EXHIBIT 99.4
Item 1 to the Covanta Energy Corporation Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 2004.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COVANTA ENERGY CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
SUCCESSOR PREDECESSOR
----------------- -----------------
FOR THE PERIOD FOR THE PERIOD
MARCH 11, 2004 JANUARY 1, 2004
THROUGH MARCH 31, THROUGH MARCH 10,
2004 2004
----------------- -----------------
(In Thousands of Dollars, Except Per Share Amounts)
Service revenues $ 25,453 $ 89,858
Electricity and steam sales 13,521 53,307
Construction revenues - 58
Other revenues-net 2 9
----------------- -----------------
Total revenues 38,976 143,232
----------------- -----------------
Plant operating expenses 27,322 100,774
Construction costs - 73
Depreciation and amortization 3,495 13,426
Debt service charges-net 2,237 13,241
Other operating costs and expenses 12 (209)
Net loss on sale of businesses and equity investments - (175)
Selling, general and administrative expenses 1,596 7,597
Other expense-net (198) (1,924)
----------------- -----------------
Total costs and expenses 34,464 132,803
----------------- -----------------
Equity in income from unconsolidated investments 932 4,817
----------------- -----------------
Operating income 5,444 15,246
Interest expense (net of interest income of $1,147, $935 and $664, respectively,
and excluding post-petition contractual interest of $243 and $243 for the period
January 1, 2004 through March 10, 2004 and the three months ended
March 31, 2003, respectively) (2,649) (5,374)
Reorganization items - (58,282)
Gain on cancellation of pre-petition debt - 510,680
Fresh start adjustments - (214,927)
----------------- -----------------
Income (loss) from continuing operations before income taxes, minority interests,
discontinued operations and the cumulative effect of changes in accounting principles 2,795 247,343
Income tax benefit (expense) (1,257) (215,269)
Minority interests (557) (2,511)
----------------- -----------------
Income (loss) from continuing operations before discontinued
operations and change in accounting principles 981 29,563
Gain from discontinued operations (net of income tax expense of $1,439 in 2003) - -
Cumulative effect of change in accounting principles (net of
income tax benefit of $5,532 in 2003) - -
----------------- -----------------
Net income (loss) 981 29,563
----------------- -----------------
Other comprehensive income (loss), net of income tax:
Foreign currency translation adjustments (54) -
----------------- -----------------
Other comprehensive income (loss) (54) -
----------------- -----------------
Comprehensive income (loss) $ 927 $ 29,563
================= =================
Basic income (loss) per share:
Income (loss) from continuing operations $ 0.59
Income (loss) from discontinued operations -
Cumulative effect of change in accounting principle -
-----------------
Net income (loss) $ 0.59
=================
Diluted income (loss) per share:
Income (loss) from continuing operations $ 0.59
Income (loss) from discontinued operations -
Cumulative effect of change in accounting principle -
-----------------
Net income (loss) $ 0.59
=================
FOR THE THREE
MONTHS ENDED
MARCH 31,
2003
-------------
(In Thousands of Dollars, Except Per Share Amounts)
Service revenues $ 120,492
Electricity and steam sales 69,912
Construction revenues 6,007
Other revenues-net -
-------------
Total revenues 196,411
-------------
Plant operating expenses 126,045
Construction costs 5,566
Depreciation and amortization 18,674
Debt service charges-net 19,970
Other operating costs and expenses 136
Net loss on sale of businesses and equity investments (417)
Selling, general and administrative expenses 9,651
Other expense-net (574)
-------------
Total costs and expenses 179,051
-------------
Equity in income from unconsolidated investments 4,441
-------------
Operating income 21,801
Interest expense (net of interest income of $1,147, $935 and $664, respectively,
and excluding post-petition contractual interest of $243 and $243 for the period
January 1, 2004 through March 10, 2004 and the three months ended
March 31, 2003, respectively) (10,010)
Reorganization items (12,194)
Gain on cancellation of pre-petition debt -
Fresh start adjustments -
-------------
Income (loss) from continuing operations before income taxes, minority interests,
discontinued operations and the cumulative effect of changes in accounting principles (403)
Income tax benefit (expense) 186
Minority interests (2,564)
-------------
Income (loss) from continuing operations before discontinued
operations and change in accounting principles (2,781)
Gain from discontinued operations (net of income tax expense of $1,439 in 2003) 1,789
Cumulative effect of change in accounting principles (net of
income tax benefit of $5,532 in 2003) (8,538)
-------------
Net income (loss) (9,530)
-------------
Other comprehensive income (loss), net of income tax: -
Foreign currency translation adjustments 807
-------------
Other comprehensive income (loss) 807
-------------
Comprehensive income (loss) $ (8,723)
=============
Basic income (loss) per share:
Income (loss) from continuing operations $ (0.06)
Income from discontinued operations 0.04
Cumulative effect of change in accounting principles (0.17)
-------------
Net income (loss) $ (0.19)
=============
Diluted income (loss) per share:
Income (loss) from continuing operations $ (0.06)
Income from discontinued operations 0.04
Cumulative effect of change in accounting principles (0.17)
-------------
Net income (loss) $ (0.19)
=============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2
COVANTA ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SUCCESSOR PREDECESSOR
MARCH 31, 2004 DECEMBER 31, 2003
-------------- -----------------
(In Thousands of Dollars, Except Share and Per Share Amounts)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 91,953 $ 289,424
Restricted funds held in trust 162,370 79,404
Receivables (less allowances of $45 and $27,893, respectively) 178,596 230,093
Deferred income taxes 6,538 9,763
Prepaid expenses and other current assets (less allowances of zero
and $5,000, respectively) 70,511 82,115
-------------- -----------------
TOTAL CURRENT ASSETS 509,968 690,799
Property, plant and equipment-net 1,033,584 1,453,354
Restricted funds held in trust 109,415 119,480
Unbilled service and other receivables (less allowances of zero
and $5,026 respectively) 113,944 125,363
Service and energy contracts (net of accumulated amortization of $1,407) 316,707 -
Unamortized contract acquisition costs-net - 27,073
Goodwill 24,470 -
Other intangible assets-net - 7,073
Investments in and advances to investees and joint ventures 68,885 137,374
Other assets 38,276 53,064
-------------- -----------------
TOTAL ASSETS $ 2,215,249 $ 2,613,580
============== =================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
LIABILITIES:
CURRENT LIABILITIES:
Current portion of long-term debt $ 9,631 $ 9,492
Current portion of project debt 94,134 99,216
Accounts payable 23,186 23,584
Federal income tax payable 1,301 -
Accrued expenses 184,635 208,342
Deferred revenue 35,040 37,431
-------------- -----------------
TOTAL CURRENT LIABILITIES 347,927 378,065
Long-term debt 337,775 2,150
Project debt 847,003 933,185
Deferred income taxes 311,034 195,059
Deferred revenue 127,177 129,304
Other liabilities 124,349 78,358
Liabilities subject to compromise - 956,095
-------------- -----------------
TOTAL LIABILITIES 2,095,265 2,672,216
-------------- -----------------
MINORITY INTERESTS 71,532 69,398
-------------- -----------------
SHAREHOLDERS' EQUITY (DEFICIT):
Successor common stock, par value $0.01 per share authorized, 200 shares,
200 shares issued and outstanding as of March 31, 2004 - -
Predecessor serial cumulative convertible preferred stock, par value $1.00
per share, authorized, 4,000,000 shares; shares outstanding: 33,049 net
of treasury shares of 29,820 - 33
Predecessor common stock, par value $.50 per share; authorized, 80,000,000
shares; outstanding: 49,824,251 net of treasury shares of 4,125,350 - 24,912
Capital surplus 47,525 188,156
Notes receivable from key employees for common stock issuance - (451)
Retained earnings (deficit) 981 (340,661)
Accumulated other comprehensive loss (54) (23)
-------------- -----------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 48,452 (128,034)
-------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 2,215,249 $ 2,613,580
============== =================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
COVANTA ENERGY CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
SUCCESSOR PREDECESSOR
---------------- ---------------------------------
FOR THE PERIOD FOR THE PERIOD FOR THREE MONTHS
MARCH 10, 2004 JANUARY 1, 2004 MONTHS ENDED
THROUGH MARCH 31, THROUGH MARCH 10, MARCH 31,
2004 2004 2003
---------------- ----------------- ----------------
(In Thousands of Dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 981 $ 29,563 $ (9,530)
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by Operating Activities of Continuing Operations:
Gain on cancellation of pre-petition debt - (510,680) -
Fresh start adjustments - 214,927 -
Fresh start tax adjustments - 214,756 -
Loss (gain) from discontinued operations - - (1,789)
Reorganization items - 58,282 12,154
Payment of reorganization items - (49,782) (2,356)
Depreciation and amortization 3,495 13,426 18,674
Deferred income taxes - (7) 228
Provision for doubtful accounts 46 852 1,071
Equity in income from unconsolidated investments (932) (4,817) (4,441)
Cumulative effect of change in accounting principles, net of income taxes - - 8,538
Other (754) 2,268 942
Management of Operating Assets and Liabilities:
Decrease (Increase) in Assets:
Receivables 7,959 5,406 10,580
Other assets 5,336 (17,705) 939
Increase (Decrease) in Liabilities:
Accounts payable (385) 3,853 2,133
Accrued expenses (23,248) 17,730 (10,740)
Deferred income (167) 229 (237)
Other liabilities (2,880) 1,437 (8,373)
---------------- ----------------- ----------------
Net cash provided by operating activities
of continuing operations (10,549) (20,262) 17,793
---------------- ----------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of businesses - - 417
Proceeds from sale of property, plant, and equipment - 86 286
Proceeds from sale of investment - - 267
Proceeds from sale of marketable securities - 87 -
Investments in facilities (1,224) (4,192) (5,600)
Other capital expenditures - - (28)
Distributions from investees and joint ventures 632 6,401 -
Increase in investments in and advances to investees and joint ventures - (279) -
---------------- ----------------- ----------------
Net cash provided by (used in) investing activities of continuing
operations (592) 2,103 (4,658)
---------------- ----------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings for facilities - - 3,584
New borrowings - - 3,990
Decrease (increase) in restricted funds held in trust 8,210 (96,677) (11,303)
Payment of debt (175) (28,089) (33,849)
Distributions to secured lenders and 9.25% holders - (80,507) -
Proceeds from issuance of stock - 29,825 -
Distribution to minority partners (428) (530) -
Proceeds from sale of minority interests - 175 -
Proceeds from issuance of equity interest 25 - -
---------------- ----------------- ----------------
Net cash used in financing activities of continuing operations 7,632 (175,803) (37,578)
---------------- ----------------- ----------------
Net cash provided by discontinued operations - - 8,925
---------------- ----------------- ----------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,509) (193,962) (15,518)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 95,462 289,424 115,815
---------------- ----------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 91,953 $ 95,462 $ 100,297
================ ================= ================
SUPPLEMENTAL INFORMATION
Cash paid for interest $ 804 $ 12,647 $ 18,257
================ ================= ================
Cash paid for taxes $ 1,696 $ 1,518 $ 1,747
================ ================= ================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
COVANTA ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The accompanying unaudited Condensed Consolidated Financial Statements
("Financial Statements") include the accounts of Covanta Energy Corporation and
its subsidiaries (together, "Covanta" or the "Company"). The financial
statements presented reflect the reorganization under which Covanta became a
wholly-owned subsidiary of Danielson Holding Corporation ("Danielson") as of
March 10, 2004.
Accordingly, the Financial Statements for the first quarter of 2004 reflect both
fresh start accounting in accordance with American Institute of Certified Public
Accountants Statement of Position 90-7 "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" ("SOP 90-7") and business combination
accounting in accordance with Statement of Financial Accounting Standards No.
141 "Business Combinations" and Statement of Financial Accounting Standards No.
109 "Accounting for Income Taxes". References in these Financial Statements to
the "Predecessor" refer to the Company prior to March 10, 2004. References to
the "Successor" refer to the Company on and after March 10, 2004 after giving
effect to the application of fresh start reporting. Separate statements of
consolidated operations and cash flows are presented for the Predecessor company
for the period January 1, 2004 to March 10, 2004 (the date of Reorganization)
and for the Successor company for the period from March 11, 2004 through March
31, 2004.
The accompanying unaudited Financial Statements have been prepared in accordance
with the instructions to Form 10-Q. As permitted by the rules and regulations of
the Securities and Exchange Commission (the "SEC"), the Financial Statements
contain certain condensed financial information and exclude certain footnote
disclosures normally included in audited consolidated financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP"). In the opinion of management, the
accompanying Financial Statements contain all adjustments, including normal
recurring accruals, necessary to fairly present the accompanying financial
statements. The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the Financial Statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Significant estimates include management's estimated useful lives of long-lived
assets, allowances for doubtful accounts receivable, and liabilities for workers
compensation, severance, and certain litigation.
Covanta is engaged in developing, constructing, owning and operating for others,
key infrastructure for the conversion of waste-to-energy, independent power
production and the treatment of water and wastewater in the United States and
abroad. Companies in which Covanta has equity investments of 20% to 50% are
accounted for using the equity method since Covanta has the ability to exercise
significant influence over their operations. Those companies in which Covanta
owns less than 20% are accounted for using the cost method. Six of the Company's
subsidiaries have not reorganized or filed a liquidation plan under Chapter 11
of the United States Bankruptcy Code. While Covanta exercises significant
influence over the operating and financial policies of those subsidiaries, those
six subsidiaries will continue to operate as debtors in possession in the
Chapter 11 Cases. Because any plan of reorganization or liquidation relating to
these debtors would have to be approved by the Bankruptcy Court, and possibly
their respective creditors, the Company does not control these debtors or the
ultimate outcome of their respective Chapter 11 Cases. Accordingly, effective
with the reorganization applicable accounting rules require that Covanta no
longer include those six subsidiaries as consolidated subsidiaries in its
financial statements. Covanta's investment in these six subsidiaries are
recorded using the equity method effective as of March 10, 2004.
All intercompany transactions and balances among consolidated entities have been
eliminated.
2. REORGANIZATION:
On March 10, 2004 ("the Effective Date"), the Company consummated a plan of
reorganization and, emerged from its reorganization proceeding under Chapter 11
of the United States Bankruptcy Code (the "Bankruptcy Code"). As a result of the
consummation of the plan, Covanta is a wholly-owned subsidiary of Danielson
Holding Corporation, a Delaware corporation ("Danielson"). The Chapter 11
proceedings commenced on April 1, 2002 (the "First Petition Date"), when Covanta
and most of its domestic subsidiaries filed voluntary petitions for relief under
Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the
Southern District of New York (the "Bankruptcy Court"). All of the bankruptcy
cases (the "Chapter 11 Cases") were jointly administered. During the Chapter 11
Cases, Covanta and its subsidiaries which were part of the Chapter 11 Cases (the
"Debtors") operated their business as debtors-
5
in-possession pursuant to the Bankruptcy Code. International operations and
certain other subsidiaries and joint venture partnerships were not included in
the bankruptcy filings.
The Financial Statements of the Predecessor through March 10, 2004 (the "Stub
Period") were prepared in accordance with SOP 90-7. Accordingly, all
pre-petition liabilities believed to be subject to compromise were segregated in
the Condensed Consolidated Balance Sheet and classified as Liabilities subject
to compromise, at the estimated amount of allowable claims. Liabilities not
believed to be subject to compromise were separately classified as current and
non-current, as appropriate. Revenues, expenses (including professional fees
relating to the bankruptcy proceeding), realized gains and losses, and
provisions for losses resulting from the reorganization were reported separately
as Reorganization items. Also, interest expense was accrued during the Chapter
11 Cases only to the extent that it was to be paid. Cash used for reorganization
items is disclosed separately in the Condensed Consolidated Statements of Cash
Flows.
Prior to the Effective Date of the Company's Reorganization Plan, the Debtors
acted as debtors-in-possession and were authorized to continue to operate as an
ongoing business, but could not engage in transactions outside the ordinary
course of business without the approval of the Bankruptcy Court. The Debtors
obtained numerous orders from the Bankruptcy Court that were intended to enable
the Debtors to operate in the normal course of business during the Chapter 11
Cases. Among other things, these orders authorized: (i) the retention of
professionals to represent and assist the Debtors in the Chapter 11 Cases, (ii)
the use and operation of the Debtors' consolidated cash management system during
the Chapter 11 Cases in substantially the same manner as it was operated prior
to the commencement of the Chapter 11 Cases, (iii) the payment of pre-petition
employee salaries, wages, health and welfare benefits, retirement benefits and
other employee obligations, (iv) the payment of pre-petition obligations to
certain critical vendors to aid the Debtors in maintaining the operation of
their businesses, (v) the use of cash collateral and the grant of adequate
protection to creditors in connection with such use, (vi) the adoption of
certain employee benefit plans, and (vii) the obtaining of post-petition
financing.
Pursuant to the Bankruptcy Code, pre-petition obligations of the Debtors,
including obligations under debt instruments, generally could not be enforced
against the Debtors, and any actions to collect pre-petition indebtedness were
automatically stayed, unless the stay was lifted by the Bankruptcy Court. The
obligations of, and the ultimate payments by, the Debtors under pre-petition
commitments were substantially altered in the course of the Chapter 11 cases.
This resulted in claims being satisfied in the Chapter 11 Cases at less than
their face value or being paid other than in cash. However, as authorized by the
Bankruptcy Court, debt service continued to be paid on the Company's project
debt throughout the Chapter 11 Case.
With respect to post-petition financing, the Debtors entered into a
debtor-in-possession credit facility (the "DIP Facility") as of April 1, 2002,
which was approved by final order of the Bankruptcy Court on May 15, 2002. The
DIP Facility was replaced with new credit and letter of credit facilities as of
March 10, 2004 and is no longer in effect.
Over the course of the Chapter 11 Cases, the Company held discussions with the
Official Committee of Unsecured Creditors (the "Creditors Committee"),
representatives of certain of the Company's pre-petition bank lenders and other
lenders (the "DIP Lenders" and together with the Company's pre-petition bank
lenders, the "Secured Bank Lenders") under the DIP Facility and the holders of
the 9.25% Debentures with respect to possible capital and debt structures for
the Debtors and the formulation of a plan of reorganization.
On December 2, 2003, Covanta and Danielson entered into an Investment and
Purchase Agreement (as amended, the "DHC Agreement"). The DHC Agreement provided
for:
- - Danielson to purchase 100% of the equity in Covanta for approximately $30
million as part of a plan of reorganization (the "DHC Transaction");
- - agreement as to new revolving credit and letter of credit facilities for
the Company's domestic and international operations, provided by certain
of the Secured Bank Lenders and a group of additional lenders organized by
Danielson; and
- - execution and consummation of the Tax Sharing Agreement between Danielson
and Covanta (the "Tax Sharing Agreement"), pursuant to which (a) Covanta
(exclusive of its international holding company), will file a consolidated
tax return with Danielson, and (b) Danielson will make a portion of its
net operating loss tax carry-forwards ("NOLs") available to Covanta for
purposes of Covanta's calculation for its portion of the consolidated tax
liability it pays to Danielson.
On March 5, 2004, the Bankruptcy Court entered an order confirming the Company's
plan of reorganization premised on the DHC Transaction (the "Reorganization
Plan") and liquidation for certain of those Debtors involved in non-core
6
businesses (the "Liquidation Plan"). On March 10, 2004 both plans were effected
upon the consummation of the DHC Transaction (the plans of reorganization and
liquidation collectively, the "Reorganization Plan"). The following is a summary
of material provisions of the Reorganization Plan. The Debtors owning or
operating the Company's Warren County, New Jersey, Lake County, Florida, and
Tampa Bay, Florida projects remain debtors-in-possession (the "Remaining
Debtors"), and are not the subject of either plan.
The Reorganization Plan provided for, among other things, the following
distributions:
(i) Secured Lender and 9.25% Debenture Holder Claims
On account of their allowed secured claims, the Secured Lenders and the 9.25%
Debenture holders received, in the aggregate, a distribution consisting of:
- - the cash available for distribution after payment by the Company of exit
costs necessary to confirm the Plans and establishment of required
reserves pursuant to the Reorganization Plans,
- - new high-yield secured notes issued by Covanta and guaranteed by its
subsidiaries (other than Covanta Power International Holdings, Inc.
("CPIH") and its subsidiaries) which are not contractually prohibited from
incurring or guaranteeing additional debt (Covanta and such subsidiaries,
the "Domestic Borrowers") with a stated maturity of seven years (the "High
Yield Notes"), and
- - a term loan of CPIH with a stated maturity of 3 years.
(ii) Unsecured Claims against Operating Company Subsidiaries
The holders of allowed unsecured claims against any of the Company's operating
subsidiaries received or will receive unsecured notes bearing interest at 7.5%
in a principal amount equal to the amount of their allowed unsecured claims with
a stated maturity of 8 years (the "Unsecured Notes").
(iii) Unsecured Claims against Covanta and Holding Company
Subsidiaries
The holders of allowed unsecured claims against Covanta or certain of its
holding company subsidiaries will receive, in the aggregate, its pro rata share
of a distribution consisting of (i) $4 million in principal amount of the 7.5%,
8 year Unsecured Notes, (ii) a participation interest equal to 5% of the first
$80 million in net proceeds received in connection with the sale or other
disposition of CPIH and its subsidiaries, and (iii) the recoveries, if any, from
avoidance actions not waived under the Reorganization Plan that might be brought
on behalf of the Debtors' estates. In addition, the holders of such claims are
entitled to receive a distribution equal to 12.5% of the value of distributions
otherwise payable to the 9.25% Debenture Holders.
(iv) Subordinated Claims of Holders of Convertible Subordinated
Debentures
The holders of Covanta's Convertible Subordinated Debentures did not receive any
distribution or retain any property pursuant to the proposed Reorganization
Plan. The Convertible Subordinated Debentures were cancelled as of March 10,
2004, the Effective Date of the Reorganization Plan.
(v) Equity Interests of Common and Preferred Stockholders
The holders of Covanta's preferred and common stock outstanding immediately
before consummation of the DHC Transaction did not receive any distribution or
retain any property pursuant to the Reorganization Plan. The preferred stock and
common stock was cancelled as of March 10, 2004, the effective date of the
Reorganization Plan.
The Reorganization Plan provides for the complete liquidation of those of the
Company's subsidiaries that have been designated as liquidating entities.
Substantially all of the assets of these liquidating entities have already been
sold. Under the Reorganization Plan the creditors of the liquidating entities
will not receive any distribution other than those administrative creditors with
respect to claims against the liquidating entities that have been incurred in
the implementation of the Reorganization Plan and priority claims required to be
paid under the Bankruptcy Code.
Covanta had the right during the Chapter 11 Cases, subject to Bankruptcy Court
approval and certain other limitations, to assume or reject executory contracts
and unexpired leases. As a condition to assuming a contract, the Company was
required to cure all existing defaults (including payment defaults). The Company
has paid approximately $9 million in cure amounts associated with assumed
executory contracts and unexpired leases. Several counterparties
7
have indicated that they believe that actual cure amounts are greater than the
amounts specified in the Company's notices, and there can be no assurance that
the cure amounts ultimately associated with assumed executory contracts and
unexpired leases will not be materially higher than the amounts estimated by the
Company.
The Company is in the process of reconciling recorded pre-petition liabilities
with proofs of claim filed by creditors with the Bankruptcy Court. The Company
expects this process to conclude during 2004. In total, approximately 4,700
proofs of claim in aggregate amount of approximately $13.3 billion have been
filed. The Company believes that many of the proofs of claim are invalid,
duplicative, untimely, inaccurate or otherwise objectionable. The Company
intends to contest claims to the extent they materially exceed the amounts the
Company believes may be due. The Company believes the claims resolution process
will not result in material liabilities in excess of those recorded in its
consolidated financial statements.
DEVELOPMENTS IN PROJECT RESTRUCTURINGS
During the course of the Chapter 11 Cases, the Debtors and certain contract
parties reached agreement with respect to material restructuring of their mutual
obligations in connection with several waste-to-energy projects. The Debtors
were also involved in material disputes and/or litigation with respect to the
Warren County, New Jersey and Lake County, Florida waste-to-energy projects and
the Tampa Bay water project, which matters remain unresolved. As a result,
Covanta's subsidiaries involved in these projects remain in Chapter 11 and are
not consolidated in the Company's consolidated financial statements. The Warren
County matter is described below; the Lake County and Tampa Bay matters are
described in Note 16. The Company expects that the outcome of the issues
described below and in Note 16 relating to these projects will not negatively
affect its ability to implement its business plan.
Warren County, New Jersey
The Covanta subsidiary ("Covanta Warren") which operates the Company's
waste-to-energy facility in Warren County, New Jersey (the "Warren Facility")
and the Pollution Control Financing Authority of Warren County ("Warren
Authority") have been engaged in negotiations for an extended time concerning a
potential restructuring of the parties' rights and obligations under various
agreements related to Covanta Warren's operation of the Warren Facility. Those
negotiations were in part precipitated by a 1997 federal court of appeals
decision invalidating certain of the State of New Jersey's waste-flow laws,
which resulted in significantly reduced revenues for the Warren Facility. Since
1999, the State of New Jersey has been voluntarily making all debt service
payments with respect to the project bonds issued to finance construction of the
Warren Facility, and Covanta Warren has been operating the Warren Facility
pursuant to an agreement with the Warren Authority which modifies the existing
Service Agreement.
Although discussions continue, to date Covanta Warren and the Warren Authority
have been unable to reach an agreement to restructure the contractual
arrangements governing Covanta Warren's operation of the Warren Facility. The
Warren Authority has indicated that a consensual restructuring of the parties'
contractual arrangements may be possible in 2004. In addition, the Warren
Authority has agreed to release approximately $1.2 million being held in escrow
to Covanta Warren so that Covanta Warren may perform an environmental retrofit
during 2004.
In order to emerge from bankruptcy without uncertainty concerning potential
claims against Covanta related to the Warren Facility, Covanta rejected its
guarantees of Covanta Warren's obligations relating to the operation and
maintenance of the Warren Facility. The Company anticipates that if a
restructuring is consummated, reorganized Covanta may at that time issue a new
parent guarantee in connection with that restructuring and emergence from
bankruptcy.
In the event the parties are unable to timely reach agreement upon and
consummate a restructuring of the contractual arrangements governing Covanta
Warren's operation of the Warren Facility, the Debtors may, among other things,
elect to litigate with counterparties to certain agreements with Covanta Warren,
assume or reject one or more executory contracts related to the Warren Facility,
attempt to file a plan of reorganization on a non-consensual basis, or liquidate
Covanta Warren. In such an event, creditors of Covanta Warren may receive little
or no recovery on account of their claims.
8
REORGANIZATION ITEMS
In accordance with SOP 90-7, the Company has segregated and classified certain
income and expenses as reorganization items. The following reorganization items
were incurred for the Period January 1, 2004 through March 10, 2004 and the
three months ended March 31, 2003, (in Thousands of Dollars):
For the period
January 1, 2004 For the three
through months ended
March 10, 2004 March 31, 2003
--------------- --------------
Legal and professional fees $ 27,562 $ 10,240
Severance 7,097 1,114
Bank fees related to DIP Credit Facility 1,163 840
Bankruptcy exit costs 22,460 -
---------- ------------
Total $ 58,282 $ 12,194
========== ============
Legal and professional fees consist of fees related to professionals for work
associated with the bankruptcy of the Company.
Bankruptcy exit costs consist primarily of trustee costs, directors and officers
liability insurance (covering the period prior to emergence) and administrative
expenses.
Pursuant to SOP 90-7, the Company had segregated and classified certain
pre-petition obligations as liabilities subject to compromise. Liabilities
subject to compromise were recorded at the likely allowed claim amount. The
following table sets forth the estimated liabilities of the Company subject to
compromise as of December 31, 2003, (in Thousands of Dollars):
December 31, 2003
-----------------
Debt $ 110,485
Debt under credit arrangement 125,091
Accounts payable 66,117
Other liabilities 232,691
Obligations related to the Centre and the Team 182,517
Obligations related to Arrowhead Pond 90,544
Convertible Subordinated Debentures 148,650
-----------------
Total $ 956,095
=================
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fresh-Start accounting requires the selection of appropriate accounting policies
for the reorganized Company. The significant accounting policies previously used
by the Company will continue to be used by the reorganized Company except for
the following:
PROPERTY, PLANT AND EQUIPMENT: As of March 10, 2004, property, plant, and
equipment were recorded at its estimated fair market values based upon
discounted cash flows using currently available information. For financial
reporting purposes, depreciation is calculated by the straight-line method over
the estimated remaining useful lives of the assets, which range generally from
three years for computer equipment to 41 years for waste-to-energy facilities.
SERVICE AND ENERGY CONTRACTS: As of March 10, 2004, service and energy contracts
were recorded at their estimated fair market values based upon discounted cash
flows from the service contracts and the "above market" portion of the energy
contracts using currently available information. Amortization is calculated by
the straight-line method over the estimated life of the agreements. Estimated
amortization over the next five years is as follows (in thousands):
2004 $21,346
2005 $28,900
2006 $28,900
2007 $28,900
2008 $26,425
9
GOODWILL: Goodwill represents the amount by which the Company's fair value of
its tangible assets and identified intangible assets less its liabilities
exceeds its reorganization value. Pursuant to the provisions of Statement of
Accounting Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS No.
142"), goodwill is not amortized, but is subject to annual impairment testing or
when indicators of impairment exist.
CONTRACT ACQUISITION COSTS: As of March 10, 2004 contract acquisition costs were
recorded at their fair value of zero.
BOND ISSUANCE COSTS: As of March 10, 2004, bond issuance costs were recorded at
their fair value of zero. Costs incurred in connection with the issuance of
bonds are amortized using the effective interest rate method over the terms of
the respective debt issues. Unamortized bond issuance costs are included in
Other assets on the Consolidated Balance Sheets.
STOCK OPTIONS
On March 10, 2004, the Company had three stock-based employee compensation plans
that were terminated upon emergence from bankruptcy and all outstanding options
and restricted stock were cancelled. The Company had accounted for those plans
under the recognition and measurement provision of APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and related Interpretations. No
stock-based employee compensation cost is reflected in the 2004 and 2003 net
income (loss), as all options granted under those plans had an exercise price
equal to the market value of the underlying common stock on the date of grant.
No options were granted in 2004 or 2003. Awards under the Company's plans vest
over periods ranging from three to five years. Therefore, the cost related to
stock-based employee compensation included in the determination of net income
(loss) for 2004 and 2003 is less than that which would have been recognized if
the fair value based method had been applied to all awards since the original
effective date of SFAS No. 123.
The following table summarizes the pro forma impact on net income (loss) and
income (loss) per common share for the period January 1, 2004 through March 10,
2004 and for the three months ended March 31, 2003 including the effect on net
income (loss) and income (loss) per share if the fair value based method had
been applied to all outstanding and unvested awards in each period (in
thousands, except per share amounts):
FOR THE PERIOD FOR THE THREE
JANUARY 1, 2004 THROUGH MONTHS ENDED
MARCH 10, 2004 MARCH 31, 2003
----------------------- --------------
Net income (loss), as reported $ 29,563 $ (9,530)
Deduct:
SFAS No. 123 total stock based employee
compensation expense determined under the fair value
method for all awards, net of related tax effects (435) (744)
----------------------- --------------
Pro forma net income (loss) $ 29,128 $ (10,274)
======================= ==============
Basic income (loss), per share:
Basic - as reported $ 0.59 $ (0.19)
======================= ==============
Basic - pro forma $ 0.58 $ (0.21)
======================= ==============
Diluted income (loss), per share:
Diluted - as reported $ 0.59 $ (0.19)
======================= ==============
Diluted - pro forma $ 0.58 $ (0.21)
======================= ==============
NEW ACCOUNTING PRONOUNCEMENTS:
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN No. 46"). FIN No. 46 clarifies the application
of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," and
applies immediately to any variable interest entities created after January 31,
2003 and to variable interest entities in which an interest is obtained after
that date. FIN No. 46 was revised in December 2003 and is applicable for the
Company on January 1, 2004 for interests acquired in variable interest entities
prior to February 1, 2003. The Company adopted the provisions of FIN No. 46
without impact on its financial position or results of operations.
10
RECLASSIFICATION:
Certain prior period amounts, including various revenues and expenses, have been
reclassified in the Financial Statements to conform with the current period
presentation.
4. FRESH START AND PURCHASE ACCOUNTING ADJUSTMENTS
The Company's emergence from Chapter 11 proceedings on March 10, 2004 resulted
in a new reporting entity and adoption of fresh start accounting as of that
date, in accordance with SOP 90-7. The consolidated financial statements as of
March 10, 2004, reflect a preliminary allocation of value to the assets and
liabilities of the Company in proportion to their relative fair values in
conformity with SFAS No. 141. Accordingly, the Company valued its assets and
liabilities at fair value. The equity value was based on the purchase price that
was paid by DHC. Preliminary fair value determinations of the tangible and
intangible assets have been determined by management based on anticipated cash
flows using currently available information. The excess of the reorganization
value over tangible assets and identifiable intangible assets has been reflected
as Goodwill on the Condensed Consolidated Balance Sheet. Management's estimate
of the fair value of long term debt was based on the new principal amounts of
recourse debt that was part of the reorganized capital structure of the Company
upon emergence. The Company has engaged valuation consultants to review its
valuation methodology and their work is ongoing.
In accordance with SFAS No. 141, the preliminary allocation of the fresh start
values is subject to additional adjustment within one year after emergence from
bankruptcy when additional information on asset and liability valuations becomes
available. The Company expects that adjustment to recorded fair values may
include those relating to:
o property, plant, and equipment, intangibles, debt, and equity
investments, all of which may change based on our consideration of
additional analysis by the Company and its valuation consultants;
o accrued expenses which may change based on identification of final fees
and costs associated with emergence from bankruptcy, resolution of
disputed claims, and completion of Chapter 11 Cases relating to six
debtors remaining in bankruptcy;
o the final principal amount of the Unsecured Notes (recorded as an
estimated principal amount of $36.5 million), which will adjust based
upon the resolution of claims of creditors entitled to such notes as
distributions; and
o tax liabilities, which may adjust based upon additional information to
be received from taxing authorities.
The following financial information reflects the implementation of the
Reorganization Plan and the preliminary adjustments recorded to the Company's
assets and liabilities to reflect the discharge of debt and the adoption of
fresh start reporting in accordance with SOP 90-7.
Estimated fresh start adjustments and purchase accounting in the Pro Forma
Balance Sheet result primarily from the:
(i) reduction of property, plant and equipment carrying values;
(ii) increase in the carrying value of the Company's various
operation and maintenance agreements and power purchase
agreements;
(iii) forgiveness of the Company's pre-petition debt;
(iv) issuance of new common stock and other items in equity and
notes pursuant to the Plan;
(v) payment of various administrative and other claims associated
with the Company's emergence from Chapter 11;
(vi) distribution of cash of $235.5 million to the Company's
pre-petition secured lenders and for the payment of exit costs
and funding of reserves;
(vii) deferred tax assets principally related to net operating loss
carry-forwards from Danielson's NOLs; and
(viii) direct costs and expenses related to Danielson's acquisition
of Covanta.
These adjustments were based upon the preliminary work of the Company and its
valuation consultants, as well as other valuation estimates to determine the
relative fair values of the Company's assets and liabilities. The table below
reflects preliminary reorganization adjustments for the discharge of
indebtedness, issuance of new common stock, issuance of notes, and the fresh
start adjustments and the resulting fresh start consolidated balance sheet.
11
LIQUIDATING ENTITIES PURCHASE
MARCH 10, AND DECONSOLIDATION DISCHARGE OF ACCOUNTING
2004 OF ENTITIES (A) INDEBTEDNESS ADJUSTMENTS
---------- -------------------- ----------------- ------------
(In Thousands of Dollars)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 149,528 $ 877 $ (81,204) (b) $ 29,825 (f)
Restricted funds held in trust 177,737 (4,845) - -
Receivables 223,835 (22,772) - -
Deferred income taxes 9,763 - - -
Prepaid expenses and other current assets 81,894 (5,121) - -
---------- -------------------- ------------ --------
TOTAL CURRENT ASSETS 642,757 (31,861) (81,204) 29,825
Property, plant and equipment-net 1,444,838 (97,101) - -
Restricted funds held in trust 117,824 (8,196) - -
Unbilled service and other receivables 130,168 (15,035) - -
Other intangible assets-net 33,381 (3,561) - -
Service and energy contracts - - - -
Investments in and advances to investees and
joint ventures 134,656 56,870 - -
Other assets and other intangibles 63,946 (276) - -
Goodwill - - - (73,995)
---------- -------------------- ------------ --------
TOTAL ASSETS $2,567,570 $ (99,159) $ (81,204) $(44,170)
========== ==================== ============ ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
LIABILITIES:
CURRENT LIABILITIES:
Current portion of long-term debt 9,625 - - -
Current portion of project debt 104,076 (10,070) - -
Accounts payable 27,437 (3,235) - -
Accrued expenses 234,121 (5,296) - -
Deferred income 37,660 (2,453) - -
---------- -------------------- ------------ --------
TOTAL CURRENT LIABILITIES $ 412,919 $ (21,054) $ - $ -
Long-term debt 1,261 - 336,500 (c) -
Project debt 902,442 (71,905) - -
Deferred income taxes 195,164 - - (91,695) (g)
Deferred income 127,925 - - -
Other liabilities 99,650 - - -
Liabilities subject to compromise 934,752 (6,368) (928,384) (d) -
---------- -------------------- ------------ --------
TOTAL LIABILITIES $2,674,113 $ (99,327) $ (591,884) $(91,695)
---------- -------------------- ------------ --------
MINORITY INTERESTS $ 71,372 $ - $ - $ -
---------- -------------------- ------------ --------
SHAREHOLDERS' DEFICIT:
Serial cumulative convertible
preferred stock $ 33 $ - $ - $ -
Common stock 24,912 - - -
Capital surplus 188,156 - - 47,525 (h)
Deficit (392,095) 46 510,680 (e) -
Accumulated other comprehensive income
(loss) 1,079 122 - -
---------- -------------------- ------------ --------
TOTAL SHAREHOLDERS' DEFICIT $ (177,915) $ 168 $ 510,680 $ 47,525
---------- -------------------- ------------ --------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $2,567,570 $ (99,159) $ (81,204) $(44,170)
========== ==================== ============ ========
FRESH START MARCH 10,
ADJUSTMENTS 2004
---------------- -----------
(In Thousands of Dollars)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ (3,564) (i) $ 95,462
Restricted funds held in trust 39 172,931
Receivables (14,463) (j) 186,600
Deferred income taxes (8,475) (k) 1,288
Prepaid expenses and other current assets (3,131) (i) 73,642
----------- ------------
TOTAL CURRENT ASSETS (29,594) 529,923
Property, plant and equipment-net (312,958) (l) 1,034,779
Restricted funds held in trust (2,564) (i) 107,064
Unbilled service and other receivables - 115,133
Other intangible assets-net (29,820) (l) -
Service and energy contracts 318,114 (l) 318,114
Investments in and advances to investees and
joint ventures (122,679) (l) 68,847
Other assets and other intangibles (24,971) (m) 38,699
Goodwill 98,465 24,470
----------- -----------
TOTAL ASSETS $(106,008) $ 2,237,029
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
LIABILITIES:
CURRENT LIABILITIES:
Current portion of long-term debt - 9,625
Current portion of project debt 25 (n) 94,031
Accounts payable (631) 23,571
Accrued expenses (19,641) (o) 209,184
Deferred income - 35,207
----------- -----------
TOTAL CURRENT LIABILITIES $ (20,247) $ 371,618
Long-term debt - 337,761
Project debt 17,114 (p) 847,651
Deferred income taxes 202,315 (q) 305,784
Deferred income - 127,925
Other liabilities 27,743 (r) 127,393
Liabilities subject to compromise - -
----------- -----------
TOTAL LIABILITIES $ 226,925 $ 2,118,132
----------- -----------
MINORITY INTERESTS $ - $ 71,372
----------- -----------
SHAREHOLDERS' DEFICIT:
Serial cumulative convertible
preferred stock $ (33) (s) $ -
Common stock (24,912) (s) -
Capital surplus (188,156) (s) 47,525
Deficit (118,631) (s) -
Accumulated other comprehensive income
(loss) (1,201) (s) -
----------- -----------
TOTAL SHAREHOLDERS' DEFICIT $ (332,933) $ 47,525
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ (106,008) $ 2,237,029
=========== ===========
Footnotes to Pro forma Condensed Consolidated Balance Sheet
(a) Pro Forma Balance Sheet excludes Covanta entities which are part of the
Liquidating Plan and Covanta entities which remain in Chapter 11 and have
been deconsolidated.
(b) Reflects cash payments to secured creditors paid upon emergence.
(c) Reflects the issuance by Covanta of $205.0 million principal amount of new
high yield secured notes, $36.5 million of estimated principal amount of
new reorganization plan unsecured notes, and $95.0 million in new CPIH
funded debt.
(d) Reflects the discharge of pre-petition indebtedness, except for those
related to Warren, Lake and Tampa Bay facilities which remain in
bankruptcy and are deconsolidated in the financial statements. These three
facilities are part of the emerging entity purchased by Danielson.
(e) Reflects the gain on the extinguishment of the liabilities subject to
compromise.
(f) Reflects cash portion of the purchase price paid by Danielson.
(g) Represents the reduction in net deferred income tax liabilities resulting
from recording the income tax benefits arising from the estimated future
utilization of Danielson's NOLs.
(h) Danielson's purchase price includes $29.8 million in cash, $6.4 million in
expenses and $11.3 million for the estimated fair value of stock purchase
rights to be issued to certain of Covanta's pre-petition creditors. Such
creditors are expected to purchase up to an additional 3.0 million shares
of Danielson common stock at $1.53 per share based upon levels of public
participation in the rights offering.
(i) Reflects the write down of the MCI facility assets and liabilities to a
fair value of $0.
(j) Reflects a tax receivable of $11.3 million that was fair valued at $0 and
the MCI facility receivable of $3.1 million was valued at $0.
(k) Reflects adjustment to fair value of deferred taxes related to allowance
for doubtful accounts.
(l) Reflects fresh start adjustments of Covanta's property, plant and
equipment, intangibles and investments in joint ventures to an estimated
fair value.
(m) Includes $23.5 million write down of pre-paid bond costs to a fair value
of $0.
(n) Includes a $10.2 million write down of the current portion of the MCI
facility project debt to a fair value of $0 and an increase of $10.5
million for the current portion on the fair market value premium on
waste-to-energy project debt.
(o) Includes a write down of $11.0 million in the MCI facility accrued
expenses to a fair value of $0, a reduction of $6.0 million to reclassify
pension liabilities to long-term liabilities, a back tax liability of $1.3
million and various other adjustments reducing accrued expenses by an
additional $1.3 million.
(p) Reflects an $18.3 million write down of the long-term portion of the MCI
facility project debt to a fair value of $0 and an increase of $36.1
million for the long-term portion of the fair market value premium on
waste-to-energy project debt.
(q) Reflects the change in deferred taxes resulting from the fair valuation of
property, plant and equipment and intangibles.
(r) Reflects increase of $15.6 million to true up tax reserves to $22.6
million at emergence, increase of $6.0 million for the reclassification of
pension liabilities from current liabilities and an increase of $18.4
million for additional pension liabilities.
(s) Reflects the zeroing out of old equity accounts.
5. CREDIT ARRANGEMENTS
The Company entered into the Master Credit Facility as of March 14, 2001. The
Master Credit Facility was secured by substantially all of the Company's assets
and was scheduled to mature on May 31, 2002 but was not fully discharged by the
Debtor-In-Possession Credit Agreement (as amended, the "DIP Facility") discussed
below. This, as well as the non-compliance with required financial ratios and
possible other items, caused the Company to be in default under its Master
Credit Facility. However, as previously discussed, the filing of bankruptcy
petitions by the Debtors acted as a stay of enforcement of any remedies under
the Master Credit Facility against any Debtor. The Master Credit Facility was
discharged upon the effectiveness of the Reorganization Plan (see Note 2).
13
In connection with the bankruptcy petition, Covanta and most of its subsidiaries
entered into the DIP Facility with the DIP Lenders. The DIP Facility was largely
for the continuation of existing letters of credit and was secured by all of the
Company's domestic assets not subject to liens of others and generally 65% of
the stock of its foreign subsidiaries held by domestic subsidiaries. Obligations
under the DIP Facility were senior in status to other pre-petition secured
claims, and the DIP Facility was the operative debt agreement with the Company's
banks. All claims relating to the DIP Facility were discharged upon the
effectiveness of the Reorganization Plan (see Note 2).
In connection with the effectiveness of the Reorganization Plan and the
consummation of the DHC Transaction, the Company emerged from bankruptcy with a
new debt structure. Domestic Borrowers have two credit facilities; the First
Lien Facility and the Second Lien Facility.
- - The First Lien Facility provides commitments for the issuance of letters
of credit contractually required in connection with the Detroit
waste-to-energy facility. These letters of credit are currently required
in the aggregate amount of approximately $138.2 million as of March 31,
2004, and the contractually required amount decreases semi-annually. The
First Lien Facility has a term of five years, and requires cash collateral
to be posted for issued letters of credit in the event Covanta has cash in
excess of specified amounts. Covanta paid a 1% upfront fee (approximately
$1.38 million) upon entering into the First Lien Facility, and will pay
with respect to each issued letter of credit (i) a fronting fee equal to
the greater of $500 or 0.25% per annum of the daily amount available to be
drawn under such letter of credit, (ii) a letter of credit fee equal to
2.5% per annum of the daily amount available to be drawn under such letter
of credit, and (iii) an annual fee of $1,500.
- - The Second Lien Facility provides commitments in the aggregate amount of
$118 million, up to $10 million of which shall also be available for cash
borrowings on a revolving basis and the balance for letters of credit
supporting the Company's domestic and international businesses. This
second lien credit facility has a term of five years. The Second Lien
Credit facility requires cash collateral to be posted for issued letters
of credit in the event Covanta has cash in excess of specified amounts.
The revolving loan component of the second lien credit facility bears
interest at either (i) 4.5% over a base rate with reference to either the
Federal Funds rate of the Federal Reserve System or Bank One's prime rate,
or (ii) 6.5% over a formula Eurodollar rate, the applicable rate to be
determined by Covanta (increasing by 2% over the then applicable rate in
specified default situations). Covanta also paid an upfront fee of $2.36
million upon entering into the second lien credit agreement, and will pay
(i) a commitment fee equal to 0.5% per annum of the daily calculation of
available credit, (ii) an annual agency fee of $30,000, and (iii) with
respect to each issued letter of credit an amount equal to 6.5% per annum
of the daily amount available to be drawn under such letter of credit. As
of March 31, 2004, letters of credit in the approximate aggregate amount
of $85.9 million had been issued under the Second Lien Facility, which
amount was reduced to $70.9 million as of April 2, 2004, and the Company
had not sought to make draws against the $10 million liquidity facility of
the Second Lien Facility.
Total fees of $11.6 million paid on March 10, 2004 have been capitalized and are
being amortized using the interest method over the life of the credit facilities
on a straight line basis to the extent no borrowings exist. Both facilities are
secured by the assets of the Domestic Borrowers not otherwise pledged. The lien
of the Second Lien Facility is junior to that of the First Lien Facility.
Also, CPIH and each of its domestic subsidiaries, which hold all of the assets
and operations of the Company's international businesses (the "CPIH Borrowers")
entered into a secured credit facility:
- - The CPIH Revolving Credit Facility is secured by a first priority lien on
the CPIH stock and substantially all of the CPIH Borrowers' assets not
otherwise pledged, and consists of commitments for cash borrowings of up
to $10 million for purposes of supporting the international businesses.
The CPIH revolving credit facility has a maturity date of three years and
to the extent drawn upon bears interest at the rate of either (i) 7% over
a base rate with reference to either the Federal Funds rate, of the
Federal Reserve System or Deutsche Bank's prime rate, or (ii) 8% over a
formula Eurodollar rate, the applicable rate to be determined by CPIH
(increasing by 2% over the then applicable rate in specified default
situations). CPIH also paid a 2% upfront fee of $0.2 million, and will pay
(i) a commitment fee equal to 0.5% per annum of the average daily
calculation of available credit, and (ii) an annual agency fee of $30,000.
As of March 31, 2004, CPIH had not sought to make draws on this facility.
The debt of the CPIH Borrowers is non-recourse to Covanta and its other domestic
subsidiaries.
14
6. OTHER LONG-TERM DEBT
Long-term debt (expressed in thousands of dollars) consisted of the following:
SUCCESSOR PREDECESSOR
MARCH 31, 2004 DECEMBER 31, 2003
-------------- -----------------
High yield notes $ 205,190 $ -
CPIH term loan facility 94,825 -
Unsecured notes 36,500 -
9.25% debentures due 2022 - 100,000
Other long-term debt 10,891 22,127
-------------- -----------------
Total 347,406 122,127
Less amounts subject to compromise - (110,485)
Less current portion of long term debt (9,631) (9,492)
-------------- -----------------
Total $ 337,775 $ 2,150
============== =================
The Domestic Borrowers also issued the High Yield Notes and issued or will issue
the Unsecured Notes.
- The High Yield Notes are secured by a third priority lien in the
same collateral securing the First Lien Facility and the Second Lien
Facility. The High Yield Notes were issued in the initial principal
amount of $205 million, which will accrete to $230 million at
maturity in seven years. Interest is payable at a rate of 8.25%
semi-annually on the basis of the principal at final maturity; no
principal is due prior to maturity of the High Yield Notes.
- Unsecured Notes in a principal amount of $4 million were issued on
the effective date of the Reorganization Plan, and the Company
expects to issue additional Unsecured Notes in a principal amount of
between $30 and $35 million including additional Unsecured Notes
that may be issued to holders of allowed claims against the
Remaining Debtors if and when they emerge from bankruptcy. The final
principal amount of all Unsecured Notes will be equal to the amount
of allowed unsecured claims against the Company's operating
subsidiaries which were reorganizing Debtors, and such amount will
be determined when such claims are resolved through settlement or
further proceedings in the Bankruptcy Court. The principal amount of
unsecured notes indicated in the table above represents the expected
liability upon completion of the claims process. Notwithstanding the
date on which Unsecured Notes are issued, interest on the Unsecured
Notes accrues from March 10, 2004. Interest is payable semi-annually
on the Unsecured Notes at a rate of 7.5%; principal is paid annually
beginning in March, 2006. The Unsecured Notes mature in eight years.
Also, the CPIH Borrowers entered into the following secured credit facility:
- The CPIH Term Loan Facility of up to $95 million, secured by a
second priority lien on the same collateral as the CPIH Revolving
Credit Facility, and bears interest at 10.5% per annum, 6.0% of such
interest to be paid in cash and the remaining 4.5% to be paid in
cash to the extent available and otherwise payable by adding it to
the outstanding principal balance. The interest rate increases to
12.5% per annum in specified default situations. The CPIH Term Loan
Facility matures in three years.
The debt of the CPIH Borrowers is non-recourse to Covanta and its other domestic
subsidiaries.
Covanta may issue tax notes in an aggregate principal amount equal to the
aggregate amount of allowed priority tax claims with a maturity six years after
the date of assessment. Interest will be payable semi-annually at the rate of
four percent. Under the Reorganization Plan, the Company may pay the amount of
such claims in cash. The Company does not expect the amount of such allowed
priority tax claims to negatively affect its ability to implement its business
plan.
The maturities on long-term debt including capital lease obligations, (expressed
in thousands of dollars) at March 31, 2004 were as follows:
2004 $ 9,631
2005 25
2006 1,235
2007 94,825
Later years 241,690
---------
15
Total 347,406
Less current portion (9,631)
---------
Total long-term debt $ 337,775
=========
7. PROJECT DEBT
Project debt (expressed in thousands of dollars) consisted of the following:
SUCCESSOR PREDECESSOR
MARCH 31, DECEMBER 31,
2004 2003
--------- ------------
Revenue Bonds Issued by and Prime Responsibility of
Municipalities:
3.625-6.75% serial revenue bonds due 2005 through 2011 $ 306,843 $ 287,320
5.0-7.0% term revenue bonds due 2005 through 2015 165,961 221,644
Adjustable-rate revenue bonds due 2006 through 2013 120,967 126,665
--------- ------------
Total 593,771 635,629
--------- ------------
Revenue Bonds Issued by Municipal Agencies with Sufficient
Service Revenues Guaranteed by Third Parties:
5.25-8.9% serial revenue bonds due 2005 through 2008 24,006 47,260
--------- ------------
Other Revenue Bonds:
4.7-5.5% serial revenue bonds due 2005 through 2015 72,515 71,820
5.5-6.7% term revenue bonds due 2014 through 2019 69,515 68,020
--------- ------------
Total 142,030 139,840
--------- ------------
Other project debt 87,196 110,456
--------- ------------
Total long-term project debt $ 847,003 $ 933,185
========= ============
Project debt associated with the financing of waste-to-energy facilities is
generally arranged by municipalities through the issuance of tax-exempt and
taxable revenue bonds. The category, "Revenue Bonds Issued by and Prime
Responsibility of Municipalities," includes bonds issued with respect to
projects owned by the Company for which debt service is an explicit component of
the client community's obligation under the related service agreement. In the
event that a municipality is unable to satisfy its payment obligations, the
bondholders' recourse with respect to the Company is limited to the
waste-to-energy facilities and restricted funds pledged to secure such
obligations.
The category "Revenue Bonds Issued by Municipal Agencies with Sufficient Service
Revenues Guaranteed by Third Parties" includes municipal bonds issued to finance
two facilities for which contractual obligations of third parties to deliver
waste ensure sufficient revenues to pay debt service, although such debt service
is not an explicit component of the third parties' service fee obligations.
The category "Other Revenue Bonds" includes bonds issued to finance one facility
for which current contractual obligations of third parties to deliver waste
provide sufficient revenues to pay debt service related to that facility through
2011, although such debt service is not an explicit component of the third
parties' service fee obligations. The Company anticipates renewing such
contracts prior to 2011.
Payment obligations for the project debt associated with facilities owned by the
Company are limited recourse to the operating subsidiary and non-recourse to the
Company, subject to construction and operating performance guarantees and
commitments. These obligations are secured by the revenues pledged under various
indentures and are collateralized principally by a mortgage lien and a security
interest in each of the respective facilities and related assets.
The maturities on long-term project debt (expressed in thousands of dollars) at
March 31, 2004 were as follows:
2004 $ 64,525
2005 93,696
2006 99,904
2007 98,183
2008 98,048
16
Later years 486,781
---------
Total $ 941,137
Less current portion (94,134)
---------
Total long-term project debt $ 847,003
=========
8. INCOME TAXES
PREDECESSOR COMPANY
The provision for income taxes of $215.3 million for the period January 1, 2004
through March 10, 2004 consists of an income tax provision of $229.3 million
related to the increase in carrying value of certain assets to fair value
recorded in connection with the Company's adoption of fresh start accounting,
and the gain on cancellation of pre-petition debt.
The effective tax rate for the period January 1, 2004 through March 10, 2004
differs from the federal statutory rate as the Company has established a
valuation allowance against certain foreign net operating loss carry-forwards
and certain other fresh start adjustments to reduce them to the amounts that
will more likely than not be realized.
SUCCESSOR COMPANY
Included in the net deferred tax liability of the Successor Company is a
deferred tax asset of $91.7 million related to Danielson Holdings Corporation
NOLs that will be available to offset Covanta's taxable income.
Danielson reported in its Form 10-K for the fiscal year ended December 31, 2003
filed with the SEC, that it expected to have NOLs estimated to be approximately
$652 million for federal income tax purposes as of the end of 2003. Under a Tax
Sharing Agreement between Covanta and Danielson, certain of Danielson's NOLs
will be made available to offset the income tax liability of Covanta and its
domestic subsidiaries (other than CPIH and its domestic subsidiaries, which are
not consolidated for tax purposes). The NOLs will expire in various amounts
beginning on December 31, 2004 through December 31, 2023, if not used. The
amount of NOLs available to Covanta will be reduced by any taxable income
generated by current members of Danielson's tax consolidated group. The Internal
Revenue Service ("IRS") has not audited any of Danielson's tax returns.
If Danielson were to undergo an "ownership change" as such term is used in
Section 382 of the Internal Revenue Code, the use of its NOLs would be limited.
Danielson will be treated as having had an "ownership change" if there is a more
than 50% increase in stock ownership during a 3-year "testing period" by "5%
stockholders". Danielson's Certificate of Incorporation contains stock transfer
restrictions that were designed to help preserve Danielson's NOLs by avoiding an
ownership change. The transfer restrictions were implemented in 1990, and
Danielson expects that they will remain in-force as long as Danielson has NOLs.
Danielson cannot be certain, however, that these restrictions will prevent an
ownership change.
BANKRUPTCY EFFECT
In connection with the Debtors' emergence from bankruptcy, the Company realized
a gain on the extinguishment of debt of $510.7 million. This gain will not be
taxable since the gain resulted from the Company's reorganization under the
Bankruptcy Code. However, for U.S. income tax reporting purposes, as of the
beginning of its short taxable period ending December 31, 2004, the Company will
be required to reduce certain tax attributes, including (a) net operating loss
carry-forwards and (b) certain tax credit carry-forwards, equal to the gain on
the extinguishment of debt. The reorganization of the company on the Effective
Date constituted an ownership change under Section 382 of the Code, and the use
of any of the Company's net operating loss carry-forwards and tax credit
carry-forwards generated prior to the ownership change that are not reduced
pursuant to these provisions will be subject to an overall annual limitation.
The actual amount of reduction in tax attributes for U.S. income tax reporting
purposes will not be determined until 2005 and is therefore not reflected in
this note to the consolidated condensed financial statements.
9. PENSION AND POST RETIREMENT BENEFITS
Net periodic defined benefit pension and post-retirement expense we as follows
(in thousands of Dollars):
17
Pension Benefits Other Benefits
For the period For the period For the period For the period
March 11,2004 January 1,2004 March 11,2004 January 1,2004
Through Through Through Through
March 31,2004 March 10,2004 March 31,2004 March 10,2004
-------------- -------------- -------------- ---------------
Service cost $ 484 $ 1,431 $ - $ -
Interest cost 200 650 39 257
Expected Return on Assets (137) (450) - -
Amortization
Prior Services cost - (35) - -
(Gain)/Loss - 127 - 128
---------- ---------- ---------- ----------
Net periodic benefit cost $ 547 $ 1,723 $ 39 $ 385
The Company has recorded a pension plan liability equal to the amount that the
present value of projected benefit obligations (using a discount rate of 5.75%)
exceeded the fair value of pension plan assets at March 10, 2004 in accordance
with the provisions of Statement of Financial Accounting Standards No. 141
"Business Combinations". The Company made contributions of $0.97 million to the
plan in the three months ended March 31, 2004.
10. BUSINESS SEGMENTS
The Company's reportable segments are: Domestic energy and water and
International energy. The segment information for the prior year has been
restated to conform with the current segments.
Covanta's two segments develop, operate and in some cases own, energy generating
facilities that utilize a variety of fuels, as well as water and wastewater
facilities that serves communities on a long-term basis.
Revenues and income (loss) from continuing operations by segment for the periods
from March 11, 2004 through March 31, 2004, January 1, 2004 through March 10,
2004 and the three months ended March 31, 2003 (expressed in thousands of
dollars) were as follows:
For the period For the period
March 11, 2004 January 1, 2004 Three Months Ended
Through March 31, Through March 10, March 31,
2004 2004 2003
- ---------------------------------------------------------------------------------------------------------------------------
Revenues:
Domestic energy and water $ 29,798 $ 107,696 $ 152,640
International energy 9,178 35,536 43,771
-------- --------- ---------
Total revenue 38,976 143,232 196,411
-------- --------- ---------
Income (loss) from operations:
Domestic energy and water 4,736 5,828 24,353
International energy 3,184 8,299 10,531
Corporate unallocated income
and expenses-net (2,476) 1,119 (13,083)
-------- --------- ---------
Operating income 5,444 15,246 21,801
Interest expense - net (2,649) (5,374) (10,010)
Reorganization items -- (58,282) (12,194)
Gain on cancellation of pre-petition debt -- 510,680 --
Fresh start adjustments -- (214,927) --
-------- --------- ---------
Income (loss) from continuing operations before income
taxes, minority interests, discontinued operations and the
cumulative effect of change in accounting principle $ 2,795 $ 247,343 $ (403)
======== ========= =========
11. INVESTMENTS IN AND ADVANCES TO INVESTEES AND JOINT VENTURES
The following disclosure of unaudited results of operations and financial
position are presented as required by the SEC's rules pursuant to Regulation S-X
Rule 4-08(g) and 3-09 (expressed in thousands of dollars):
HARIPUR BARGE
QUEZON POWER PLANT
(THE PHILIPPINES) (BANGLADESH)
----------------- ------------
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2004:
Revenues $ 51,128 $ 8,442
Operating income 23,328 4,950
Net income 13,679 2,113
Company's share of net income 4,259 953
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2003:
Revenues $ 45,657 $ 8,009
Operating income 22,085 4,968
Net income 12,172 1,788
Company's share of net income 3,180 807
HARIPUR BARGE
QUEZON POWER PLANT
(THE PHILIPPINES) (BANGLADESH)
----------------- -------------
CONDENSED BALANCE SHEETS AT MARCH 31, 2004:
Current assets $ 144,790 $ 26,046
Non-current assets 736,605 94,178
Total assets 881,395 120,224
Current liabilities 61,487 14,672
Non-current liabilities 496,823 60,200
Total liabilities 558,310 74,872
CONDENSED BALANCE SHEETS AT DECEMBER 31, 2003:
Current assets $ 143,725 $ 29,974
Non-current assets 741,169 95,429
Total assets 884,894 125,403
Current liabilities 56,912 18,185
Non-current liabilities 496,700 63,900
Total liabilities 553,612 82,085
The Companies share of each of the net assets shown above is less than five
percent of the Company's consolidated assets.
Investment in Unconsolidated Subsidiaries
The following table summarizes the results of operations for Covanta's six
unconsolidated entities still in bankruptcy for the period March 10, 2004
through March 31, 2004 (in thousands).
CONDENSED STATEMENTS OF OPERATIONS
Revenues $ 2,439
Operating income (241)
Net income (241)
12. EARNINGS (LOSS) PER SHARE:
19
For the period January 1, 2004 through
March 10, 2004 For the Three Months Ended March 31, 2003
------------------------------------------------------------------------------------
(In thousands of dollars except Income (Loss) Shares Per share Income (Loss) Shares Per share
for per share amounts) (Numerator) (Denominator) Amount (Numerator) (Denominator) AMOUNT
------------- ------------- --------- ------------- ------------- ---------
BASIC EARNINGS (LOSS)
PER SHARE:
Earnings (loss) to common stockholders $ 29,563 49,821 $ 0.59 $ (2,781) 49,824 $ (0.06)
============= ============= ========= ============= ============= =========
Earnings (loss) from discontinued
operations $ - 49,821 $ - $ 1,789 49,824 $ 0.04
============= ============= ========= ============= ============= =========
Cumulative effect of change in accounting
principles $ - 49,821 $ - $ (8,538) 49,824 $ (0.17)
============= ============= ========= ============= ============= =========
Net income (loss) $ 29,563 49,821 $ 0.59 $ (9,530) 49,824 $ (0.19)
============= ============= ========= ============= ============= =========
Effect of Dilutive Securities:
Stock options (A) (A)
Restricted stock 3 (A)
Convertible preferred stock 198 (A)
---
DILUTED LOSS
PER SHARE:
Earnings (loss) to common stockholders $ 29,563 50,022 $ 0.59 $ (2,781) 49,824 $ (0.06)
============= ============= ========= ============= ============= =========
Earnings (loss) from discontinued
operations $ - 50,022 $ - $ 1,789 49,824 $ 0.04
============= ============= ========= ============= ============= =========
Cumulative effect of change in accounting
principles $ - 50,022 $ - $ (8,538) 49,824 $ (0.17)
============= ============= ========= ============= ============= =========
Net income (loss) $ 29,563 50,022 $ 0.59 $ (9,530) 49,824 $ (0.19)
============= ============= ========= ============= ============= =========
(A) Antidilutive
Basic earnings per common share was computed by dividing net loss, reduced by
preferred stock dividends, by the weighted average of the number of shares of
common stock outstanding during each period.
Diluted earnings per common share was computed on the assumption that all
convertible debentures, convertible preferred stock, restricted stock and stock
options converted or exercised during each period, or outstanding at the end of
each period were converted at the beginning of each period or the date of
issuance or grant, if dilutive. This computation provides for the elimination of
related convertible debenture interest and preferred dividends. Outstanding
stock options to purchase common stock with an exercise price greater than the
average market price of common stock were not included in the computation of
diluted earnings per share. The balance of such options were 3,310,002 and
3,310,002 for the periods ended March 10, 2004 and March 31, 2003, respectively.
Shares of common stock to be issued, assuming conversion of convertible
preferred stock, the 6% convertible debentures, the 5 3/4% convertible
debentures, stock options and unvested restricted stock issued to employees and
directors were not included in computation of diluted earnings per share as to
do so would have been antidilutive.
The common stock so excluded from the calculation was 2,175,000 for the period
January 1, 2004 through March 10, 2004 and in the first quarter of 2003 for the
6% convertible debentures; 1,524,000 for the period January 1, 2004 through
March 10, 2004 and the first quarter of 2003 for the 5 3/4% convertible
debentures; 0 for the period January 1, 2004 through March 10, 2004 and the
first quarter of 2003 for stock options, 198,000 and 198,000 for the period
January 1, 2004 through March 10, 2004 and the first quarter of 2003,
respectively, for convertible preferred stock; and 22,000 and 22,000 for the
period January 1, 2004 through March 10, 2004 and the first quarter of 2003,
respectively, for unvested restricted stock issued to employees.
All shares of common stock, and options with respect to common stock, were
cancelled in connection with the Company's emergence from bankruptcy.
13. SPECIAL CHARGES
As a result of the decisions discussed below, the Company has incurred various
expenses, described as special charges, which have been recognized in its
continuing and discontinued operations. The following is a summary of the
principal special charges (both cash and non-cash charges) recognized in the
stub period ended March 10, 2004 and the periods ended March 31, 2004 and 2003
(expressed in thousands of dollars):
Transferred to
Balance at Amounts Liabilities Balance at
March 10, Charges for Paid In subject to March 31,
2004 Operations 2004 compromise 2004
------------ ----------- ------- -------------- ----------
2004
Severance for approximately
216 New York city employees $ 988 $ - $ (220) $ - $ 768
Severance for approximately
60 Employees terminated post petition 34 - (6) - 28
Key employee retention plan 985 - (985) - -
Office closure costs - - - - -
------------ ----------- ------- -------------- ----------
Total $ 2,007 $ - $(1,211) $ - $ 796
============ =========== ======= ============== ==========
Transferred to
Balance at Amounts Liabilities Balance at
December 31, Charges for Paid In subject to March 10,
2003 Operations 2004 compromise 2004
------------ ----------- ------- -------------- ----------
2004
Severance for approximately
216 New York city employees $ 1,470 $ (312)(A) $ ( 170) $ - $ 988
Severance for approximately
60 Employees terminated post petition 277 (239)(A) (4) - 34
Key employee retention plan 1,425 (440)(A) - - 985
Office closure costs 518 - (48) (470) -
------------ --------- ------- -------------- ----------
Total $ 3,690 $ (991) $ (222) $ (470) $ 2,007
============ ========= ======= ============== ==========
Transferred to
Balance at Amounts Liabilities Balance at
December 31, Charges for Paid In subject to March 31,
2002 Operations 2003 compromise 2003
------------ ----------- ------- -------------- ----------
2003
Severance for approximately
216 New York city employees $ 1,600 $ - $ (15) $ - $ 1,585
Severance for approximately
80 energy employees 2,500 - (48) (2,452) -
Severance for approximately
60 Employees terminated post petition 4,350 - (1,037) - 3,313
Key employee retention plan 700 600 - - 1,300
Contract termination settlement 400 - - - 400
Office closure costs 1,200 - - - 1,200
------------ ----------- ------- -------------- ----------
Total $ 10,750 $ 600 $(1,100) $ (2,452) $ 7,798
============ =========== ======= ============== ==========
(A) Reflects adjustments to reconcile to Bankruptcy Court approved amount at
March 10, 2004.
14. COMMITMENTS AND CONTINGENT LIABILITIES
At March 31, 2004, capital commitments amounted to $11.2 million for normal
maintenance and replacement in Domestic energy and water. Other capital
commitments for Domestic energy and water and International energy as of March
31, 2004 amounted to approximately $11.9 million. This amount includes a
commitment to pay $10.6 million in 2009 for a service contract extension at an
energy facility. In addition, this amount includes a commitment to contribute
$1.3 million in capital to an investment in a waste-to-energy facility in Italy,
which is expected to be contributed in late 2004.
Covanta and certain of its subsidiaries have issued or are party to performance
bonds and guarantees and related contractual obligations undertaken mainly
pursuant to agreements to construct and operate certain energy facilities.
The surety bonds relate to performance under its waste water treatment operating
contracts ($8.5 million), possible closure costs for various energy projects
when such projects cease operating ($10.8 million) and to energy businesses that
have been sold and related surety bonds ($1.2 million) are expected to be
cancelled in 2004.
The Company is party to a number of other claims, lawsuits and pending actions,
most of which are routine and all of which are incidental to its business. The
Company assesses the likelihood of potential losses on an ongoing basis and when
losses are considered probable and reasonably estimable, records as a loss an
estimate of the ultimate outcome. If the Company can only estimate the range of
a possible loss, an amount representing the low end of the range of possible
outcomes is recorded. The final consequences of these proceedings are not
presently determinable with certainty.
Generally claims and lawsuits against the Debtors emerging from bankruptcy upon
consummation of the DHC Transaction arising from events occurring prior to their
respective Petition Dates have been resolved pursuant to the Reorganization
Plan, and have been discharged pursuant to the March 5, 2004 order of the
Bankruptcy Court which confirmed the Reorganization Plan. However, to the extent
that claims are not dischargeable in bankruptcy, such claims may not be
discharged. For example, the claims of certain persons who were personally
injured prior to the Petition Date but whose injury only became manifest
thereafter may not be discharged pursuant to the Reorganization Plan.
Environmental Matters
The Company's operations are subject to the environmental regulatory laws and
the environmental remediation laws. Although the Company's operations are
occasionally subject to proceedings and orders pertaining to emissions into the
environment and other environmental violations, which may result in fines,
penalties, damages or other sanctions, the Company believes that it is in
substantial compliance with existing environmental laws and regulations.
The Company may be identified, along with other entities, as being among parties
potentially responsible for contribution to costs associated with the correction
and remediation of environmental conditions at disposal sites subject to CERCLA
and/or analogous state laws. In certain instances, the Company may be exposed to
joint and several liability for remedial action or damages. The Company's
ultimate liability in connection with such environmental claims will depend on
many factors, including its volumetric share of waste, the total cost of
remediation, the financial viability of other companies that also sent waste to
a given site and, in the case of divested operations, its contractual
arrangement with the purchaser of such operations. Generally such claims arising
prior to the Petition Date were resolved in and discharged by the Chapter 11
Cases.
On September 15, 2003, the Environmental Protection Agency (the "EPA") issued a
"General Notice Letter" identifying Covanta as among 41 potentially responsible
parties ("PRPs") with respect to the Diamond Alkali Superfund Site/"Lower
Passaic River Project." The EPA alleges that the PRPs are liable for releases or
potential releases of hazardous substances to a 17 mile segment of the Passaic
River, located in northern New Jersey, and requests the PRPs' participation as
"cooperating parties" with respect to the funding of a five to seven year study
to determine an environmental remedial and restoration program. The Company has
informed the EPA that it was a Debtor, the EPA did not file a proof of claim,
and the Company believes that its liability, if any, was discharged under the
Reorganization Plan. On March 5, 2004, one PRP did file a motion in the
Bankruptcy Court for leave to file a late proof of claim, but subsequently
withdrew that motion. No other proofs of claim have been filed relating to this
matter. The allegations as to Covanta relate to discontinued, non-energy
operations.
In 1985, Covanta sold its interests in several manufacturing subsidiaries, some
of which allegedly used asbestos in their manufacturing processes, and one of
which was Avondale Shipyards, now a subsidiary of Northrop Grumman Corporation.
Some of these former subsidiaries have been and continue to be parties to
asbestos-related litigation. In 2001, Covanta was named a party, with 45 other
defendants, to one such case. Before the First Petition Date, Covanta had filed
for its dismissal from the case. Also, eleven proofs of claim seeking
unliquidated amounts have been filed against Covanta in the Chapter 11 Cases
based on what appears to be purported asbestos-related injuries that may relate
to the operations of former Covanta subsidiaries. Covanta believes that these
claims lack merit and has filed objections to them, and plans to object
vigorously to such claims if necessary to resolve them.
The potential costs related to the following matters and the possible impact on
future operations are uncertain due in part to the complexity of governmental
laws and regulations and their interpretations, the varying costs and
effectiveness of cleanup technologies, the uncertain level of insurance or other
types of recovery and the questionable level of the Company's responsibility.
Although the ultimate outcome and expense of any litigation, including
environmental remediation, is uncertain, the Company believes that the following
proceedings will not have a material adverse effect on the Company's
consolidated financial position or results of operations.
1. On June 8, 2001, the EPA named the Company's wholly-owned
subsidiary, Ogden Martin Systems of Haverhill, Inc., now known as
Covanta Haverhill, Inc., as one of 2,000 PRPs at the Beede Waste Oil
Superfund Site, Plaistow, New Hampshire in connection with alleged
waste disposal by PRPs on this site. On January 9, 2004, the EPA
signed its Record of Decision with respect to the cleanup of the
site. According to the EPA, the costs of response actions incurred
as of January 2004 by the EPA and the State of New Hampshire total
approximately $19 million, and the estimated cost to implement the
remedial alternative selected in the Record of Decision is an
additional $48 million. Covanta Haverhill, Inc. is participating in
PRP group discussions towards settlement of the EPA's claims and
will continue to seek a negotiated resolution of this matter.
Although Covanta Haverhill, Inc.'s share of liability, if any,
cannot be determined at this time as a result of uncertainties
regarding the source and scope of contamination, the large number of
PRPs and the varying degrees of responsibility among various classes
of PRPs, the Company believes that based on the amount of materials
Covanta Haverhill, Inc. sent to the site, any liability will not be
material. Covanta Haverhill, Inc. was not a Debtor.
2. On May 25, 2000 the California Regional Water Quality Control Board,
Central Valley Region, issued a cleanup and abatement order to
Pacific-Ultrapower Chinese Station ("Chinese Station"), a general
partnership in which one of Covanta's subsidiaries owns 50% and
which owns and operates an independent power project
22
in Jamestown, California which uses waste wood as a fuel. The order
is in connection with the partnership's neighboring property owner's
use of ash generated by Chinese Station's plant. Chinese Station
completed the cleanup in mid-2001 and submitted its Clean Closure
Report to the Water Quality Control Board on November 2, 2001. The
Board and other state agencies continue to investigate alleged civil
and criminal violations associated with the management of the
material. The partnership believes it has valid defenses, and a
petition for review of the order is pending. Settlement discussions
in this matter are underway. Based on penalties proposed by the
Board, the Company believes that this matter can be resolved in
amounts that will not be material to the Company taken as a whole.
Chinese Station and Covanta's subsidiary that owns a partnership
interest in Chinese station were not Debtors.
Other Matters
1. In late 2000, Lake County, Florida commenced a lawsuit in Florida
state court against Covanta Lake, Inc. (now merged with Covanta Lake
II, Inc., ("Covanta Lake")) which also refers to its merged
successor, as defined below) relating to the waste-to-energy
facility operated by Covanta in Lake County, Florida (the "Lake
Facility"). In the lawsuit, Lake County sought to have its Service
Agreement with Covanta Lake declared void and in violation of the
Florida Constitution. That lawsuit was stayed by the commencement of
the Chapter 11 Cases. Lake County subsequently filed a proof of
claim seeking in excess of $70 million from Covanta Lake and
Covanta.
On June, 20, 2003, Covanta Lake filed a motion with the Bankruptcy
Court seeking entry of an order (i) authorizing Covanta Lake to
assume, effective upon confirmation of a plan of reorganization for
Covanta Lake, its Service Agreement with Lake County, (ii) finding
no cure amounts due under the Service Agreement, and (iii) seeking a
declaration that the Service Agreement is valid, enforceable and
constitutional, and remains in full force and effect.
Contemporaneously with the filing of the assumption motion, Covanta
Lake filed an adversary complaint asserting that Lake County is in
arrears to Covanta Lake in the amount of more than $8.5 million.
Shortly before trial commenced in these matters, the Company and
Lake County reached a tentative settlement calling for a new
agreement specifying the parties' obligations and restructuring of
the project. That tentative settlement and the proposed
restructuring will involve, among other things, termination of the
existing Service Agreement and the execution of a new waste disposal
agreement which shall provide for a put-or-pay obligation on Lake
County's part to deliver 163,000 tons per year of acceptable waste
to the Lake Facility and a different fee structure; a replacement
guarantee from Covanta in a reduced amount; the payment by Lake
County of all amounts due as "pass through" costs with respect to
Covanta Lake's payment of property taxes; the payment by Lake County
of a specified amount in each of 2004, 2005 and 2006 in
reimbursement of certain capital costs; the settlement of all
pending litigation; and a refinancing of the existing bonds.
The Lake settlement is contingent upon, among other things, receipt
of all necessary approvals, as well as a favorable outcome to the
Company's pending objection to the proof of claims filed by F.
Browne Gregg, a third-party claiming an interest in the existing
Service Agreement that would be terminated under the proposed
settlement. On November 3-5, 2003, the Bankruptcy Court conducted a
trial on Mr. Gregg's proofs of claim. At issue in the trial was
whether Mr. Gregg is entitled to damages as a result of Covanta
Lake's proposed termination of the existing Service Agreement and
entry into a waste disposal agreement with Lake County. As of May 1,
2004, the Bankruptcy Court had not ruled on the Company's claims
objections. Based on the foregoing, the Company determined not to
propose a plan of reorganization or plan of liquidation for Covanta
Lake, and instead that Covanta Lake should remain a
debtor-in-possession after the effective date of the Reorganization
Plan.
To emerge from bankruptcy without uncertainty concerning potential
claims against Covanta related to the Lake Facility, Covanta has
rejected its guarantees of Covanta's obligations relating to the
operation and maintenance of the Lake Facility. The Company
anticipates that if a restructuring is consummated, Covanta may at
that time issue new parent guarantees in connection with that
restructuring and emergence from bankruptcy.
Depending upon the ultimate resolution of these matters with Mr.
Gregg and the County, Covanta Lake may determine to assume or reject
one or more executory contracts related to the Lake Facility,
terminate the Service Agreement with Lake County for its breaches
and default and pursue litigation against Lake County and/or Mr.
Gregg. Based on this determination, the Company may reorganize or
liquidate Covanta Lake. Depending on how Covanta Lake determines to
proceed, creditors of Covanta Lake may receive little or no recovery
on account of their claims.
23
2. During 2003 Covanta Tampa Construction, Inc. ("CTC") completed
construction of a 25 million gallon per day desalination-to-drinking
water facility under a contract with Tampa Bay Water ("TBW") near
Tampa, Florida. Covanta Energy Group, Inc., guaranteed CTC's
performance under its construction contract with TBW. A separate
subsidiary, Covanta Tampa Bay, Inc entered into a contract with TBW
to operate the Tampa Water Facility after construction and testing
is completed by CTC.
As construction of the Tampa Water Facility neared completion, the
parties had material disputes between them, primarily relating to
(i) whether CTC has satisfied acceptance criteria for the Tampa
Water Facility; (ii) whether TBW has obtained certain permits
necessary for CTC to complete start-up and testing, and for Covanta
Tampa Bay ("CTB") to subsequently operate the Tampa Water Facility;
(iii) whether influent water provided by TBW for the Tampa Water
Facility is of sufficient quality to permit CTC to complete start-up
and testing, or to permit CTB to operate the Tampa Water Facility as
contemplated and (iv) if and to the extent that the Tampa Water
Facility cannot be optimally operated, whether such shortcomings
constitute defaults under CTC's agreements with TBW.
In October 2003, TBW issued a default notice to CTC, indicated that
it intended to commence arbitration proceedings against CTC, and
further indicated that it intended to terminate CTC's construction
agreement. As a result, on October 29, 2003, CTC filed a voluntary
petition for relief under chapter 11 of the Bankruptcy Code in order
to, among other things, prevent attempts by TBW to terminate the
construction agreement between CTC and TBW. On November 14, 2003,
TBW commenced an adversary proceeding against CTC and filed a motion
seeking a temporary restraining order and preliminary injunction
directing that possession of the Tampa Water Facility be turned over
to TBW. On November 25, 2003, the Bankruptcy Court denied the motion
for a temporary restraining order and preliminary injunction and
ordered, among other things, that the parties attempt to resolve
their disputes in a non-binding mediation.
In February 2004 the Company and TBW reached a tentative compromise
of their disputes which has been approved by the Bankruptcy Court,
subject to definitive documentation, and confirmation of an
acceptable plan of reorganization for CTC and CTB, which were not
included in the Reorganization Plan. Under that tentative
compromise, all contractual relationships between the Company and
TBW will be terminated, CTC will operate the facility in "hot
stand-by" for a limited period of time, and the responsibility for
optimization and operation of the Tampa Water Facility will be
transitioned to a new, non-affiliated operator. In addition, TBW
will pay $4.95 million to or for the benefit of CTC, of which up to
$550,000 is earmarked for the payment of claims under the
subcontracts previously assigned by the Company to TBW. The
settlement funds ultimately would be distributed to creditors and
equity holders of CTC and CTB pursuant to a plan of reorganization
for CTC. As a result of the foregoing, the Company determined not to
include CTC and CTB in the Reorganization Plan or Liquidation Plan,
and instead that CTC and CTB should remain debtor-in-possessions
after the effective date of the Reorganization Plan, and that
separate plans of reorganization subsequently would be proposed for
CTC and CTB. In April, 2004, CTC and CTB filed a plan of
reorganization as contemplated by the settlement. It is anticipated
that the Bankruptcy Court will schedule a hearing in July, 2004 at
which the Court will consider confirmation of such plan of
reorganization.
If the parties are unable to resolve their differences consensually,
and depending upon, among other things, whether the parties are able
to successfully effect the settlement described above, CTC and CTB
may, among other things, commence additional litigation against TBW,
attempt to assume or reject one or more executory contracts related
to the Tampa Water Facility, or propose different liquidating plans
and/or plans of reorganization for CTB and/or CTC. In such an event,
creditors of CTC and CTB may receive little or no recovery on
account of their claims.
15. RELATED PARTIES
1. In order to finance its acquisition of Covanta, Danielson entered
into a note purchase agreement with SZ Investments, LLC, Third
Avenue Trust (on behalf of Third Avenue Value Fund Series), and D.E.
Shaw Laminar Portfolios, LLC (together, the "Bridge Lenders"). Under
the note purchase agreement, the Bridge Lenders agreed to arrange
for the Second Lien Facility described above in Note 5. Covanta paid
a fee shared by the Bridge Lenders, among others, to the agent bank
for the Second Lien Facility.
24
2. Danielson and Covanta have entered into a corporate services
agreement, pursuant to which Danielson provides, at Covanta's
expense, certain administrative and professional services.
25