no longer outstanding. Dividends will accrue, but will not be paid
until all of its senior notes have been redeemed.
The definitive proxy statement that Azurix mailed to its shareholders in
connection with the merger stated that Enron does not view Azurix as a core
strategic asset. Azurix is currently pursuing the disposal of certain of its
assets, specifically including Azurix North America Corp. Azurix has not
committed to a plan to sell these assets, and a sale would occur only if
favorable prices for those assets can be obtained. Such asset disposals, should
they occur, may result in Azurix incurring losses in future periods.
NEW ACCOUNTING PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which was subsequently amended by Statement of
Financial Accounting Standards No. 137 and No. 138. Statement of Financial
Accounting Standards No. 133, as amended, must be applied to all derivative
instruments and certain derivative instruments embedded in hybrid instruments
and requires that such instruments be recorded in the balance sheet either as an
asset or liability measured at their fair value through earnings, with special
accounting allowed for certain qualifying hedges. Azurix
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adopted Statement of Financial Accounting Standards No. 133, as amended, as of
January 1, 2001. Due to its adoption, Azurix recognized an after-tax non-cash
gain of approximately $1.5 million in earnings ($2.1 million, pre-tax) and an
after-tax non-cash loss in "Accumulated other comprehensive loss," a component
of stockholders' equity, of approximately $0.5 million ($0.7 million, pre-tax),
both from the cumulative effect of a change in accounting principle.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
This statement modifies existing generally accepted accounting principles
related to the amortization and impairment of goodwill and other intangible
assets. Upon adoption of the new standard, goodwill, including goodwill
associated with equity method investments, will no longer be amortized. In
addition, goodwill, other than goodwill associated with equity method
investments, must be assessed at least annually for impairment using a
fair-value based approach. The provisions of this statement are required to be
adopted as of the beginning of the first fiscal year after December 15, 2001.
Companies such as Azurix which have a December 31 fiscal year-end may not early
adopt the provisions of the statement. Impairment losses that arise due to the
initial application of this statement are to be reported as a cumulative effect
of change in accounting principle. Azurix has not completed an analysis of the
impact of implementing the provisions of this statement.
RESULTS OF OPERATIONS
For each of the six-month periods ended June 30, 2001 and 2000, 55% of
Azurix's operating revenues were denominated in U.K. pound sterling. The average
U.S. dollar to pound sterling exchange rate for the three months and six months
ended June 30, 2001 was 1.42 and 1.44, respectively, compared to the same
periods in 2000 of 1.53 and 1.57, respectively. These rates represent a decrease
from 2000 to 2001 for the three month and six month periods ending June 30 of
7.2% and 8.3%, respectively. The decrease in the pound sterling exchange rates
for the three months and six months ended June 30, 2001, as compared to the same
periods in the prior year, reduced net income by approximately $1.2 million and
$2.7 million, respectively.
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
Net loss for the three months ended June 30, 2001 of $7.9 million compared
to a net income of $3.0 million for the three months ended June 30, 2000. The
primary reasons for the decline in earnings are described below.
Operating revenues for the three months ended June 30, 2001 of $176.4
million decreased $12.8 million, or 7%, when compared to the three months ended
June 30, 2000. Lower current period pound sterling exchange rate decreased
current period revenues by $7.6 million. Revenues also decreased at Azurix North
America by approximately $5.0 million due to the completion of the Seattle-Tolt
construction contract in the fourth quarter of 2000 and $5.5 million due to
lower carbon and mobile residual revenues. These decreases were partially offset
by an increase of $1.1 million in regulated revenues as a result of an inflation
price increase in April 2001 and an increase of $3.7 million in unregulated
revenues at Wessex.
Operations and maintenance expense for the three months ended June 30, 2001
of $87.0 million decreased $4.4 million, or 5%, when compared to the three
months ended June 30, 2000. The decrease included the effect of the lower
current period pound sterling exchange rate, which resulted in a $2.2 million
decrease from the same period in the prior year. Operations and maintenance
expense decreased by $5.2 million due to the completion of the Seattle-Tolt
construction contract at Azurix North America in the fourth quarter of 2000. The
decrease was partially offset by $3.0 million of higher operating costs at
Wessex related to additional costs of operating new plants and processes and
costs incurred to generate the additional revenues earned from unregulated
activities and $1.7 million of higher bad debt expense at Azurix Buenos Aires.
General and administrative expense for the three months ended June 30, 2001
of $31.8 million decreased $3.0 million, or 9%, when compared to the three
months ended June 30, 2000. The decrease was due to the impact of
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cost-cutting efforts at Azurix's corporate headquarters and the effect of the
lower current period pound sterling exchange rate.
Interest income for the three months ended June 30, 2001 of $3.6 million
decreased $2.6 million, or 42%, when compared to the three months ended June 30,
2000. The decrease resulted primarily from $1.7 million of interest income
earned during the three months ended June 30, 2000 on restricted cash that was
on deposit in a cash collateral account that secured a bank loan that was used
to fund the Buenos Aires acquisition. The loan was repaid in April 2000 with the
restricted cash proceeds.
Equity in earnings of unconsolidated affiliates for the three months ended
June 30, 2001 of $0.8 million decreased $1.5 million when compared to the three
months ended June 30, 2000. The decrease resulted primarily from lower earnings
from Azurix's investment in the entity which manages and operates the water and
wastewater concession for Cancun and Isla Mujeres, Mexico.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
Net loss for six months ended June 30, 2001 of $26.3 million compared to a
net income of $14.4 million for the six months ended June 30, 2000. The primary
reasons for the decline in earnings are described below.
Operating revenues for the six months ended June 30, 2001 of $350.3 million
decreased $33.5 million, or 9%, when compared to the six months ended June 30,
2000. The decrease resulted from the impact of the Wessex rate cut, effective
April 1, 2000, and the effect of the lower current period pound sterling
exchange rate, which decreased current period revenues by $8.1 million and $17.4
million, respectively. Revenues also decreased at Azurix North America by
approximately $11.5 million due to the completion of the Seattle-Tolt
construction contract in the fourth quarter of 2000, partially offset by a $7.1
million increase in unregulated revenues at Wessex.
Operations and maintenance expense for the six months ended June 30, 2001 of
$176.1 million increased $2.1 million, or 1%, when compared to the six months
ended June 30, 2000. The increase included $11.1 million of higher operating
costs at Wessex related to additional costs of operating new plants and
processes and costs incurred to generate the additional revenues earned from
unregulated activities. In addition, the six months ended June 30, 2001 included
higher operations and maintenance expense of $2.4 million from acquisitions that
occurred during 2000 and $3.0 million of higher bad debt expense at Azurix
Buenos Aires. These increases were partially offset by the effect of the lower
current period pound sterling exchange rate, which resulted in a $4.9 million
decrease from the same period in the prior year and lower costs at Azurix North
America of $10.1 million, primarily associated with the completion of the
Seattle-Tolt construction contract in the fourth quarter of 2000.
General and administrative expense for the six months ended June 30, 2001 of
$74.7 million increased $3.4 million, or 5%, when compared to the six months
ended June 30, 2000. General and administrative expense for the six months ended
June 30, 2001 included $4.3 million of costs paid to Azurix employees for the
cancellation of the stock options and unvested restricted stock, which was
required under the stock plan as a result of the merger (see "Merger"). The six
months ended June 30, 2001 also included $4.3 million of expenses incurred by
Azurix related to the merger and $3.8 million of employee severance costs. These
increases were partially offset by the impact of cost-cutting efforts at
Azurix's corporate headquarters and the effect of the lower current period pound
sterling exchange rate.
Interest income for the six months ended June 30, 2001 of $7.1 million
decreased $9.9 million, or 58%, when compared to the six months ended June 30,
2000. The decrease resulted primarily from $7.5 million of interest income
earned during the six months ended June 30, 2000 on restricted cash that was on
deposit in a cash collateral account that secured a bank loan that was used to
fund the Buenos Aires acquisition. The loan was repaid in April 2000 with the
restricted cash proceeds.
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Interest expense for the six months ended June 30, 2001 of $73.2 million
decreased $1.8 million, or 2%, when compared to the six months ended June 30,
2000. Lower current period average borrowings outstanding and pound sterling
exchange rate reduced current period interest expense by $2.5 million and $3.2
million, respectively. These were partially offset by higher cost of borrowings
during the current period, primarily resulting from the senior notes issued in
February 2000, and lower current period capitalized interest, which increased
current period interest expense by $2.1 million and $1.9 million, respectively.
As of June 30, 2001, approximately 64% of Azurix's debt was denominated in pound
sterling.
Income tax expense for the six months ended June 30, 2001 of $0.3 million
decreased $7.7 million, or 96%, when compared to the six months ended June 30,
2000. The effective tax rate for the six months ended June 30, 2001 was (1)%
compared to the effective tax rate for the six months ended June 30, 2000 of
36%. The decrease in the effective tax rate was due primarily to the impact of
non-deductible goodwill amortization relative to a lower current period pre-tax
loss, certain foreign losses which are not tax benefited and a valuation
allowance which was recorded in the first quarter of 2001 on certain Canadian
deferred tax assets of $1.1 million.
LIQUIDITY AND CAPITAL RESOURCES
Azurix's cash used in operating activities for the six months ended June 30,
2001 was $61.1 million. Cash used in investing activities for the period was
$135.1 million which included capital expenditures of $102.6 million. Cash
provided by financing activities for the period was $196.8 million and primarily
resulted from net borrowings during the period.
As of June 30, 2001, Azurix had a working capital deficit of $343.5 million.
Of this amount, $465.3 million was related to borrowings outstanding or secured
by the Azurix Europe credit facility which terminates in May 2002. Azurix, and
Wessex, its predecessor company, have during the past several years operated
with a working capital deficit as part of its normal business practice.
Under the terms of the Azurix Europe credit facility, Azurix Europe is
restricted from paying dividends. Azurix does not anticipate that this will have
an impact on liquidity for the remainder of the Azurix consolidated group. Under
the terms of the Azurix Europe credit facility, at June 30, 2001, $337.8 million
of the total capacity of the facility may be borrowed in a manner allowing for
its use by Azurix for general corporate purposes. As of June 30, 2001, Azurix
had outstanding borrowings of $199.0 million under that portion of the facility
available for use by Azurix for general corporate purposes.
On March 16, 2001, the then outstanding balance of the Enron credit
agreement of $180 million was retired through the issuance to Enron of
mandatorily redeemable preferred stock and the credit agreement was terminated
(see "Merger").
As of June 30, 2001, Azurix through Wessex, had among other credit
facilities, committed credit facilities with major commercial banks providing
for an aggregate of $211.2 million of borrowing capacity. Of this capacity, 50%
expires in October 2001 and the remainder expires in April 2002. As of June 30,
2001, outstanding borrowings consisted of $16.9 million under the facilities
that expire in 2002.
Azurix estimates that required capital expenditures, primarily related to
its ownership of water and wastewater concessions, will be approximately $1.4
billion for the period 2001 to 2005. Azurix intends to finance its projected
capital expenditures for its existing businesses principally with internally
generated funds and proceeds under existing long-term and short-term borrowing
arrangements and future financing arrangements.
Azurix's short-term debt, net of restricted cash which secures such debt,
was $262.2 million as of June 30, 2001. In addition, it had approximately $129.0
million of long-term debt and $102.8 million of long-term debt with affiliates
that mature before the end of 2004. Included in these amounts are the Wessex
committed bank facilities
15
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and the Azurix Europe credit facility which mature in April 2002 and May 2002,
respectively. These two facilities along with existing cash, cash flows from
operations and uncommitted bank facilities are Azurix's primary sources of
liquidity. Azurix anticipates that it will need to renew, refinance or replace
these borrowings and credit facilities before they mature. Azurix cannot assure
that such additional capital needed to replace maturing borrowings and credit
facilities can be obtained at reasonable costs, and if Azurix is not successful
in these efforts, it will need to raise capital through other means, which may
include disposing of assets. Azurix is pursuing the potential disposal of
certain of its assets to improve its long-term liquidity, provided favorable
prices can be obtained for those assets.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Azurix is exposed to market risks, particularly changes in U.S. and
international interest rates and changes in currency exchange rates as measured
against the functional currencies in which it operates. Azurix engages in
hedging programs aimed at limiting the impact of significant and sudden
fluctuations, but there can be no assurance that such an approach will be
successful. Factors that could impact the effectiveness of its hedging programs
include the accuracy of revenue forecasts, volatility of the currency and
interest rate markets and the availability of hedging instruments. Azurix
utilizes swap contracts to manage interest rate risk. Currency exchange rate
risk is the result of transactions that are denominated in a currency other than
the functional currencies in which Azurix operates. The primary purpose of
Azurix's foreign currency hedging activities is to manage the volatility
associated with currency exchange rates. Azurix manages these risks by utilizing
derivative financial instruments for non-trading purposes. Azurix enters into
currency or interest rate contracts for the sole purpose of hedging an existing
or anticipated exposure, not for speculation. Azurix's accounting policies for,
and the significant terms of, derivative financial instruments are described in
Note 1 and Note 8, respectively, to the Consolidated Financial Statements
included in Azurix's Annual Report on Form 10-K for the year ended December 31,
2000.
Azurix uses J.P. Morgan's RiskMetrics(TM) system to estimate the
value-at-risk of its financial instruments. Value-at-risk is a statistical
estimate of the loss that would result from changes in market prices.
Value-at-risk is based on volatility and correlation data provided by J.P.
Morgan, a statistical confidence level and an estimate of the time period
required to liquidate the positions in the various financial instruments. The
value-at-risk estimate was based on normal market conditions, a 95% confidence
level and a liquidation period between 30 days and 60 months, depending on the
type of financial instrument. At December 31, 2000, the value-at-risk estimate
for foreign currency and interest rate exposure was $0.1 million and
approximately $0.2 million, respectively. At June 30, 2001, the value-at-risk
estimate for foreign currency and interest rate exposure was approximately
$48,000 and $0.7 million, respectively. The value-at-risk estimate includes only
the risk related to the financial instruments that serve as hedges and does not
include the related underlying hedged item. Judgment is required in interpreting
market data and in the use of different market assumptions or estimation
methodologies that will affect the estimated value-at-risk amount.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-Q may constitute
"forward-looking statements" as such term is defined in the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. The
forward-looking statements are based on management's current expectations and
beliefs and are subject to a number of factors and uncertainties that could
cause actual results to differ materially from those described in the
forward-looking statements. Words such as "anticipates," "believes," "expects,"
"estimates," "intends," "plans," "projects," and similar expressions may
identify such forward-looking statements. Important factors that could cause
actual results to differ materially from those described in the forward-looking
statements include the following: political developments in foreign countries;
the ability to enter new water and wastewater markets in the United States and
in other jurisdictions; the timing and extent of deregulation of water resource
markets in the United States and in other countries; regulatory developments in
the United States and in other countries, including tax and environmental
legislation and regulation; the timing and extent of efforts by governments to
privatize water and wastewater industries; the timing and extent of changes in
non-U.S. currencies and interest rates; the extent of success in
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securing new service contracts, acquiring water and wastewater assets and
developing and managing water resources; Azurix's ability to access the debt and
equity markets during periods covered by the forward-looking statements;
regulatory developments affecting the purchase and sale of water resources;
Azurix's ability to enter into, and retain, strategic relationships with
governmental and quasi-governmental agencies; the prices that are offered for
any assets that Azurix may seek to sell; and other factors discussed elsewhere
in this Form 10-Q and in Azurix's other filings with the Securities and Exchange
Commission.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: None
(b) Reports on Form 8-K:
None.
SIGNATURES
The Company has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
AZURIX CORP.
Date: July 31, 2001 By: /s/ J. Michael Anderson
----------------------------------------
Managing Director and
Chief Financial Officer
(Duly Authorized Officer)
(Principal Financial Officer)
17