e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
June 30,
2009
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number 1-06732
COVANTA HOLDING
CORPORATION
(Exact name of registrant as
specified in its charter)
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Delaware
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95-6021257
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(I.R.S. Employer
Identification Number)
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40 Lane Road, Fairfield, NJ
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07004
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(Address of Principal Executive
Office)
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(Zip Code)
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(973) 882-9000
(Registrants telephone number including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
Applicable
Only to Corporate Issuers:
The number of shares of the registrants Common Stock
outstanding as of the last practicable date.
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Class
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Outstanding at July 16, 2009
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Common Stock, $0.10 par value
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154,989,004 shares
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COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTERLY REPORT
For the Quarter Ended June 30, 2009
2
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on
Form 10-Q
may constitute forward-looking statements as defined
in Section 27A of the Securities Act of 1933 (the
Securities Act), Section 21E of the Securities
Exchange Act of 1934 (the Exchange Act), the Private
Securities Litigation Reform Act of 1995 (the PSLRA)
or in releases made by the Securities and Exchange Commission
(SEC), all as may be amended from time to time. Such
forward-looking statements involve known and unknown risks,
uncertainties and other important factors that could cause the
actual results, performance or achievements of Covanta Holding
Corporation and its subsidiaries (Covanta) or
industry results, to differ materially from any future results,
performance or achievements expressed or implied by such
forward-looking statements. Statements that are not historical
fact are forward-looking statements. Forward-looking statements
can be identified by, among other things, the use of
forward-looking language, such as the words plan,
believe, expect, anticipate,
intend, estimate, project,
may, will, would,
could, should, seeks, or
scheduled to, or other similar words, or the
negative of these terms or other variations of these terms or
comparable language, or by discussion of strategy or intentions.
These cautionary statements are being made pursuant to the
Securities Act, the Exchange Act and the PSLRA with the
intention of obtaining the benefits of the safe
harbor provisions of such laws. Covanta cautions investors
that any forward-looking statements made by Covanta are not
guarantees or indicative of future performance. Important
assumptions and other important factors that could cause actual
results to differ materially from those forward-looking
statements with respect to Covanta include, but are not limited
to, the risks and uncertainties affecting their businesses
described in Item 1A. Risk Factors of Covantas Annual
Report on
Form 10-K
for the year ended December 31, 2008 and in other filings
by Covanta with the SEC.
Although Covanta believes that its plans, intentions and
expectations reflected in or suggested by such forward-looking
statements are reasonable, actual results could differ
materially from a projection or assumption in any of its
forward-looking statements. Covantas future financial
condition and results of operations, as well as any
forward-looking statements, are subject to change and inherent
risks and uncertainties. The forward-looking statements
contained in this Quarterly Report on
Form 10-Q
are made only as of the date hereof and Covanta does not have or
undertake any obligation to update or revise any forward-looking
statements whether as a result of new information, subsequent
events or otherwise, unless otherwise required by law.
3
PART I.
FINANCIAL INFORMATION
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Item 1.
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FINANCIAL
STATEMENTS
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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2009
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2008
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2009
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2008
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(As Adjusted)
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(As Adjusted)
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(Unaudited)
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(In thousands, except per share amounts)
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OPERATING REVENUES:
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|
|
|
|
|
|
|
|
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Waste and service revenues
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$
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227,842
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$
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242,689
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$
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434,111
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$
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460,312
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Electricity and steam sales
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136,540
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163,832
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278,409
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316,897
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Other operating revenues
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11,404
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|
|
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16,475
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|
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22,026
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34,553
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|
|
|
|
|
|
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Total operating revenues
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375,786
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422,996
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734,546
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811,762
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OPERATING EXPENSES:
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|
|
|
|
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|
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Plant operating expenses
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214,556
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|
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238,608
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470,598
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|
|
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497,619
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Depreciation and amortization expense
|
|
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51,162
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|
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51,590
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|
|
|
102,660
|
|
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100,164
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Net interest expense on project debt
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|
|
12,108
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13,776
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24,877
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27,537
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General and administrative expenses
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26,906
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23,135
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52,421
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47,289
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Other operating expenses
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9,722
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19,358
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19,466
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31,859
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Total operating expenses
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314,454
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346,467
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670,022
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704,468
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Operating income
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61,332
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76,529
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64,524
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107,294
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|
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|
|
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|
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Other income (expense):
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|
|
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Investment income
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1,156
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|
|
1,052
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|
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2,184
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|
|
|
2,692
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|
Interest expense
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(8,532
|
)
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|
|
(11,563
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)
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(16,448
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)
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|
|
(25,283
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)
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Non-cash convertible debt related expense
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(6,395
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)
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(4,453
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)
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(11,097
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)
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|
|
(8,827
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)
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|
|
|
|
|
|
|
|
|
|
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Total other expenses
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(13,771
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)
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(14,964
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)
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(25,361
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)
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(31,418
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)
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Income before income tax expense, equity in net income from
unconsolidated investments and noncontrolling interests in
subsidiaries
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47,561
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61,565
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39,163
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75,876
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Income tax expense
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(17,901
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)
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(24,361
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)
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(14,583
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)
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(30,032
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)
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Equity in net income from unconsolidated investments
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|
5,671
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7,320
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11,480
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|
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12,812
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|
|
|
|
|
|
|
|
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|
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NET INCOME
|
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|
35,331
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|
|
|
44,524
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|
|
36,060
|
|
|
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58,656
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|
|
|
|
|
|
|
|
|
|
|
|
|
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Less: Net income attributable to noncontrolling interests in
subsidiaries
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(2,164
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)
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(2,225
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)
|
|
|
(3,544
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)
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|
|
(4,094
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)
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|
|
|
|
|
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|
|
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NET INCOME ATTRIBUTABLE TO COVANTA HOLDING CORPORATION
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|
$
|
33,167
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|
|
$
|
42,299
|
|
|
$
|
32,516
|
|
|
$
|
54,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Weighted Average Common Shares Outstanding:
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|
|
|
|
|
|
|
|
|
|
|
|
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Basic
|
|
|
153,731
|
|
|
|
153,387
|
|
|
|
153,600
|
|
|
|
153,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Diluted
|
|
|
154,953
|
|
|
|
154,848
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|
|
|
154,846
|
|
|
|
154,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.22
|
|
|
$
|
0.28
|
|
|
$
|
0.21
|
|
|
$
|
0.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.21
|
|
|
$
|
0.27
|
|
|
$
|
0.21
|
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed
consolidated financial statements.
4
|
|
|
|
|
|
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|
|
|
|
As of
|
|
|
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June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
|
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(In thousands, except per share amounts)
|
|
|
ASSETS
|
Current:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
551,166
|
|
|
$
|
192,393
|
|
Marketable securities available for sale
|
|
|
300
|
|
|
|
300
|
|
Restricted funds held in trust
|
|
|
139,207
|
|
|
|
175,093
|
|
Receivables (less allowances of $3,419 and $3,437)
|
|
|
246,210
|
|
|
|
243,791
|
|
Unbilled service receivables
|
|
|
49,123
|
|
|
|
49,468
|
|
Deferred income taxes
|
|
|
36,350
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
124,257
|
|
|
|
123,214
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
1,146,613
|
|
|
|
784,259
|
|
Property, plant and equipment, net
|
|
|
2,497,055
|
|
|
|
2,530,035
|
|
Investments in fixed maturities at market (cost: $26,612 and
$26,620, respectively)
|
|
|
27,112
|
|
|
|
26,737
|
|
Restricted funds held in trust
|
|
|
139,675
|
|
|
|
149,818
|
|
Unbilled service receivables
|
|
|
35,051
|
|
|
|
44,298
|
|
Waste, service and energy contracts, net
|
|
|
200,479
|
|
|
|
223,397
|
|
Other intangible assets, net
|
|
|
86,614
|
|
|
|
83,331
|
|
Goodwill
|
|
|
202,996
|
|
|
|
195,617
|
|
Investments in investees and joint ventures
|
|
|
117,284
|
|
|
|
102,953
|
|
Other assets
|
|
|
291,303
|
|
|
|
139,544
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
4,744,182
|
|
|
$
|
4,279,989
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
Current:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
6,639
|
|
|
$
|
6,922
|
|
Current portion of project debt
|
|
|
179,901
|
|
|
|
198,034
|
|
Accounts payable
|
|
|
27,414
|
|
|
|
24,470
|
|
Deferred revenue
|
|
|
13,565
|
|
|
|
15,202
|
|
Accrued expenses and other current liabilities
|
|
|
175,614
|
|
|
|
215,046
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
403,133
|
|
|
|
459,674
|
|
Long-term debt
|
|
|
1,416,767
|
|
|
|
941,596
|
|
Project debt
|
|
|
779,857
|
|
|
|
880,336
|
|
Deferred income taxes
|
|
|
553,194
|
|
|
|
493,919
|
|
Waste and service contracts
|
|
|
107,970
|
|
|
|
114,532
|
|
Other liabilities
|
|
|
163,236
|
|
|
|
165,881
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
3,424,157
|
|
|
|
3,055,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 14)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
Covanta Holding Corporation stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock ($0.10 par value; authorized
10,000 shares; none issued and outstanding)
|
|
|
|
|
|
|
|
|
Common stock ($0.10 par value; authorized
250,000 shares; issued 155,561 and 154,797 shares;
outstanding 154,889 and 154,280 shares)
|
|
|
15,556
|
|
|
|
15,480
|
|
Additional paid-in capital
|
|
|
892,273
|
|
|
|
832,595
|
|
Accumulated other comprehensive loss
|
|
|
(3,452
|
)
|
|
|
(8,205
|
)
|
Accumulated earnings
|
|
|
381,735
|
|
|
|
349,219
|
|
Treasury stock, at par
|
|
|
(67
|
)
|
|
|
(52
|
)
|
|
|
|
|
|
|
|
|
|
Total Covanta Holding Corporation stockholders equity
|
|
|
1,286,045
|
|
|
|
1,189,037
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interests in subsidiaries
|
|
|
33,980
|
|
|
|
35,014
|
|
|
|
|
|
|
|
|
|
|
Total Equity
|
|
|
1,320,025
|
|
|
|
1,224,051
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity
|
|
$
|
4,744,182
|
|
|
$
|
4,279,989
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed
consolidated financial statements.
5
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(As Adjusted)
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
36,060
|
|
|
$
|
58,656
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
102,660
|
|
|
|
100,164
|
|
Amortization of long-term debt deferred financing costs
|
|
|
2,074
|
|
|
|
1,856
|
|
Amortization of debt premium and discount
|
|
|
(4,382
|
)
|
|
|
(5,547
|
)
|
Non-cash convertible debt related expense
|
|
|
11,097
|
|
|
|
8,827
|
|
Stock-based compensation expense
|
|
|
7,669
|
|
|
|
8,061
|
|
Equity in net income from unconsolidated investments
|
|
|
(11,480
|
)
|
|
|
(12,812
|
)
|
Dividends from unconsolidated investments
|
|
|
2,566
|
|
|
|
15,668
|
|
Deferred income taxes
|
|
|
4,997
|
|
|
|
12,599
|
|
Other, net
|
|
|
2,332
|
|
|
|
6,606
|
|
Decrease (increase) in restricted funds held in trust
|
|
|
6,654
|
|
|
|
(14,018
|
)
|
Change in working capital, net of effects of acquisitions
|
|
|
(22,925
|
)
|
|
|
(18,709
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
137,322
|
|
|
|
161,351
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from the sale of investment securities
|
|
|
4,596
|
|
|
|
18,177
|
|
Purchase of investment securities
|
|
|
(5,544
|
)
|
|
|
(11,106
|
)
|
Purchase of property, plant and equipment
|
|
|
(42,098
|
)
|
|
|
(53,764
|
)
|
Purchase of equity interest
|
|
|
(8,938
|
)
|
|
|
(18,503
|
)
|
Acquisition of businesses, net of cash acquired
|
|
|
(17,517
|
)
|
|
|
(20,128
|
)
|
Loan issued to client community to fund certain facility
improvements
|
|
|
(7,646
|
)
|
|
|
(1,000
|
)
|
Property insurance proceeds
|
|
|
|
|
|
|
6,315
|
|
Other, net
|
|
|
422
|
|
|
|
(146
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(76,725
|
)
|
|
|
(80,155
|
)
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from borrowings on long-term debt
|
|
|
460,000
|
|
|
|
|
|
Proceeds from issuance of warrants
|
|
|
53,958
|
|
|
|
|
|
Purchase of convertible note hedge
|
|
|
(112,378
|
)
|
|
|
|
|
Payment of long-term debt deferred financing costs
|
|
|
(12,650
|
)
|
|
|
|
|
Proceeds from borrowings on project debt
|
|
|
2
|
|
|
|
4,102
|
|
Principal payments on long-term debt
|
|
|
(3,345
|
)
|
|
|
(3,361
|
)
|
Principal payments on project debt
|
|
|
(115,458
|
)
|
|
|
(65,164
|
)
|
Decrease (increase) in restricted funds held in trust
|
|
|
39,856
|
|
|
|
(12,148
|
)
|
Proceeds from the exercise of options for common stock, net
|
|
|
147
|
|
|
|
221
|
|
Financings of insurance premiums, net
|
|
|
(6,259
|
)
|
|
|
(6,911
|
)
|
Distributions to partners of noncontrolling interests in
subsidiaries
|
|
|
(6,085
|
)
|
|
|
(3,746
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
297,788
|
|
|
|
(87,007
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
388
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
358,773
|
|
|
|
(5,700
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
192,393
|
|
|
|
149,406
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
551,166
|
|
|
$
|
143,706
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed
consolidated financial statements.
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Covanta Holding Corporation Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Treasury Stock
|
|
|
Interests in
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Loss
|
|
|
Earnings
|
|
|
Shares
|
|
|
Amount
|
|
|
Subsidiaries
|
|
|
Total
|
|
|
|
(Unaudited, In thousands)
|
|
|
Balance as of December 31, 2008 (As Adjusted)
|
|
|
154,797
|
|
|
$
|
15,480
|
|
|
$
|
832,595
|
|
|
$
|
(8,205
|
)
|
|
$
|
349,219
|
|
|
|
517
|
|
|
$
|
(52
|
)
|
|
$
|
35,014
|
|
|
$
|
1,224,051
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
7,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,669
|
|
Issuance of Warrants
|
|
|
|
|
|
|
|
|
|
|
53,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,846
|
|
Shares forfeited for terminated employees
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
Shares repurchased for tax withholdings for vested stock awards
|
|
|
|
|
|
|
|
|
|
|
(1,909
|
)
|
|
|
|
|
|
|
|
|
|
|
140
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
(1,923
|
)
|
Exercise of options to purchase common stock
|
|
|
25
|
|
|
|
3
|
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147
|
|
Shares issued in non-vested stock award
|
|
|
739
|
|
|
|
73
|
|
|
|
(73
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to partners of noncontrolling interests in
subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,085
|
)
|
|
|
(6,085
|
)
|
Comprehensive income, net of income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,516
|
|
|
|
|
|
|
|
|
|
|
|
3,544
|
|
|
|
36,060
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,507
|
|
|
|
5,855
|
|
SFAS 158 unrecognized net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(84
|
)
|
Net unrealized gain on
available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,753
|
|
|
|
32,516
|
|
|
|
|
|
|
|
|
|
|
|
5,051
|
|
|
|
42,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2009
|
|
|
155,561
|
|
|
$
|
15,556
|
|
|
$
|
892,273
|
|
|
$
|
(3,452
|
)
|
|
$
|
381,735
|
|
|
|
672
|
|
|
$
|
(67
|
)
|
|
$
|
33,980
|
|
|
$
|
1,320,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Covanta Holding Corporation Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Treasury Stock
|
|
|
Interests in
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income
|
|
|
Earnings
|
|
|
Shares
|
|
|
Amount
|
|
|
Subsidiaries
|
|
|
Total
|
|
|
|
(Unaudited, In thousands)
|
|
|
Balance as of December 31, 2007 (As Adjusted)
|
|
|
154,281
|
|
|
$
|
15,428
|
|
|
$
|
821,338
|
|
|
$
|
16,304
|
|
|
$
|
220,259
|
|
|
|
359
|
|
|
$
|
(36
|
)
|
|
$
|
40,773
|
|
|
$
|
1,114,066
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
8,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,061
|
|
Shares forfeited for terminated employees
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
Shares repurchased for tax withholdings for vested stock awards
|
|
|
|
|
|
|
|
|
|
|
(3,706
|
)
|
|
|
|
|
|
|
|
|
|
|
137
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
(3,720
|
)
|
Exercise of options to purchase common stock
|
|
|
16
|
|
|
|
2
|
|
|
|
220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
222
|
|
Shares issued in non-vested stock award
|
|
|
491
|
|
|
|
49
|
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to partners of noncontrolling interests in
subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,746
|
)
|
|
|
(3,746
|
)
|
Comprehensive (loss) income, net of income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,562
|
|
|
|
|
|
|
|
|
|
|
|
4,094
|
|
|
|
58,656
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,254
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,852
|
)
|
|
|
(3,106
|
)
|
SFAS 158 unrecognized net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(339
|
)
|
Net unrealized gain on
available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(372
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(372
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,965
|
)
|
|
|
54,562
|
|
|
|
|
|
|
|
|
|
|
|
2,242
|
|
|
|
54,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2008
|
|
|
154,788
|
|
|
$
|
15,479
|
|
|
$
|
825,865
|
|
|
$
|
14,339
|
|
|
$
|
274,821
|
|
|
|
508
|
|
|
$
|
(51
|
)
|
|
$
|
39,269
|
|
|
$
|
1,169,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed
consolidated financial statements.
7
|
|
Note 1.
|
Organization
and Basis of Presentation
|
The terms we, our, ours,
us and Company refer to Covanta Holding
Corporation and its subsidiaries; the term Covanta
Energy refers to our subsidiary Covanta Energy Corporation
and its subsidiaries.
Organization
We are a leading developer, owner and operator of infrastructure
for the conversion of waste to energy (known as
energy-from-waste), as well as other waste disposal
and renewable energy production businesses in the Americas,
Europe and Asia. We conduct all of our operations through
subsidiaries which are engaged predominantly in the businesses
of waste and energy services. We also engage in the independent
power production business outside the Americas.
We own, have equity investments in,
and/or
operate 60 energy generation facilities, 50 of which are in the
United States and 10 of which are located outside the United
States. Our energy generation facilities use a variety of fuels,
including municipal solid waste, wood waste (biomass), landfill
gas, water (hydroelectric), natural gas, coal, and heavy
fuel-oil. We also own or operate several businesses that are
associated with our energy-from-waste business, including a
waste procurement business, a biomass procurement business, four
landfills, which we use primarily for ash disposal, and several
waste transfer stations. We have two reportable segments,
Domestic and International, which are comprised of our domestic
and international waste and energy services operations,
respectively.
Basis of
Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with United States
generally accepted accounting principles (GAAP) and
with the instructions to
Form 10-Q
and Article 10 of
Regulation S-X.
Accordingly, they do not include all information and footnotes
required by GAAP for complete financial statements. In the
opinion of management, all adjustments (including normal
recurring accruals) considered necessary for fair presentation
have been included in our financial statements. Operating
results for the interim period are not necessarily indicative of
the results that may be expected for the fiscal year ended
December 31, 2009. This
Form 10-Q
should be read in conjunction with the Audited Consolidated
Financial Statements and accompanying Notes to the Consolidated
Financial Statements in our
Form 8-K
for the year ended December 31, 2008 filed on May 18,
2009.
We use the equity method to account for our investments for
which we have the ability to exercise significant influence over
the operating and financial policies of the investee.
Consolidated net income includes our proportionate share of the
net income or loss of these companies. Such amounts are
classified as equity in net income from unconsolidated
investments in our condensed consolidated financial
statements. Investments in companies in which we do not have the
ability to exercise significant influence are carried at the
lower of cost or estimated realizable value. We monitor
investments for other than temporary declines in value and make
reductions when appropriate.
All intercompany accounts and transactions have been eliminated.
Significant events which occurred subsequent to June 30,
2009 but prior to July 22, 2009, the filing date of this
report, have been disclosed in Note 15. Subsequent Events.
Effective January 1, 2009, we adopted the following
pronouncements which require us to retrospectively restate
previously disclosed condensed consolidated financial
statements. Certain prior period amounts have thus been
reclassified in the unaudited condensed consolidated financial
statements to conform to the current period presentation.
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|
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|
|
We adopted Statement of Financial Accounting Standards
(SFAS) No. 160, Noncontrolling Interests
in Consolidated Financial Statements an amendment of
Accounting Research Bulletin (ARB) No. 51
(SFAS 160). SFAS 160 amends the accounting
and reporting for noncontrolling interests in a consolidated
subsidiary and the deconsolidation of a subsidiary. Under
SFAS 160, we now report minority interests in
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8
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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|
|
|
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subsidiaries (now referred to as noncontrolling interests
in subsidiaries) as a separate component of equity in our
condensed consolidated financial statements and show both net
income attributable to the noncontrolling interest and net
income attributable to the controlling interest on the face of
the condensed consolidated income statement. SFAS 160
applies prospectively, except for presentation and disclosure
requirements, which are applied retrospectively.
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|
|
|
|
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We adopted Financial Accounting Standards Board
(FASB) Staff Position (FSP) No. APB
14-1,
Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement) (FSP APB
14-1).
FSP APB 14-1
is effective for our $373.8 million aggregate principal
amount of 1.00% Senior Convertible Debentures (the
Debentures) and requires retrospective application
for all periods presented. The FSP requires the issuer of
convertible debt instruments with cash settlement features to
separately account for the liability ($276.0 million as of
the date of the issuance of the Debentures) and equity
components ($97.8 million as of the date of the issuance of
the Debentures) of the instrument. The debt component was
recognized at the present value of its cash flows discounted
using a 7.25% discount rate, our borrowing rate at the date of
the issuance of the Debentures for a similar debt instrument
without the conversion feature. The equity component, recorded
as additional paid-in capital, was $56.1 million, which
represents the difference between the proceeds from the issuance
of the Debentures and the fair value of the liability, net of
deferred taxes of $41.7 million as of the date of the
issuance of the Debentures. For additional information, see
Note 6. Changes in Capitalization.
|
FSP APB 14-1
also requires accretion of the resultant debt discount over the
expected life of the Debentures, which is February 1, 2007
to February 1, 2012, based on the first permitted
redemption date of the Debentures. The condensed consolidated
income statements were retrospectively modified compared to
previously reported amounts as follows (in millions, except per
share amounts):
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|
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|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
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June 30, 2008
|
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|
June 30, 2008
|
|
|
Additional pre-tax non-cash convertible debt related expense
|
|
$
|
(4.5
|
)
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|
$
|
(8.8
|
)
|
Additional deferred tax benefit
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1.9
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3.7
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|
|
|
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Retrospective change in net income and retained earnings
|
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$
|
(2.6
|
)
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$
|
(5.1
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)
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|
|
|
|
|
|
|
|
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Change to basic earnings per share
|
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$
|
(0.01
|
)
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$
|
(0.03
|
)
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|
|
|
|
|
|
|
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Change to diluted earnings per share
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$
|
(0.02
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)
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$
|
(0.04
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)
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|
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For the three and six months ended June 30, 2009, the
additional pre-tax non-cash convertible debt related expense
recognized in our condensed consolidated income statement
related to the adoption of FSP APB
14-1 was
$4.8 million and $9.5 million, respectively.
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Note 2.
|
Recent
Accounting Pronouncements
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In June 2009, the FASB issued SFAS No. 168, The
FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles a
replacement of FASB Statement No. 162
(SFAS 168). The FASB Accounting Standards
Codification (Codification) will become the source
of authoritative U.S. GAAP recognized by the FASB to be
applied by nongovernmental entities. Rules and interpretive
releases of the Securities and Exchange Commission
(SEC) under authority of federal securities laws are
also sources of authoritative GAAP for SEC registrants. The
Codification will supersede all then-existing non-SEC accounting
and reporting standards. SFAS 168 is effective for our
financial statements issued for interim and annual periods
commencing with the quarterly period ended September 30,
2009. In the FASBs view, the issuance of SFAS 168 and
the Codification will not change GAAP, and therefore we do not
expect the adoption of SFAS 168 to have an effect on our
financial statements or disclosures.
9
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In June 2009, the FASB issued SFAS No. 167,
Amendments to FASB Interpretation No. 46(R)
(SFAS 167), which is a revision to FASB
Interpretation No. 46(R), Consolidation of Variable
Interest Entities. SFAS 167 changes how a company
determines when an entity that is insufficiently capitalized or
when an entity is not controlled through voting (or similar
rights) should be consolidated. The determination of whether a
company is required to consolidate an entity is based on, among
other things, an entitys purpose and design and a
companys ability to direct the activities of the entity
that most significantly impact the entitys economic
performance. SFAS 167 is effective for us on
January 1, 2010. We do not expect the adoption of
SFAS 167 to have a material impact on our consolidated
financial statements and we are continuing to assess the
potential effects of this pronouncement.
In June 2009, the FASB issued SFAS No. 166,
Accounting for Transfers of Financial Assets
(SFAS 166), which is a revision to
SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities. SFAS 166 requires more information about
transfers of financial assets, including securitization
transactions and risks related to transferred financial assets.
SFAS 166 eliminates the concept of a qualifying
special-purpose entity, changes the requirements for
derecognizing financial assets, and requires additional
disclosures. SFAS 166 is effective for us on
January 1, 2010. We do not expect the adoption of
SFAS 166 to have a material impact on our consolidated
financial statements and we are continuing to assess the
potential effects of this pronouncement.
In December 2008, the FASB issued FSP
SFAS No. 132R-1,
Employers Disclosures about Postretirement Benefit
Plan Assets (FSP
SFAS 132R-1)
which significantly expands the disclosures required by
employers for postretirement plan assets. The FSP requires plan
sponsors to provide extensive new disclosures about assets in
defined benefit postretirement benefit plans as well as any
concentrations of associated risks. In addition, the FSP
requires new disclosures similar to those in
SFAS No. 157, Fair Value Measurements
(SFAS 157), in terms of the three-level fair
value hierarchy. The disclosure requirements are annual and do
not apply to interim financial statements and are required by us
in disclosures related to the year ended December 31, 2009.
We do expect the adoption of FSP
SFAS 132R-1
to result in additional annual financial reporting disclosures
and we are continuing to assess the potential effects of this
pronouncement.
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|
Note 3.
|
Acquisitions,
Business Development and Dispositions
|
Acquisitions made prior to December 31, 2008 were accounted
for in accordance with SFAS No. 141, Business
Combinations (SFAS 141). Effective
January 1, 2009, all business combinations are accounted
for in accordance with SFAS No. 141 (revised 2007),
Business Combinations (SFAS 141R).
In April 2009, the FASB issued FSP SFAS 141(R)-1,
Accounting for Assets Acquired and Liabilities Assumed in
a Business Combination that Arise from Contingencies
(FSP SFAS 141(R)-1). The FSP amends SFAS 141R
to require that assets acquired and liabilities assumed in a
business combination that arise from contingencies (referred to
as pre-acquisition contingencies) be recognized at
fair value, in accordance with SFAS 157, if the fair value
can be determined during the measurement period. If the fair
value of a pre-acquisition contingency cannot be determined
during the measurement period, the FSP requires that the
contingency be recognized at the acquisition date in accordance
with SFAS No. 5, Accounting for
Contingencies, and FASB Interpretation No. 14,
Reasonable Estimation of the Amount of a Loss, if it
meets the criteria for recognition in that guidance. FSP
SFAS 141(R)-1 has the same effective date as SFAS 141R,
which was effective for us for business combinations for which
the acquisition date is on or after January 1, 2009.
Our growth strategy includes the acquisition of waste and energy
related businesses located in markets with significant growth
opportunities and the development of new projects and expansion
of existing projects. We will also consider acquiring or
developing new technologies and businesses that are
complementary with our existing renewable energy and waste
services business. Acquisitions are accounted for under the
purchase method of accounting. The results of operations reflect
the period of ownership of the acquired businesses, business
development projects and dispositions. The acquisitions in the
section below are not material to our condensed
10
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
consolidated financial statements individually or in the
aggregate and therefore, disclosures of pro forma financial
information have not been presented.
Acquisitions
and Business Development
Domestic
Detroit
Michigan Energy-from-Waste Facility
On June 30, 2009, our long-term operating contract with the
Greater Detroit Resource Recovery Authority (GDRRA)
to operate the 2,832 tons per day (tpd)
energy-from-waste facility located in Detroit, Michigan (the
Detroit Facility) expired. Effective June 30,
2009, we entered into the following transactions, which extend
our interest in the Detroit Facility:
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We purchased an undivided 30% owner participant interest in the
Detroit Facility and final working capital for total cash
consideration of approximately $7.9 million.
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|
|
|
We entered into an operating and maintenance agreement with
owners of the Detroit Facility, pursuant to which we will
operate, maintain and provide certain other services for the
owners at the Detroit Facility for a term of one year.
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|
|
|
We entered into a waste disposal agreement with GDRRA pursuant
to which we will dispose of the waste of the City of Detroit for
a term of at least one year. The term of the waste disposal
agreement will automatically renew for successive one-year terms
unless either party provides advance written notice of
termination in accordance with the provisions thereof. In
addition, as an owner participant we have the right, on one or
more occasions, to call upon GDRRA to deliver the waste of the
City of Detroit to the Detroit Facility at
market-based
rates. The call right continues for the duration of the
participation agreement, which expires in 2035.
|
We have not finalized negotiation of pricing for a new steam
agreement for the Detroit Facility. Securing a steam agreement
with appropriate pricing is important for the long-term economic
viability of the Detroit Facility.
Philadelphia
Transfer Stations
On May 1, 2009, we acquired two waste transfer stations
with combined capacity of 4,500 tpd in Philadelphia,
Pennsylvania for cash consideration of approximately
$17.5 million, subject to final working capital
adjustments. The preliminary purchase price allocation, which
includes $5.9 million of identifiable intangible assets
primarily related to customer relationships and goodwill of
approximately $1.3 million, is based on estimates and
assumptions, any changes to which could affect the reported
amounts of assets, liabilities and expenses resulting from this
acquisition.
Maine
Biomass Energy Facilities
On December 22, 2008, we acquired Indeck Maine Energy, LLC
which owned and operated two biomass energy facilities. The two
nearly identical facilities, located in West Enfield and
Jonesboro, Maine, added a total of 49 gross megawatts
(MW) to our renewable energy portfolio. We sell the
electric output and renewable energy credits from these
facilities into the New England market. We acquired these two
facilities for cash consideration of approximately
$53.4 million, net of cash acquired, inclusive of final
working capital adjustments. There were no amounts allocated to
goodwill or other intangible assets in the final purchase price
allocation.
Kent
County, Michigan Energy-from-Waste Facility
On December 4, 2008, we entered into a new tip fee contract
with Kent County in Michigan which commenced on January 1,
2009 and extended the existing contract from 2010 to 2023. This
contract is expected to supply waste utilizing most or all of
the facilitys capacity. Previously this was a service fee
contract.
11
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Pasco
County, Florida Energy-from-Waste Facility
On September 23, 2008, we entered into a new service fee
contract with the Pasco County Commission in Florida which
commenced on January 1, 2009 and extended the existing
contract from 2011 to 2016.
Indianapolis
Energy-from-Waste Facility
On July 25, 2008, we entered into a new tip fee contract
with the City of Indianapolis for a term of 10 years which
commenced upon expiration of the existing service fee contract
in December 2008. This contract represents approximately 50% of
the facilitys capacity.
Tulsa
Energy-from-Waste Facility
On June 2, 2008, we acquired an energy-from-waste facility
in Tulsa, Oklahoma for cash consideration of approximately
$12.7 million. The design capacity of the facility is 1,125
tpd of waste and gross electric capacity of 16.5 MW. This
facility was shut down by the prior owner in the summer of 2007
and we returned two of the facilitys three boilers to
service in November 2008. Since the acquisition of this
energy-from-waste facility, we have invested approximately
$5.3 million in capital improvements to restore its
operational performance.
Peabody
Landfill
On May 20, 2008, we acquired a landfill for the disposal of
ash in Peabody, Massachusetts from Peabody Monofill Associates,
Inc. and others for cash consideration of approximately
$7.4 million.
Alternative
Energy Technology Development
We have entered into various agreements with multiple partners
to invest in the development, testing or licensing of new
technologies related to the transformation of waste materials
into renewable fuels or the generation of energy. Initial
licensing fees and demonstration unit purchases approximated
$6.5 million and $1.4 million during the year ended
December 31, 2008 and six months ended June 30, 2009,
respectively.
Harrisburg
Energy-from-Waste Facility
In February 2008, we entered into a ten year agreement to
maintain and operate an 800 tpd energy-from-waste facility
located in Harrisburg, Pennsylvania. Under the agreement, we
have a right of first refusal to purchase the facility. We also
have agreed to provide construction management services and to
advance up to $25.5 million in funding for certain facility
improvements required to enhance facility performance, the
repayment of which is guaranteed by the City of Harrisburg. We
have advanced $15.9 million as of June 30, 2009 under
this funding arrangement. The facility improvements are expected
to be completed in the second half of 2009. On July 1,
2009, the first repayment installment on the advance was due but
not paid. We are pursuing efforts to collect the past due
amount, and to ensure that other amounts we have advanced will
be repaid when due.
Hillsborough
County Energy-from-Waste Facility
We designed, constructed, and now operate and maintain the 1,200
tpd mass-burn energy-from-waste facility located in and owned by
Hillsborough County in Florida. In 2005, we entered into
agreements with Hillsborough County to implement an expansion of
this energy-from-waste facility, and to extend the agreement
under which we operate the facility through 2027. Completion of
the expansion, and commencement of the operation of the expanded
project, is expected in the second half of 2009.
International
China
Joint Ventures and Energy-from-Waste Facilities
On April 2, 2008, our project joint venture with Chongqing
Iron & Steel Company (Group) Limited received an award
to build, own, and operate an 1,800 metric tpd energy-from-waste
facility for Chengdu Municipality, in Sichuan Province,
Peoples Republic of China. On June 25, 2008, the
projects 25 year waste concession agreement was
executed. In connection with this project, we invested
$17.1 million for a 49% equity interest in the project
joint
12
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
venture company. The joint venture has obtained project
financing for Rmb 480 million for the project, which we
expect to be 49% guaranteed by us and 51% guaranteed by
Chongqing Iron & Steel Company (Group) Limited until
the project has been constructed and for one year after
operations commence. The Chengdu project is expected to commence
construction in the third quarter of 2009.
In December 2008, we entered into an agreement with Beijing
Baoluo Investment Co., Ltd. (Beijing Baoluo) to
purchase a direct 58% equity interest in the Fuzhou project, a
1,200 metric tpd 24 MW mass-burn energy-from-waste project
in China for approximately $14 million. We currently hold a
noncontrolling interest in this project. This purchase was
conditional upon various regulatory and other conditions
precedent and was expected to close in the second quarter of
2009. Conditions required for closing were not achieved and
Beijing Baoluo informed us that it no longer desired to proceed
to closing the sale. We continue to hold a noncontrolling
interest in this project.
On March 24, 2009, our joint venture Taixing Covanta
Yanjiang Cogeneration Co., Ltd. of which we own 85%, entered
into a 25 year concession agreement and waste supply
agreements to build, own and operate a 350 metric tpd
energy-from-waste facility for Taixing Municipality, in Jiangsu
Province, Peoples Republic of China. The project, which
will be built on the site of our existing coal-fired facility in
Taixing, will supply steam to an adjacent industrial park under
short-term arrangements. The Taixing project is expected to
commence construction in the second half of 2009 and be
completed in 2011.
Dublin
Joint Venture
On September 6, 2007, we entered into definitive agreements
to build, own, and operate a 1,700 metric tpd energy-from-waste
project serving the City of Dublin, Ireland and surrounding
communities. The Dublin project is being developed and will be
owned by Dublin Waste to Energy Limited, which we control and
co-own with DONG Energy Generation A/S. Project construction,
which is expected to start in the second half of 2009, is
estimated to cost approximately 350 million and is
expected to require 36 months to complete, once full
construction commences. Dublin Waste to Energy Limited has a
25-year tip
fee type contract to provide disposal service for approximately
320,000 metric tons of waste annually. The project is expected
to sell electricity into the local electricity grid under
short-term arrangements. We and DONG Energy Generation A/S have
committed to provide financing for all phases of the project,
and we expect to utilize debt financing for the project. The
primary approvals and licenses for the project have been
obtained, and any remaining consents, approvals and conditions
necessary to begin full construction are expected to be obtained
in due course. We have begun to perform preliminary
on-site work
and expect to commence full construction in the second half of
2009.
Dispositions
International
In April 2009, we entered into agreements to terminate our joint
venture with Guangzhou Development Power Investment Co., Ltd.
(GDPI) and to sell our 40% equity interest in the
joint venture entity, Guangzhou Development Covanta
Environmental Energy Co., Ltd., at book value to an affiliate of
GDPI for approximately $1.2 million. The termination and
sale are conditional upon various regulatory and other
conditions precedent and is expected to close later this year.
Notwithstanding the termination and sale, we intend to continue
to cooperate with GDPI on the development of energy-from-waste
projects in Guangdong Province, Peoples Republic of China
on a project by project basis.
13
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 4.
|
Earnings
Per Share
|
Per share data is based on the weighted average number of
outstanding shares of our common stock, par value $0.10 per
share, during the relevant period. Basic earnings per share are
calculated using only the weighted average number of outstanding
shares of common stock. Diluted earnings per share computations,
as calculated under the treasury stock method, include the
weighted average number of shares of additional outstanding
common stock issuable for stock options, restricted stock,
rights and warrants whether or not currently exercisable.
Diluted earnings per share for all the periods presented does
not include securities if their effect was anti-dilutive (in
thousands, except per share amounts).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Net income attributable to Covanta Holding Corporation
|
|
$
|
33,167
|
|
|
$
|
42,299
|
|
|
$
|
32,516
|
|
|
$
|
54,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares outstanding
|
|
|
153,731
|
|
|
|
153,387
|
|
|
|
153,600
|
|
|
|
153,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.22
|
|
|
$
|
0.28
|
|
|
$
|
0.21
|
|
|
$
|
0.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares outstanding
|
|
|
153,731
|
|
|
|
153,387
|
|
|
|
153,600
|
|
|
|
153,276
|
|
Dilutive effect of stock options
|
|
|
412
|
|
|
|
745
|
|
|
|
433
|
|
|
|
682
|
|
Dilutive effect of restricted stock
|
|
|
810
|
|
|
|
716
|
|
|
|
813
|
|
|
|
752
|
|
Dilutive effect of convertible debentures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding
|
|
|
154,953
|
|
|
|
154,848
|
|
|
|
154,846
|
|
|
|
154,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.21
|
|
|
$
|
0.27
|
|
|
$
|
0.21
|
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options excluded from the weighted average dilutive common
shares outstanding because their inclusion would have been
antidilutive
|
|
|
1,981
|
|
|
|
300
|
|
|
|
1,981
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards excluded from the weighted average
dilutive common shares outstanding because their inclusion would
have been antidilutive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Note 1. Organization and Basis of Presentation for a
discussion of the retrospective accounting change resulting from
the adoption of FSP APB
14-1
effective January 1, 2009.
On May 22, 2009, we entered into privately negotiated
warrant transactions in connection with the issuance of 3.25%
Cash Convertible Senior Notes due 2014. These warrants could
have a dilutive effect to the extent that the price of our
common stock exceeds the applicable strike price of the
warrants. As of June 30, 2009, the warrants did not have a
dilutive effect on earnings per share. See Note 6. Changes
in Capitalization.
On January 31, 2007, we issued 1.00% Senior
Convertible Debentures due 2027. The Debentures are convertible
under certain circumstances if the closing sale price of our
common stock exceeds a specified conversion price before
February 1, 2025. As of June 30, 2009, the Debentures
did not have a dilutive effect on earnings per share.
14
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 5.
|
Financial
Information by Business Segments
|
We have two reportable segments, Domestic and International,
which are comprised of our domestic and international waste and
energy services operations, respectively. The results of our
reportable segments are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable Segments
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
International
|
|
|
All Other(1)
|
|
|
Total
|
|
|
Three Months Ended June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
329,455
|
|
|
$
|
41,506
|
|
|
$
|
4,825
|
|
|
$
|
375,786
|
|
Operating income (loss)
|
|
|
59,804
|
|
|
|
2,039
|
|
|
|
(511
|
)
|
|
|
61,332
|
|
Three Months Ended June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
350,729
|
|
|
$
|
69,152
|
|
|
$
|
3,115
|
|
|
$
|
422,996
|
|
Operating income (loss)
|
|
|
73,553
|
|
|
|
3,506
|
|
|
|
(530
|
)
|
|
|
76,529
|
|
Six Months Ended June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
642,628
|
|
|
$
|
83,043
|
|
|
$
|
8,875
|
|
|
$
|
734,546
|
|
Operating income (loss)
|
|
|
64,239
|
|
|
|
1,180
|
|
|
|
(895
|
)
|
|
|
64,524
|
|
Six Months Ended June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
674,013
|
|
|
$
|
131,931
|
|
|
$
|
5,818
|
|
|
$
|
811,762
|
|
Operating income (loss)
|
|
|
98,907
|
|
|
|
9,344
|
|
|
|
(957
|
)
|
|
|
107,294
|
|
|
|
|
(1) |
|
All other is comprised of our insurance subsidiaries
operations. |
|
|
Note 6.
|
Changes
in Capitalization
|
Short-Term
Liquidity
The credit facilities are comprised of a $300 million
revolving credit facility (the Revolving Loan
Facility), a $320 million funded letter of credit
facility (the Funded L/C Facility), and a
$650 million term loan (the Term Loan Facility)
(collectively referred to as the Credit Facilities).
As of June 30, 2009, we were in compliance with all
required covenants and had available credit for liquidity as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Outstanding Letters
|
|
|
|
|
Available
|
|
|
|
of Credit as of
|
|
Available as of
|
|
|
Under Facility
|
|
Maturing
|
|
June 30, 2009
|
|
June 30, 2009
|
|
Revolving Loan Facility(1)
|
|
$
|
300,000
|
|
|
|
2013
|
|
|
$
|
|
|
|
$
|
300,000
|
|
Funded L/C Facility
|
|
$
|
320,000
|
|
|
|
2014
|
|
|
$
|
283,031
|
|
|
$
|
36,969
|
|
|
|
|
(1) |
|
Up to $200 million of which may be utilized for letters of
credit. |
In July 2009, the 6.8% pro rata commitment previously provided
by Lehman Brothers Commercial Bank under the Revolving Loan
Facility was assigned to another financial institution.
15
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Long-Term
Debt
Long-term debt is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
3.25% Cash Convertible Senior Notes due 2014
|
|
$
|
460,000
|
|
|
$
|
|
|
Debt discount related to Cash Convertible Senior Notes
|
|
|
(122,206
|
)
|
|
|
|
|
Cash conversion option derivative at fair value
|
|
|
130,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.25% Cash Convertible Senior Notes, net
|
|
|
468,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.00% Senior Convertible Debentures due 2027
|
|
|
373,750
|
|
|
|
373,750
|
|
Debt discount related to Convertible Debentures
|
|
|
(54,880
|
)
|
|
|
(64,369
|
)
|
|
|
|
|
|
|
|
|
|
1.00% Senior Convertible Debentures, net
|
|
|
318,870
|
|
|
|
309,381
|
|
|
|
|
|
|
|
|
|
|
Term Loan Facility due 2014
|
|
|
635,375
|
|
|
|
638,625
|
|
Other long-term debt
|
|
|
416
|
|
|
|
512
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,423,406
|
|
|
|
948,518
|
|
Less: current portion
|
|
|
(6,639
|
)
|
|
|
(6,922
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
1,416,767
|
|
|
$
|
941,596
|
|
|
|
|
|
|
|
|
|
|
3.25%
Cash Convertible Senior Notes due 2014
On May 22, 2009, we issued $400 million aggregate
principal amount of 3.25% Cash Convertible Senior Notes (the
Notes) due 2014 in a private transaction exempt from
registration under the Securities Act of 1933, as amended. On
June 15, 2009, we issued an additional $60 million
aggregate principal amount of Notes upon exercise in full of an
over-allotment option we granted as part of the private
offering. We have used and will use the net proceeds from the
offering, together with the proceeds from the warrant
transactions discussed below, for general corporate purposes,
which may include capital expenditures, potential permitted
investments or permitted acquisitions.
The Notes constitute general unsecured senior obligations and
rank equally in right of payment with our existing and future
senior unsecured indebtedness. The Notes are effectively junior
to our existing and future secured indebtedness to the extent of
the value of the assets securing such indebtedness. The Notes
are not guaranteed by any of our subsidiaries and are
effectively subordinated to all existing and future indebtedness
and liabilities (including trade payables) of our subsidiaries.
The Notes bear interest at a rate of 3.25% per year, payable
semi-annually in arrears, on June 1 and December 1 of each year,
commencing on December 1, 2009, and will mature on
June 1, 2014. Under limited circumstances, we may be
required to pay contingent interest on the Notes as a result of
failure to comply with the reporting obligations in the
indenture, failure to file required SEC documents and reports or
if the holders cannot freely trade the Notes. When applicable,
the contingent interest payable per $1,000 principal amount of
Notes ranges from 0.25% to 0.50% per annum over the applicable
term as provided under the indenture for the Notes. The
contingent interest features of the Notes are embedded
derivative instruments. The fair value of the contingent
interest features of the Notes was zero as of June 30, 2009.
Under limited circumstances described below, the Notes are
convertible by the holders thereof into cash only, based on an
initial conversion rate of 53.9185 shares of our common
stock per $1,000 principal amount of Notes (which represents an
initial conversion price of approximately $18.55 per share)
subject to certain customary adjustments as provided in the
indenture for the Notes. We will not deliver common stock (or
any other securities)
16
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
upon conversion under any circumstances. Holders may convert
their Notes only under the following circumstances:
|
|
|
|
|
prior to March 1, 2014, on any date during any fiscal
quarter commencing at any time after June 30, 2009 and only
during such fiscal quarter if the closing sale price of our
common stock for at least 20 trading days during the period of
30 consecutive trading days ending on the last trading day of
the immediately preceding fiscal quarter is greater than or
equal to 130% of the then effective conversion price; or
|
|
|
|
upon the occurrence of specified corporate transactions (as
provided in the indenture for the Notes); or
|
|
|
|
upon certain fundamental changes (as defined in the indenture
for the Notes in which case the conversion rate will be
increased as provided in the indenture); or
|
|
|
|
during the five consecutive business day period following any
five consecutive
trading-day
period in which the trading price for the Notes for each day
during such
five-day
period was less than 95% of the product of the closing sale
price of our common stock on such day multiplied by the then
effective conversion rate; or
|
|
|
|
at any time on or after March 1, 2014.
|
The Notes are also subject to repurchase by us, at the
holders option, if a fundamental change occurs, for cash
at a repurchase price equal to 100% of the principal amount of
the Notes, plus accrued and unpaid interest (including
contingent interest, if any).
The Notes are recognized as long-term debt in our condensed
consolidated financial statements. The difference between the
face value of the Notes ($460.0 million as of the date of
issuance of the Notes) and the amount recognized in the
financial statements ($335.6 million as of the date of the
issuance of the Notes) is the debt discount ($124.4 million
as of the date of the issuance of the Notes) which is accreted
to the Notes over its life and recognized as non-cash
convertible debt related expense. For both the three and six
months ended June 30, 2009, the pre-tax non-cash
convertible debt related expense recognized in our condensed
consolidated income statement related to the Notes was
$2.2 million.
The Notes are convertible into cash only, and therefore the cash
conversion option that is part of the Notes is accounted for as
a derivative under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities
(SFAS 133). The initial valuation of the cash
conversion option (the Cash Conversion Option) is an
embedded derivative of $124.4 million, which is recognized
as long-term debt in our condensed consolidated financial
statements. The Cash Conversion Option is recorded at fair value
quarterly with any change in fair value being recognized in our
condensed consolidated income statement as non-cash convertible
debt related expense. As of June 30, 2009, the fair value
of the Cash Conversion Option was $131.0 million. See
Note 11. Financial Instruments and Note 12. Derivative
Instruments for additional information regarding the Cash
Conversion Option.
In connection with the Notes offering, we entered into privately
negotiated cash convertible note hedge transactions (the
Note Hedge) with affiliates of certain of the
initial purchasers of the Notes (the Option
Counterparties) that are expected to reduce our exposure
to potential cash payments in excess of the principal amount of
the Notes that may be required to be made by us upon the cash
conversion of the Notes. The Note Hedge consisted of our
purchase for $112.4 million of cash settled call options on
our common stock (initially correlating to the same number of
shares as those initially underlying the Notes subject to
generally similar customary adjustments) that have economic
characteristics similar to those of the Cash Conversion Option
embedded in the Notes. The Note Hedge was recorded as a
noncurrent asset in our condensed consolidated financial
statements for $112.4 million. The Note Hedge is also
accounted for as a derivative instrument under SFAS 133 and
as such, is recorded at fair value quarterly with any change in
fair value being recognized in our condensed consolidated income
statement as non-cash convertible debt related expense. As of
June 30, 2009, the fair value of the Note Hedge was
$119.5 million. See Note 11. Financial Instruments and
Note 12. Derivative Instruments for additional information
regarding the Note Hedge.
17
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We expect the gain or loss from the Note Hedge to substantially
offset the gain or loss associated with changes to the valuation
of the Cash Conversion Option. Accordingly, we do not expect
there to be a material net impact to our condensed consolidated
statement of income as a result of our issuing the Notes and
entering into the Note Hedge transactions.
In connection with the Notes offering, we also sold warrants
(the Warrants) to the Option Counterparties, in
privately negotiated transactions, initially correlating to the
same number of shares as those initially underlying the Notes,
which could have a dilutive effect to the extent that the market
price of our common stock exceeds the then effective strike
price of the Warrants. The Warrants were sold for aggregate
proceeds of $54.0 million. The strike price of the Warrants
is approximately $25.74 per share and is subject to customary
adjustments. The Warrants are exercisable only at expiration in
equal tranches over 60 days beginning on September 2,
2014 and ending on November 26, 2014. The Warrants are only
net share settled which means that, with respect to any exercise
date, we will deliver to the Warrant holders a number of shares
for each warrant equal to the excess (if any) of the volume
weighted average price of the shares on the exercise date over
the then effective strike price of the Warrants, divided by such
volume weighted average price of the shares, with a cash payment
in lieu of fractional shares. Accordingly, the Warrants have
been recorded as additional paid-in capital in our condensed
consolidated financial statements for $54.0 million. The
Warrant transactions also meet the definition of a derivative
under SFAS 133. However, because the Warrant transactions
are indexed to our common stock and are recorded in equity in
our condensed consolidated balance sheets, the Warrant
transactions are exempt from the scope of SFAS 133 and will
not be subject to the fair value provisions of SFAS 133.
Net proceeds from the above transactions were
$388.9 million, consisting of gross proceeds of
$460.0 million from the Notes and $54.0 million of
proceeds from the Warrants, less the $112.4 million
purchase price for the Note Hedge and $12.7 million of
purchase discounts and other offering expenses.
The Note Hedge transactions and the Warrant transactions are
separate transactions, each of which we have entered into with
the Option Counterparties, and are not part of the terms of the
Notes and will not affect any rights of holders under the
Notes. Holders of the Notes do not have any rights with respect
to the Note Hedge transactions or Warrant transactions.
1.00% Senior
Convertible Debentures due 2027
See Note 1. Organization and Basis of Presentation for a
discussion of the liability component associated with the
Debentures and the retrospective accounting change resulting
from the adoption of FSP APB
14-1
effective January 1, 2009.
Under limited circumstances, prior to February 1, 2025, the
Debentures are convertible by the holders into cash and shares
of our common stock, if any, initially based on a conversion
rate of 35.4610 shares of our common stock per $1,000
principal amount of Debentures, (which represents an initial
conversion price of approximately $28.20 per share) or
13,253,867 issuable shares. As of June 30, 2009, if the
Debentures were converted, no shares would have been issued
since the trading price of our common stock was below the
conversion price of the Debentures.
For specific criteria related to contingent interest, conversion
or redemption features of the Debentures, refer to Note 6
of the Notes to Consolidated Financial Statements in our
Form 8-K
for the year ended December 31, 2008 filed on May 18,
2009.
Debt
discount for the Debentures and the Notes
The debt discount related to the Debentures and the debt
discount related to the Notes is accreted over their respective
terms and recognized as non-cash convertible debt related
expense. The accretion of debt discount
18
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
expected to be included in our condensed consolidated financial
statements is as follows for each of the periods indicated (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
2014
|
|
Pre-tax increase in non-cash convertible debt related expense
for the Debentures
|
|
$
|
19.3
|
|
|
$
|
20.8
|
|
|
$
|
22.3
|
|
|
$
|
1.9
|
|
|
$
|
|
|
|
$
|
|
|
Pre-tax increase in non-cash convertible debt related expense
for the Notes
|
|
$
|
11.9
|
|
|
$
|
21.3
|
|
|
$
|
23.5
|
|
|
$
|
26.0
|
|
|
$
|
28.8
|
|
|
$
|
12.9
|
|
Equity
During the six months ended June 30, 2009, we awarded
grants for 739,712 shares of restricted stock awards. See
Note 10. Stock-Based Compensation.
During the six months ended June 30, 2009, we did not
repurchase shares of our common stock under the repurchase
program authorized in September 2008.
See Note 1. Organization and Basis of Presentation for a
discussion of the equity component associated with the
Debentures and the retrospective accounting change resulting
from the adoption of FSP APB
14-1
effective January 1, 2009.
We record our interim tax provision based upon our estimated
annual effective tax rate and account for the tax effects of
discrete events in the period in which they occur. We file a
federal consolidated income tax return with our eligible
subsidiaries. Our federal consolidated income tax return also
includes the taxable results of certain grantor trusts described
below.
We currently estimate our annual effective tax rate, including
discrete items, for the year ended December 31, 2009 to be
approximately 36.3%. We review the annual effective tax rate on
a quarterly basis as projections are revised. The effective
income tax rate was 37.2% and 39.6% for the six months ended
June 30, 2009 and 2008, respectively. The liability for
uncertain tax positions, exclusive of interest and penalties,
was $132.5 million as of both June 30, 2009 and
December 31, 2008. No additional liabilities were recorded
for uncertain tax positions during the six months ended
June 30, 2009. Included in the balance of unrecognized tax
benefits as of June 30, 2009 are potential benefits of
$114.9 million that, if recognized, would impact the
effective tax rate.
We continue to reflect interest accrued on uncertain tax
positions and penalties as part of the tax provision under FASB
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement
No. 109 (FIN 48). For both the three
months ended June 30, 2009 and 2008, we recognized
$0.4 million and for the six months ended June 30,
2009 and 2008, we recognized $0.4 million and
$0.7 million, respectively of interest and penalties on
uncertain tax positions. As of June 30, 2009 and
December 31, 2008, we had accrued interest and penalties
associated with unrecognized tax benefits of $8.4 million
and $8.1 million, respectively.
We will continue to monitor issues as they are examined by
auditors representing tax authorities to determine whether an
adjustment to existing FIN 48 liabilities is required or
whether a FIN 48 liability should be provided for a new
issue. As issues are examined by the Internal Revenue Service
(IRS) and state auditors, we may decide to adjust
the existing FIN 48 liability for issues that were not
deemed an exposure at the time we adopted FIN 48.
Accordingly, we will continue to monitor the results of audits
and adjust the liability as needed. Federal income tax returns
for Covanta Energy are closed for the years through 2003.
However, to the extent NOLs are utilized from earlier years,
federal income tax returns for Covanta Holding Corporation,
formerly known as Danielson Holding Corporation, are still open.
The tax returns of our subsidiary ARC Holdings are open for
federal audit for the tax return years of 2004 and forward, and
are currently the subject of an IRS examination. This
examination is related to ARC Holdings refund requests
related to NOL carryback claims from tax years prior to our
acquisition of ARC
19
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Holdings in 2005 that require Joint Committee approval. State
income tax returns are generally subject to examination for a
period of three to five years after the filing of the respective
return. The state impact of any federal changes remains subject
to examination by various states for a period of up to one year
after formal notification to the states. We have various state
income tax returns in the process of examination, administrative
appeals or litigation.
Our NOLs predominantly arose from our predecessor insurance
entities (which were subsidiaries of our predecessor, which was
formerly named Mission Insurance Group, Inc.,
Mission). These Mission insurance entities have been
in state insolvency proceedings in California and Missouri since
the late 1980s. The amount of NOLs available to us will be
reduced by any taxable income or increased by any taxable losses
generated by current members of our consolidated tax group,
which include grantor trusts associated with the Mission
insurance entities.
While we cannot predict with certainty what amounts, if any, may
be includable in taxable income as a result of the final
administration of these grantor trusts, substantial actions
toward such final administration have been taken and we believe
that neither arrangements with the California Commissioner nor
the final administration by the Missouri Director will result in
a material reduction in available NOLs.
We had consolidated federal NOLs estimated to be approximately
$591 million for federal income tax purposes as of
December 31, 2008, based on the tax returns as filed. The
NOLs will expire in various amounts from December 31, 2009
through December 31, 2028, if not used. Current forecasts
indicate we will utilize consolidated federal NOLs in 2009 which
will otherwise expire in 2009. In addition to the consolidated
federal NOLs, as of December 31, 2008, we had state NOL
carryforwards of $119.7 million, which expire between 2012
and 2027, capital loss carryforwards of $69.0 million
expiring in 2009, additional federal credit carryforwards of
$32.7 million, and state credit carryforwards of
$0.8 million. These deferred tax assets are offset by a
valuation allowance of $34.3 million.
For further information, refer to Note 9. Income Taxes of
the Notes to the Consolidated Financial Statements included in
our
Form 8-K
for the year ended December 31, 2008 filed on May 18,
2009.
|
|
Note 8.
|
Supplementary
Information
|
Operating
Revenues
The components of waste and service revenues are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
For the Six Months
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Waste and service revenues unrelated to project debt
|
|
$
|
208,529
|
|
|
$
|
218,965
|
|
|
$
|
395,209
|
|
|
$
|
412,829
|
|
Revenue earned explicitly to service project debt-principal
|
|
|
13,720
|
|
|
|
17,167
|
|
|
|
27,439
|
|
|
|
34,364
|
|
Revenue earned explicitly to service project debt-interest
|
|
|
5,593
|
|
|
|
6,557
|
|
|
|
11,463
|
|
|
|
13,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total waste and service revenues
|
|
$
|
227,842
|
|
|
$
|
242,689
|
|
|
$
|
434,111
|
|
|
$
|
460,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under some of our service agreements, we bill municipalities
fees to service project debt (principal and interest). The
amounts billed are based on the actual principal amortization
schedule for the project bonds. Regardless of the amounts billed
to client communities relating to project debt principal, we
recognize revenue earned explicitly to service project debt
principal on a levelized basis over the term of the applicable
agreement. In the beginning of the agreement, principal billed
is less than the amount of levelized revenue recognized related
to principal and we record an unbilled service receivable asset.
At some point during the agreement, the amount we bill will
exceed the levelized revenue and the unbilled service receivable
begins to reduce, and ultimately becomes nil at the end of the
contract.
In the final year(s) of a contract, cash is utilized from debt
service reserve accounts to pay remaining principal amounts due
to project bondholders and such amounts are no longer billed to
or paid by municipalities. Generally,
20
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
therefore, in the last year of the applicable agreement, little
or no cash is received from municipalities relating to project
debt, while our levelized service revenue continues to be
recognized until the expiration date of the term of the
agreement.
Our independent power production facilities in India generate
electricity and steam explicitly for specific purchasers and as
such, these agreements are considered lease arrangements.
Electricity and steam sales included lease income from our
international business of $31.3 million and
$59.0 million for the three months ended June 30, 2009
and 2008, respectively, and $63.6 million and
$113.1 million for the six months ended June 30, 2009
and 2008, respectively.
Operating
Costs
Pass
through costs
Pass through costs are costs for which we receive a direct
contractually committed reimbursement from the municipal client
which sponsors an energy-from-waste project. These costs
generally include utility charges, insurance premiums, ash
residue transportation and disposal and certain chemical costs.
These costs are recorded net of municipal client reimbursements
in our condensed consolidated financial statements. Total pass
through costs were $14.8 million and $14.3 million for
the three months ended June 30, 2009 and 2008,
respectively, and $29.6 million and $30.2 million for
the six months ended June 30, 2009 and 2008, respectively.
Amortization
of waste, service and energy contracts
The vast majority of our waste, service and energy contracts
were valued in March 2004 and June 2005 related to the
acquisitions of Covanta Energy and ARC Holdings, respectively.
These intangible assets and liabilities were recorded using
then-available information at their estimated fair market values
based upon discounted cash flows. The following table details
the amount of the actual/estimated amortization expense and
contra-expense associated with these intangible assets and
liabilities as of June 30, 2009 included or expected to be
included in our condensed consolidated statement of income for
each of the years indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Waste, Service and
|
|
|
|
|
|
|
Energy Contracts
|
|
|
Waste and Service
|
|
|
|
(Amortization
|
|
|
Contracts
|
|
|
|
Expense)
|
|
|
(Contra-Expense)
|
|
|
Six Months ended June 30, 2009
|
|
$
|
22,918
|
|
|
$
|
(6,562
|
)
|
|
|
|
|
|
|
|
|
|
Remainder of 2009
|
|
$
|
19,384
|
|
|
$
|
(6,616
|
)
|
2010
|
|
|
29,864
|
|
|
|
(12,721
|
)
|
2011
|
|
|
26,740
|
|
|
|
(12,408
|
)
|
2012
|
|
|
24,647
|
|
|
|
(12,412
|
)
|
2013
|
|
|
21,037
|
|
|
|
(12,390
|
)
|
2014
|
|
|
20,319
|
|
|
|
(12,390
|
)
|
Thereafter
|
|
|
58,488
|
|
|
|
(39,033
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
200,479
|
|
|
$
|
(107,970
|
)
|
|
|
|
|
|
|
|
|
|
21
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other
operating expenses
The components of other operating expenses are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Operating Expenses
|
|
|
|
For the Three Months
|
|
|
For the Six Months
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Construction costs
|
|
$
|
5,979
|
|
|
$
|
12,110
|
|
|
$
|
11,325
|
|
|
$
|
25,267
|
|
Insurance subsidiary operating expenses
|
|
|
4,689
|
|
|
|
3,417
|
|
|
|
8,502
|
|
|
|
5,788
|
|
Insurance recoveries
|
|
|
(82
|
)
|
|
|
(21
|
)
|
|
|
(82
|
)
|
|
|
(3,769
|
)
|
Foreign exchange (gain) loss
|
|
|
(811
|
)
|
|
|
493
|
|
|
|
(306
|
)
|
|
|
(4
|
)
|
Other
|
|
|
(53
|
)
|
|
|
3,359
|
|
|
|
27
|
|
|
|
4,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating expenses
|
|
$
|
9,722
|
|
|
$
|
19,358
|
|
|
$
|
19,466
|
|
|
$
|
31,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
convertible debt related expense
The components of non-cash convertible debt related expense are
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Cash Convertible Debt Related Expense
|
|
|
|
For the Three Months
|
|
|
For the Six Months
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Debt discount accretion related to the Debentures
|
|
$
|
4,787
|
|
|
$
|
4,453
|
|
|
$
|
9,489
|
|
|
$
|
8,827
|
|
Debt discount accretion related to the Notes
|
|
|
2,225
|
|
|
|
|
|
|
|
2,225
|
|
|
|
|
|
Fair value changes related to the Note Hedge
|
|
|
(7,137
|
)
|
|
|
|
|
|
|
(7,137
|
)
|
|
|
|
|
Fair value changes related to the Cash Conversion Option
|
|
|
6,520
|
|
|
|
|
|
|
|
6,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-cash convertible debt related expense
|
|
$
|
6,395
|
|
|
$
|
4,453
|
|
|
$
|
11,097
|
|
|
$
|
8,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income
The components of comprehensive income are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Comprehensive income, net of income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Covanta Holding Corporation
|
|
$
|
33,167
|
|
|
$
|
42,299
|
|
|
$
|
32,516
|
|
|
$
|
54,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
6,149
|
|
|
|
(2,281
|
)
|
|
|
4,348
|
|
|
|
(1,254
|
)
|
SFAS 158 unrecognized net loss
|
|
|
(42
|
)
|
|
|
(170
|
)
|
|
|
(84
|
)
|
|
|
(339
|
)
|
Net unrealized gain (loss) on
available-for-sale
securities
|
|
|
773
|
|
|
|
(302
|
)
|
|
|
489
|
|
|
|
(372
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) attributable to Covanta
Holding Corporation
|
|
|
6,880
|
|
|
|
(2,753
|
)
|
|
|
4,753
|
|
|
|
(1,965
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to Covanta Holding Corporation
|
|
$
|
40,047
|
|
|
$
|
39,546
|
|
|
$
|
37,269
|
|
|
$
|
52,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to noncontrolling interests in
subsidiaries
|
|
$
|
2,164
|
|
|
$
|
2,225
|
|
|
$
|
3,544
|
|
|
$
|
4,094
|
|
Other comprehensive income (loss) Foreign currency
translation
|
|
|
2,037
|
|
|
|
(1,812
|
)
|
|
|
1,507
|
|
|
|
(1,852
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to noncontrolling interests in
subsidiaries
|
|
$
|
4,201
|
|
|
$
|
413
|
|
|
$
|
5,051
|
|
|
$
|
2,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
See Note 1. Organization and Basis of Presentation for a
discussion of the retrospective accounting change resulting from
the adoption of FSP APB
14-1 and
SFAS 160 effective January 1, 2009.
Goodwill
The following table details the changes in carrying value of
goodwill (in thousands):
|
|
|
|
|
|
|
Total
|
|
|
Balance as of December 31, 2008
|
|
$
|
195,617
|
|
Purchase price adjustment related to the ARC Holdings acquisition
|
|
|
6,060
|
|
Goodwill related to the Pennsylvania transfer stations
acquisition
|
|
|
1,319
|
|
|
|
|
|
|
Balance as of June 30, 2009
|
|
$
|
202,996
|
|
|
|
|
|
|
We increased goodwill and current liabilities by
$6.1 million during the quarter ended June 30, 2009 to
recognize a liability due to one of our municipal clients that
should have been recognized in the purchase price allocation
relating to the ARC Holdings acquisition of June 2005.
|
|
Note 9.
|
Benefit
Obligations
|
Pension
and Other Benefit Obligations
The components of net periodic benefit costs are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Post-Retirement Benefits
|
|
|
|
For the Three
|
|
|
For the Six
|
|
|
For the Three
|
|
|
For the Six
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Service cost
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Interest cost
|
|
|
1,197
|
|
|
|
1,176
|
|
|
|
2,394
|
|
|
|
2,352
|
|
|
|
123
|
|
|
|
137
|
|
|
|
245
|
|
|
|
274
|
|
Expected return on plan assets
|
|
|
(975
|
)
|
|
|
(1,182
|
)
|
|
|
(1,950
|
)
|
|
|
(2,364
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net prior service cost
|
|
|
19
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of actuarial gain
|
|
|
(46
|
)
|
|
|
(131
|
)
|
|
|
(92
|
)
|
|
|
(262
|
)
|
|
|
(38
|
)
|
|
|
(39
|
)
|
|
|
(75
|
)
|
|
|
(77
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
195
|
|
|
$
|
(137
|
)
|
|
$
|
390
|
|
|
$
|
(274
|
)
|
|
$
|
85
|
|
|
$
|
98
|
|
|
$
|
170
|
|
|
$
|
197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined
Contribution Plans
Substantially all of our domestic employees are eligible to
participate in defined contribution plans we sponsor. Our costs
related to defined contribution plans were $3.0 million and
$2.7 million for the three months ended June 30, 2009
and 2008, respectively, and $7.4 million and
$6.9 million for the six months ended June 30, 2009
and 2008, respectively.
|
|
Note 10.
|
Stock-Based
Compensation
|
Compensation expense related to our stock-based awards totaled
$3.8 million and $7.7 million during the three and six
months ended June 30, 2009, respectively, and
$4.4 million and $8.1 million during the three and six
months ended June 30, 2008, respectively.
During the six months ended June 30, 2009, we awarded
certain employees 694,712 shares of restricted stock
awards. The restricted stock awards will be expensed over the
requisite service period, subject to an assumed ten percent
forfeiture rate. The terms of the restricted stock awards
include two vesting provisions; one based on a performance
factor and continued service (applicable to 66% of the award)
and one based solely on continued service (applicable to 34% of
the award). If all performance and service criteria are
satisfied, 1,627 shares vest during March of 2009, 2010 and
2011 and the remaining awards vest during March of 2010, 2011
and 2012.
23
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On May 7, 2009, in accordance with our existing program for
annual director compensation, we awarded 45,000 restricted stock
awards under the Directors Plan. We determined that the service
vesting condition of the restricted stock awards granted to the
directors on May 7, 2009 to be non-substantive and, in
accordance with SFAS No. 123 (revised 2004),
Share-Based Payments, recorded the entire fair value
of the award as compensation expense on the grant date.
As of June 30, 2009, we had approximately
$15.9 million and $4.6 million of unrecognized
compensation expense related to our unvested restricted stock
awards and unvested stock options, respectively. We expect this
compensation expense to be recognized over a weighted average
period of 2.3 years for our unvested restricted stock
awards and 2.9 years for our unvested stock options.
|
|
Note 11.
|
Financial
Instruments
|
Fair
Value Measurements
For the quarter ended June 30, 2009, we adopted the
following FSPs which are intended to provide additional
application guidance and enhance disclosures regarding fair
value measurements:
|
|
|
|
|
FSP
SFAS No. 157-4,
Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly
(FSP
SFAS 157-4),
provides guidelines for making fair value measurements more
consistent with the principles presented in
SFAS No. 157, Fair Value Measurements. The
FSP provides guidance to determine if there has been a
significant decrease in the volume and level of activity for the
asset or liability, and to estimate fair values, when
transactions or quoted prices are not determinative of fair
value. FSP
SFAS 157-4
requires management to use judgment to determine whether a
market is distressed or not orderly, even if there has been a
significant decrease in the volume and level of activity for the
asset or liability.
|
|
|
|
FSP
SFAS No. 107-1
and APB
No. 28-1,
Interim Disclosures about Fair Value of Financial
Instruments enhances consistency in financial reporting by
increasing the frequency of fair value disclosures. The FSP
requires disclosure in the notes to the financial statements of
fair value of its financial instruments in interim and annual
reporting periods, together with the related carrying amounts,
methods and significant assumptions used to estimate fair value,
and changes in methods and significant assumptions, if any.
|
The adoption of these FSPs had no impact on our condensed
consolidated financial statements and resulted only in
additional financial reporting disclosures.
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it
is practicable to estimate that value:
|
|
|
|
|
For cash and cash equivalents, restricted funds, and marketable
securities, the carrying value of these amounts is a reasonable
estimate of their fair value. The fair value of restricted funds
held in trust is based on quoted market prices of the
investments held by the trustee.
|
|
|
|
Fair values for debt were determined based on interest rates
that are currently available to us for issuance of debt with
similar terms and remaining maturities for debt issues that are
not traded on quoted market prices. The fair value of project
debt is estimated based on quoted market prices for the same or
similar issuances of debt.
|
|
|
|
Fair value of our interest rate swap agreement is the estimated
amount we would receive or pay to terminate the agreement based
on the net present value of the future cash flows as defined in
the agreement.
|
|
|
|
Fair values of derivative instruments are determined using
available market information and appropriate valuation
methodologies. We recognize derivative instruments on the
balance sheet at their fair value. The Cash Conversion Option is
valued quarterly using a Black Scholes model incorporating our
common stock closing price at the reporting date and an implied
volatility factor for our common stock; to determine the
|
24
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
value of the Note Hedge, the Cash Conversion Option amount is
then discounted at a discount rate reflecting the Option
Counterparties credit standing. The Option Counterparties
are highly rated financial institutions, none of whom
experienced any significant downgrades during the three months
ending June 30, 2009 which could reduce any receivable
amount owed to us. The contingent interest features related to
the Debentures and the Notes are valued quarterly using the
present value of expected cash flow models incorporating the
probabilities of the contingent events occurring.
|
The estimated fair-value amounts have been determined using
available market information and appropriate valuation
methodologies. However, considerable judgment is necessarily
required in interpreting market data to develop estimates of
fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that we would realize in a
current market exchange. The fair-value estimates presented
herein are based on pertinent information available to us as of
June 30, 2009. However, such amounts have not been
comprehensively revalued for purposes of these financial
statements since June 30, 2009, and current estimates of
fair value may differ significantly from the amounts presented
herein.
The following tables presents information about our assets and
liabilities and their fair value measurements as of
June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
Significant
|
|
|
|
As of June 30, 2009
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Unobservable
|
|
Financial Instruments Recorded at Fair Value
|
|
Carrying
|
|
|
Estimated
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Inputs
|
|
on a Recurring Basis:
|
|
Amount
|
|
|
Fair Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
(In thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank deposits and certificates of deposit
|
|
$
|
77,639
|
|
|
$
|
77,639
|
|
|
$
|
77,639
|
|
|
$
|
|
|
|
$
|
|
|
Money market funds
|
|
|
473,527
|
|
|
|
473,527
|
|
|
|
473,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents:
|
|
|
551,166
|
|
|
|
551,166
|
|
|
|
551,166
|
|
|
|
|
|
|
|
|
|
Restricted funds held in trust:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank deposits and certificates of deposit
|
|
|
61,045
|
|
|
|
61,045
|
|
|
|
61,045
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
140,093
|
|
|
|
140,133
|
|
|
|
140,133
|
|
|
|
|
|
|
|
|
|
U.S. Treasury/Agency obligations(a)
|
|
|
30,266
|
|
|
|
30,503
|
|
|
|
30,503
|
|
|
|
|
|
|
|
|
|
State and municipal obligations
|
|
|
13,275
|
|
|
|
13,140
|
|
|
|
13,140
|
|
|
|
|
|
|
|
|
|
Commercial paper/Guaranteed investment contracts/Repurchase
agreements
|
|
|
54,595
|
|
|
|
54,731
|
|
|
|
54,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restricted funds held in trust:
|
|
|
299,274
|
|
|
|
299,552
|
|
|
|
299,552
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities available for sale
|
|
|
300
|
|
|
|
300
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
Investments held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury/Agency obligations
|
|
|
14,700
|
|
|
|
14,700
|
|
|
|
14,700
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities
|
|
|
4,031
|
|
|
|
4,031
|
|
|
|
4,031
|
|
|
|
|
|
|
|
|
|
Corporate investments
|
|
|
8,381
|
|
|
|
8,381
|
|
|
|
8,381
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
729
|
|
|
|
729
|
|
|
|
729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments:
|
|
|
28,141
|
|
|
|
28,141
|
|
|
|
28,141
|
|
|
|
|
|
|
|
|
|
Interest rate swap receivable
|
|
|
10,825
|
|
|
|
10,825
|
|
|
|
|
|
|
|
10,825
|
|
|
|
|
|
Derivative Asset Note Hedge
|
|
|
119,515
|
|
|
|
119,515
|
|
|
|
|
|
|
|
119,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets:
|
|
$
|
1,008,921
|
|
|
$
|
1,009,199
|
|
|
$
|
878,859
|
|
|
$
|
130,340
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liability Cash Conversion Option
|
|
$
|
130,951
|
|
|
$
|
130,951
|
|
|
$
|
|
|
|
$
|
130,951
|
|
|
$
|
|
|
Derivative Liabilities Contingent interest features
of the Debentures and Notes
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
Interest rate swap payable
|
|
|
10,825
|
|
|
|
10,825
|
|
|
|
|
|
|
|
10,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities:
|
|
$
|
141,776
|
|
|
$
|
141,776
|
|
|
$
|
|
|
|
$
|
141,776
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Estimated
|
|
Financial Instruments Recorded at Carrying Amount:
|
|
Amount
|
|
|
Fair Value
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Accounts receivables
|
|
$
|
269,497
|
|
|
$
|
269,497
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt (excluding Cash Conversion Option)
|
|
$
|
1,292,455
|
|
|
$
|
1,223,699
|
|
Project debt
|
|
$
|
959,758
|
|
|
$
|
947,525
|
|
Equity:
|
|
|
|
|
|
|
|
|
Warrants
|
|
$
|
53,846
|
|
|
$
|
75,157
|
|
|
|
(a) |
The U.S. Treasury/Agency obligations in restricted funds held in
trust are primarily comprised of Federal Home Loan Mortgage
Corporation securities at fair value.
|
Investments
For the quarter ended June 30, 2009, we adopted FSP
SFAS No. 115-2
and
SFAS No. 124-2,
Recognition and Presentation of
Other-Than-Temporary
Impairments, which provides additional guidance designed
to create greater clarity and consistency in accounting for and
presenting impairment losses on securities. The FSP revises
recognition guidance in determining whether a debt security is
other-than-temporarily
impaired. A debt security is considered
other-than-temporarily
impaired if the fair value is less than the amortized cost, and
in any of the following circumstances: an entity has the intent
to sell the security, or it is more likely than not that an
entity will be required to sell the security prior to the
recovery of its amortized cost basis; and an entity does not
expect to recover the entire amortized cost basis of the
security. The FSP provides further guidance to determine the
amount of impairment to be recorded in earnings
and/or other
comprehensive income. The adoption of these FSPs did not have a
material impact on our consolidated financial statements and
resulted primarily in additional financial reporting disclosures.
Our insurance subsidiaries fixed maturity debt and equity
securities portfolio are classified as
available-for-sale
and are carried at fair value. Equity securities that are traded
on a national securities exchange are stated at the last
reported sales price on the day of valuation. Debt security
values are determined by third party matrix pricing based on the
last days trading activity. Changes in fair value are credited
or charged directly to Accumulated Other Comprehensive Income
(AOCI) in the condensed consolidated statements of
equity as unrealized gains or losses, respectively. Investment
gains or losses realized on the sale of securities are
determined using the specific identification method. Realized
gains and losses are recognized in the condensed consolidated
statements of income based on the amortized cost of fixed
maturities and cost basis for equity securities on the date of
trade, subject to any previous adjustments for
other-than-temporary
declines.
Other-than-temporary
declines in fair value are recorded as realized losses in the
condensed consolidated statements of income and the cost basis
of the security is reduced. We consider the following factors in
determining whether declines in the fair value of securities are
other-than-temporary:
|
|
|
|
|
the significance of the decline in fair value compared to the
cost basis;
|
|
|
|
the time period during which there has been a significant
decline in fair value;
|
|
|
|
whether the unrealized loss is credit-driven or a result of
changes in market interest rates;
|
|
|
|
a fundamental analysis of the business prospects and financial
condition of the issuer; and
|
|
|
|
our ability and intent to hold the investment for a period of
time sufficient to allow for any anticipated recovery in fair
value.
|
Other investments, such as investments in companies in which we
do not have the ability to exercise significant influence, are
carried at the lower of cost or estimated realizable value.
26
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The cost or amortized cost, unrealized gains, unrealized losses
and fair value of our investments categorized by type of
security, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009
|
|
|
|
Cost or
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Amortized Cost
|
|
|
Gain
|
|
|
Loss
|
|
|
Value
|
|
|
Current investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
300
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
300
|
|
Equity securities insurance business
|
|
|
732
|
|
|
|
50
|
|
|
|
53
|
|
|
|
729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current investments
|
|
$
|
1,032
|
|
|
$
|
50
|
|
|
$
|
53
|
|
|
$
|
1,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities insurance business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
|
$
|
565
|
|
|
$
|
12
|
|
|
$
|
|
|
|
$
|
577
|
|
U.S. government agencies
|
|
|
13,774
|
|
|
|
349
|
|
|
|
|
|
|
|
14,123
|
|
Residential mortgage-backed
|
|
|
3,977
|
|
|
|
61
|
|
|
|
7
|
|
|
|
4,031
|
|
Corporate
|
|
|
8,296
|
|
|
|
135
|
|
|
|
50
|
|
|
|
8,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities insurance business
|
|
|
26,612
|
|
|
|
557
|
|
|
|
57
|
|
|
|
27,112
|
|
Investment at cost international business
|
|
|
3,437
|
|
|
|
|
|
|
|
|
|
|
|
3,437
|
|
Mutual and bond funds
|
|
|
1,539
|
|
|
|
97
|
|
|
|
|
|
|
|
1,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent investments
|
|
$
|
31,588
|
|
|
$
|
654
|
|
|
$
|
57
|
|
|
$
|
32,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
|
|
Cost or
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Amortized Cost
|
|
|
Gain
|
|
|
Loss
|
|
|
Value
|
|
|
Current investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
300
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
300
|
|
Equity securities insurance business
|
|
|
760
|
|
|
|
62
|
|
|
|
30
|
|
|
|
792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current investments
|
|
$
|
1,060
|
|
|
$
|
62
|
|
|
$
|
30
|
|
|
$
|
1,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities insurance business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
|
$
|
565
|
|
|
$
|
22
|
|
|
$
|
|
|
|
$
|
587
|
|
U.S. government agencies
|
|
|
17,332
|
|
|
|
307
|
|
|
|
19
|
|
|
|
17,620
|
|
Residential mortgage-backed
|
|
|
4,183
|
|
|
|
27
|
|
|
|
26
|
|
|
|
4,184
|
|
Corporate
|
|
|
4,540
|
|
|
|
|
|
|
|
194
|
|
|
|
4,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities insurance business
|
|
|
26,620
|
|
|
|
356
|
|
|
|
239
|
|
|
|
26,737
|
|
Investment at cost international business
|
|
|
3,437
|
|
|
|
|
|
|
|
|
|
|
|
3,437
|
|
Mutual and bond funds
|
|
|
1,404
|
|
|
|
|
|
|
|
433
|
|
|
|
971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent investments
|
|
$
|
31,461
|
|
|
$
|
356
|
|
|
$
|
672
|
|
|
$
|
31,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth a summary of temporarily impaired
investments held by our insurance subsidiary (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009
|
|
|
As of December 31, 2008
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Description of Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and other direct U.S. Government obligations
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,841
|
|
|
$
|
19
|
|
Federal agency mortgage-backed securities
|
|
|
1,037
|
|
|
|
7
|
|
|
|
1,547
|
|
|
|
26
|
|
Corporate bonds
|
|
|
3,420
|
|
|
|
50
|
|
|
|
3,996
|
|
|
|
194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
4,457
|
|
|
|
57
|
|
|
|
8,384
|
|
|
|
239
|
|
Equity securities
|
|
|
402
|
|
|
|
53
|
|
|
|
307
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired investments
|
|
$
|
4,859
|
|
|
$
|
110
|
|
|
$
|
8,691
|
|
|
$
|
269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The number of U.S. Treasury and federal agency obligations,
mortgage-backed securities, and corporate bonds temporarily
impaired are 0, 1, and 9, respectively. As of June 30,
2009, all of the temporarily impaired fixed maturity investments
with a fair value of $4.5 million had maturities greater
than 12 months.
Our fixed maturities held by our insurance subsidiary include
mortgage-backed securities and collateralized mortgage
obligations, collectively (MBS) representing 14.9%,
and 15.6% of the total fixed maturities as of June 30, 2009
and December 31, 2008, respectively. Our MBS holdings are
issued by the Federal National Mortgage Association
(FNMA), the Federal Home Loan Mortgage Corporation
(FHLMC), or the Government National Mortgage
Association (GNMA) all of which are rated
AAA by Moodys Investors Services. MBS and
callable bonds, in contrast to other bonds, are more sensitive
to market value declines in a rising interest rate environment
than to market value increases in a declining interest rate
environment.
The expected maturities of fixed maturity securities, by
amortized cost and fair value are shown below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
One year or less
|
|
$
|
5,631
|
|
|
$
|
5,739
|
|
Over one year to five years
|
|
|
19,470
|
|
|
|
19,869
|
|
Over five years to ten years
|
|
|
1,511
|
|
|
|
1,504
|
|
More than ten years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
$
|
26,612
|
|
|
$
|
27,112
|
|
|
|
|
|
|
|
|
|
|
The following reflects the change in net unrealized gain (loss)
on
available-for-sale
securities included as a separate component of accumulated AOCI
in the condensed consolidated statements of equity (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
|
For the Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Fixed maturities, net
|
|
$
|
500
|
|
|
$
|
(277
|
)
|
|
$
|
412
|
|
|
$
|
(177
|
)
|
Equity securities, net
|
|
|
160
|
|
|
|
(10
|
)
|
|
|
(20
|
)
|
|
|
(69
|
)
|
Mutual and bond funds
|
|
|
113
|
|
|
|
(15
|
)
|
|
|
97
|
|
|
|
(126
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized gain (loss) on investments
|
|
$
|
773
|
|
|
$
|
(302
|
)
|
|
$
|
489
|
|
|
$
|
(372
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of net unrealized gain (loss) on
available-for-sale
securities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
|
For the Six
|
|
|
|
Months
|
|
|
Months
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Net unrealized holding gain (loss) on
available-for-sale
securities arising during the period
|
|
$
|
744
|
|
|
$
|
(334
|
)
|
|
$
|
460
|
|
|
$
|
(404
|
)
|
Reclassification adjustment for net realized losses on
available-for-sale
securities included in net income
|
|
|
29
|
|
|
|
32
|
|
|
|
29
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain (loss) on
available-for-sale
securities
|
|
$
|
773
|
|
|
$
|
(302
|
)
|
|
$
|
489
|
|
|
$
|
(372
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 12.
|
Derivative
Instruments
|
Effective January 1, 2009, we adopted
SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities An Amendment of
FASB Statement No. 133 (SFAS 161).
SFAS 161 establishes the disclosure requirements for
derivative instruments and for hedging activities with the
intent to provide financial statement users with an enhanced
understanding of the entitys use of derivative
instruments, the accounting of derivative instruments and
related hedged items under SFAS 133 and its related
interpretations, and the effects of these instruments on the
entitys financial position, financial performance, and
cash flows. Other than the enhanced disclosures as follows, the
adoption of SFAS 161 had no impact on our condensed
consolidated financial statements.
The following disclosures summarize the fair value of derivative
instruments not designated as hedging instruments under
SFAS 133 in the condensed consolidated balance sheets and
the effect of changes in fair value related to those derivative
instruments not designated as hedging instruments under
SFAS 133 on the condensed consolidated statements of income.
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments Not Designated
|
|
|
|
Fair Value as of
|
|
as Hedging Instruments under SFAS 133
|
|
Balance Sheet Location
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
(In thousands)
|
|
|
Asset Derivatives:
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap receivable
|
|
Other noncurrent assets
|
|
$
|
10,825
|
|
|
$
|
13,984
|
|
Note Hedge
|
|
Other noncurrent assets
|
|
$
|
119,515
|
|
|
$
|
|
|
Liability Derivatives:
|
|
|
|
|
|
|
|
|
|
|
Cash Conversion Option
|
|
Long-term debt
|
|
$
|
130,951
|
|
|
$
|
|
|
Contingent interest features of the Debentures and Notes
|
|
Other noncurrent liabilities
|
|
$
|
0
|
|
|
$
|
0
|
|
Interest rate swap payable
|
|
Other noncurrent liabilities
|
|
$
|
10,825
|
|
|
$
|
13,984
|
|
29
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain or (Loss) Recognized in Income on
Derivative
|
|
Effect on Income of Derivatives Instruments
|
|
Location of Gain or (Loss)
|
|
For the Three
|
|
|
For the Three
|
|
|
For the Six
|
|
|
For the Six
|
|
Not Designated as Hedging Instruments
|
|
Recognized in Income on
|
|
Months Ended
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
Months Ended
|
|
under SFAS 133
|
|
Derivatives
|
|
June 30, 2009
|
|
|
June 30, 2008
|
|
|
June 30, 2009
|
|
|
June 30, 2008
|
|
|
|
|
|
(In thousands)
|
|
|
Note Hedge
|
|
Non-cash convertible debt related expense
|
|
$
|
7,137
|
|
|
$
|
|
|
|
$
|
7,137
|
|
|
$
|
|
|
Cash Conversion Option
|
|
Non-cash convertible debt related expense
|
|
|
(6,520
|
)
|
|
|
|
|
|
|
(6,520
|
)
|
|
|
|
|
Contingent interest features of the Debentures and Notes
|
|
Non-cash convertible debt related expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
Net interest expense on project debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect on income of derivative instruments not designated as
hedging instruments under SFAS 133
|
|
$
|
617
|
|
|
$
|
|
|
|
$
|
617
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Conversion Option, Note Hedge and Contingent Interest features
related to the 3.25% Cash Convertible Senior Notes
The Cash Conversion Option is a derivative instrument which is
recorded at fair value quarterly with any change in fair value
being recognized in our condensed consolidated income statement
as non-cash convertible debt related expense. The fair value of
the Cash Conversion Option was $131.0 million as of
June 30, 2009. The Note Hedge is accounted for as a
derivative instrument under SFAS 133 and as such, is
recorded at fair value quarterly with any change in fair value
being recognized in our condensed consolidated income statement
as non-cash convertible debt related expense. The fair value of
the Note Hedge was $119.5 million as of June 30, 2009.
The contingent interest features of the Notes are embedded
derivative instruments. The fair value of the contingent
interest features of the Notes was zero as of June 30, 2009.
We expect the gain or loss from the Note Hedge to substantially
offset the gain or loss associated with changes to the valuation
of the Cash Conversion Option. Accordingly, we do not expect
there to be a material net impact to our condensed consolidated
statement of income as a result of our issuing the Notes and
entering into the Note Hedge. Our most significant credit
exposure arises from the Note Hedge of the Notes. The fair value
of the Note Hedge reflects the maximum loss that would be
incurred should the Option Counterparties fail to perform
according to the terms of the Note Hedge agreement. The Option
Counterparties are highly rated financial institutions and we
believe that the credit risk associated with their
non-performance is not significant. See Note 6. Changes in
Capitalization for specific details related to the Cash
Conversion Option, Note Hedge and contingent interest features
of the Notes.
Contingent
Interest feature of the 1.00% Senior Convertible
Debentures
On January 31, 2007, we completed an underwritten public
offering of $373.8 million aggregate principal amount of
Senior Convertible Debentures. The Debentures bear interest at a
rate of 1.00% per year, payable semi-annually in arrears, on
February 1 and August 1 of each year, commencing on
August 1, 2007, and will mature on February 1, 2027.
Beginning with the six-month interest period commencing
February 1, 2012, we will pay contingent interest on the
Debentures during any six-month interest period in which the
trading price of the Debentures measured over a specified number
of trading days is 120% or more of the principal amount of the
Debentures. When applicable, the contingent interest payable per
$1,000 principal amount of Debentures will equal
30
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
0.25% of the average trading price of $1,000 principal amount of
Debentures during the five trading days ending on the second
trading day immediately preceding the first day of the
applicable six-month interest period. The contingent interest
feature in the Debentures is an embedded derivative instrument.
The first contingent cash interest payment period does not
commence until February 1, 2012, and the fair value for the
embedded derivative was zero as of June 30, 2009.
Interest
Rate Swaps
As of June 30, 2009, we had one interest rate swap
agreement related to project debt that economically fixes the
interest rate on certain adjustable-rate revenue bonds. This
swap agreement was entered into in September 1995 and expires in
January 2019. Any payments made or received under the swap
agreement, including fair value amounts upon termination, are
included as an explicit component of the client communitys
obligation under the related service agreement. Therefore, all
payments made or received under the swap agreement are a pass
through to the client community. Under the swap agreement, we
pay a fixed rate of 5.18% and receive a floating rate that is
either equal to (i) the rate on the adjustable rate revenue
bonds or (ii) an alternative floating rate based on a
percentage of LIBOR or the BMA Municipal Swap Index if certain
triggering events occur, such as a put of bonds to the standby
credit facility that backstops the weekly rate re-sets. The
notional amount of the swap as of June 30, 2009 was
$63.7 million and is reduced in accordance with the
scheduled repayments of the applicable revenue bonds. The
counterparty to the swap is a major financial institution. We
believe that the credit risk associated with nonperformance by
the counterparty is not significant. The swap agreement resulted
in increased debt service expense, which is a pass through to
the client community, of $0.8 million and $1.5 million
for the three and six months ended June 30, 2009,
respectively. The effect on our weighted-average borrowing rate
of the project debt was an increase of 0.15% for six months
ended June 30, 2009.
|
|
Note 13.
|
Related-Party
Transactions
|
We hold a 26% investment in Quezon Power, Inc.
(Quezon). We are party to an agreement with Quezon
in which we assumed responsibility for the operation and
maintenance of Quezons coal-fired electricity generation
facility. Accordingly, 26% of the net income of Quezon is
reflected in our statements of income and as such, 26% of the
revenue earned under the terms of the operation and maintenance
agreement is eliminated against Equity in Net Income from
Unconsolidated Investments. For the three months ended
June 30, 2009 and 2008, we collected $13.1 million and
$11.2 million, respectively, and for the six months ended
June 30, 2009 and 2008, we collected $18.3 million and
$20.2 million, respectively, for the operation and
maintenance of the facility. As of June 30, 2009 and
December 31, 2008, the net amount due to Quezon was
$5.2 million and $3.2 million, respectively, which
represents advance payments received from Quezon for operation
and maintenance costs.
|
|
Note 14.
|
Commitments
and Contingencies
|
We and/or
our subsidiaries are party to a number of claims, lawsuits and
pending actions, most of which are routine and all of which are
incidental to our business. We assess the likelihood of
potential losses on an ongoing basis and when losses are
considered probable and reasonably estimable, record as a loss
an estimate of the ultimate outcome. If we 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.
Environmental
Matters
Our operations are subject to environmental regulatory laws and
environmental remediation laws. Although our 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, we believe that we are in substantial
compliance with existing environmental laws and regulations.
We 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
31
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
federal
and/or
analogous state laws. In certain instances, we may be exposed to
joint and several liabilities for remedial action or damages.
Our ultimate liability in connection with such environmental
claims will depend on many factors, including our volumetric
share of waste, the total cost of remediation, and the financial
viability of other companies that also sent waste to a given
site and, in the case of divested operations, its contractual
arrangement with the purchaser of such operations.
The potential costs related to the matters described below 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 our
responsibility. Although the ultimate outcome and expense of any
litigation, including environmental remediation, is uncertain,
we believe that the following proceedings will not have a
material adverse effect on our consolidated financial position
or results of operations.
In August 2004, the United States Environmental Protection
Agency (EPA) notified Covanta Essex Company
(Essex) that it was a potentially responsible party
(PRP) for Superfund response actions in the Lower
Passaic River Study Area, referred to as LPRSA, a
17 mile stretch of river in northern New Jersey. Essex is
one of at least 73 PRPs named thus far that have joined the
LPRSA PRP group. On May 8, 2007, EPA and the PRP group
entered into an Administrative Order on Consent by which the PRP
group is undertaking a Remedial Investigation/Feasibility Study
(Study) of the LPRSA under EPA oversight. The cost
to complete the Study is estimated at $75 million, in
addition to EPA oversight costs. Essexs share of the Study
costs to date are not material to its financial position and
results of operations; however, the Study costs are exclusive of
any costs that may be required of PRPs to remediate the LPRSA or
costs associated with natural resource damages to the LPRSA that
may be assessed against PRPs. On February 4, 2009, Essex
and over 300 other PRPs were named as third-party defendants in
a suit brought by the State of New Jersey Department of
Environmental Protection (NJDEP) against Occidental
Chemical Corporation and certain related entities
(Occidental) with respect to alleged contamination
of the LPRSA by Occidental. The Occidental third party complaint
seeks contribution from the third-party defendants with respect
to any award to NJDEP of damages against Occidental in the
matter. Considering the history of industrial and other
discharges into the LPRSA from other sources, including named
PRPs, Essex believes any releases to the LPRSA from its facility
to be de minimis in comparison; however, it is not possible at
this time to predict that outcome with certainty or to estimate
Essexs ultimate liability in the matter, including for
LPRSA remedial costs
and/or
natural resource damages
and/or
contribution claims made by Occidental
and/or other
PRPs.
Other
Matters
Other commitments as of June 30, 2009 were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments Expiring by Period
|
|
|
|
|
|
|
Less Than
|
|
|
More Than
|
|
|
|
Total
|
|
|
One Year
|
|
|
One Year
|
|
|
Letters of credit
|
|
$
|
289,888
|
|
|
$
|
31,344
|
|
|
$
|
258,544
|
|
Surety bonds
|
|
|
67,158
|
|
|
|
|
|
|
|
67,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other commitments net
|
|
$
|
357,046
|
|
|
$
|
31,344
|
|
|
$
|
325,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The letters of credit were issued under various credit
facilities (primarily the Funded L/C Facility) to secure our
performance under various contractual undertakings related to
our domestic and international projects or to secure obligations
under our insurance program. Each letter of credit relating to a
project is required to be maintained in effect for the period
specified in related project contracts, and generally may be
drawn if it is not renewed prior to expiration of that period.
We believe that we will be able to fully perform under our
contracts to which these existing letters of credit relate, and
that it is unlikely that letters of credit would be drawn
because of a default of our performance obligations. If any of
these letters of credit were to be drawn by the beneficiary, the
amount drawn would be
32
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
immediately repayable by us to the issuing bank. If we do not
immediately repay such amounts drawn under these letters of
credit, unreimbursed amounts would be treated under the Credit
Facilities as additional term loans in the case of letters of
credit issued under the Funded L/C Facility, or as revolving
loans in the case of letters of credit issued under the
Revolving Loan Facility.
The surety bonds listed on the table above relate primarily to
performance obligations ($58.2 million) and support for
closure obligations of various energy projects when such
projects cease operating ($9.0 million). Were these bonds
to be drawn upon, we would have a contractual obligation to
indemnify the surety company.
We have certain contingent obligations related to the
Debentures. These are:
|
|
|
|
|
holders may require us to repurchase their Debentures on
February 1, 2012, February 1, 2017 and
February 1, 2022;
|
|
|
holders may require us to repurchase their Debentures, if a
fundamental change occurs; and
|
|
|
holders may exercise their conversion rights upon the occurrence
of certain events, which would require us to pay the conversion
settlement amount in cash
and/or our
common stock.
|
For specific criteria related to contingent interest, conversion
or redemption features of the Debentures, refer to Note 6
of the Notes to Consolidated Financial Statements in our
Form 8-K
for the year ended December 31, 2008 filed on May 18,
2009.
We have certain contingent obligations related to the Notes.
These are:
|
|
|
|
|
holders may require us to repurchase their Notes, if a
fundamental change occurs; and
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holders may exercise their conversion rights upon the occurrence
of certain events, which would require us to pay the conversion
settlement amount in cash.
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For specific criteria related to contingent interest, conversion
or redemption features of the Notes, see Note 6. Changes in
Capitalization.
We have issued or are party to guarantees and related
contractual support obligations undertaken pursuant to
agreements to construct and operate domestic and international
waste and energy facilities. For some projects, such performance
guarantees include obligations to repay certain financial
obligations if the project revenues are insufficient to do so,
or to obtain or guarantee financing for a project. With respect
to our domestic and international businesses, we have issued
guarantees to municipal clients and other parties that our
subsidiaries will perform in accordance with contractual terms,
including, where required, the payment of damages or other
obligations. Additionally, damages payable under such guarantees
on our energy-from-waste facilities could expose us to recourse
liability on project debt. If we must perform under one or more
of such guarantees, our liability for damages upon contract
termination would be reduced by funds held in trust and proceeds
from sales of the facilities securing the project debt and is
presently not estimable. Depending upon the circumstances giving
rise to such domestic and international damages, the contractual
terms of the applicable contracts, and the contract
counterpartys choice of remedy at the time a claim against
a guarantee is made, the amounts owed pursuant to one or more of
such guarantees could be greater than our then-available sources
of funds. To date, we have not incurred material liabilities
under such guarantees, either on domestic or international
projects.
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COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Concluded)
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Note 15.
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Subsequent
Events
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On July 3, 2009, we signed a definitive agreement to
acquire from Veolia Environmental Services North America Corp.
most of its North American energy-from-waste business for a
purchase price of $450 million, less net debt (consolidated
indebtedness net of cash and restricted funds held in trust) and
subject to certain other adjustments. The operations to be
acquired include seven energy-from-waste facilities, which are
located in California, Florida, New York, Pennsylvania, and
Vancouver, Canada. The operations also include a transfer
station located in Pennsylvania. Each of the operations to be
acquired includes a long-term operating contract with the
respective municipal client. Six of the energy-from-waste
facilities and the transfer station are publicly-owned
facilities, and we will acquire a majority ownership stake in
one energy-from-waste facility (Montgomery, Pennsylvania).
Collectively, these seven energy-from-waste facilities process
approximately 3 million tons of waste per year. We expect
that the entire transaction will close by year end. However, the
closing of the transaction may occur in stages and is
conditioned upon receipt of customary regulatory and other
approvals or consents. The failure to obtain certain approvals
or consents may result in the removal of certain businesses from
the transaction and a related price reduction.
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Item 2.
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MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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The terms we, our, ours,
us, Covanta and Company
refer to Covanta Holding Corporation and its subsidiaries. The
following discussion addresses our financial condition as of
June 30, 2009 and our results of operations for the three
and six months ended June 30, 2009, compared with the same
periods last year. It should be read in conjunction with our
Audited Consolidated Financial Statements and Notes thereto for
the year ended December 31, 2008 and Managements
Discussion and Analysis of Financial Condition and Results of
Operations included in our
Form 8-K
for the year ended December 31, 2008 filed on May 18,
2009, and in the interim unaudited financial statements and
notes included in our Quarterly Reports on
Form 10-Q/A
for the period ended March 31, 2009, to which the reader is
directed for additional information.
The preparation of interim financial statements necessarily
relies heavily on estimates. Due to the use of estimates and
certain other factors, such as the seasonal nature of our waste
and energy services business, as well as competitive and other
market conditions, we do not believe that interim results of
operations are indicative of full year results of operations.
The preparation of financial statements requires management to
make estimates and assumptions that affect the reported amounts
and classification 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
materially from those estimates.
OVERVIEW
We are a leading developer, owner and operator of infrastructure
for the conversion of waste to energy (known as
energy-from-waste), as well as other waste disposal
and renewable energy production businesses in the Americas,
Europe and Asia. We are organized as a holding company and
conduct all of our operations through subsidiaries which are
engaged predominantly in the businesses of waste and energy
services. We also engage in the independent power production
business outside the United States.
We own, have equity investments in,
and/or
operate 60 energy generation facilities, 50 of which are in the
United States and 10 of which are located outside the United
States. Our energy generation facilities use a variety of fuels,
including municipal solid waste, wood waste (biomass), landfill
gas, water (hydroelectric), natural gas, coal, and heavy
fuel-oil. We also own or operate several businesses that are
associated with our energy-from-waste business, including a
waste procurement business, a biomass procurement business, four
landfills, which we use primarily for ash disposal, and several
waste transfer stations.
On July 3, 2009, we signed a definitive agreement to
acquire seven energy-from-waste businesses and a transfer
station for approximately $450 million, less net debt
(consolidated indebtedness net of cash and restricted funds held
in trust) and subject to certain other adjustments, from Veolia
Environmental Services North America Corporation. The
energy-from-waste facilities are located in California, Florida,
New York, Pennsylvania and Vancouver, Canada. We expect the
entire transaction will close by year end. Additional
information is provided in Acquisitions and Business
Development below.
During the three months ended June 30, 2009, we issued
$460 million aggregate principal amount of 3.25% Cash
Convertible Senior Notes (the Notes) due 2014 for
resale to certain qualified institutional buyers in compliance
with Rule 144A under the Securities Act of 1933, as
amended. In connection with the pricing of the Notes, we entered
into privately negotiated cash convertible note hedge
transactions and warrant transactions with affiliates of certain
of the initial purchasers. Additional information, including
material terms, is provided in Liquidity and Capital
Resources Available Sources of Liquidity. We
received proceeds of approximately $388.9 million, net of
underwriting discounts, offering expenses, proceeds from the
issuance of warrants, and purchase of convertible note hedge. We
have used and will use the net proceeds from the offering,
together with the proceeds from the warrant transactions, for
general corporate purposes, which may include capital
expenditures, potential permitted investments or permitted
acquisitions.
Our mission is to be the worlds leading energy-from-waste
company, with a complementary network of renewable energy
generation and waste disposal assets. We expect to build value
for our stockholders by satisfying
35
our clients waste disposal and energy generation needs
with safe, reliable and environmentally superior solutions. In
order to accomplish this mission and create additional value for
our stockholders, we are focused on:
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providing customers with superior service and effectively
managing our existing businesses;
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generating sufficient cash to meet our liquidity needs and
invest in the business; and
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developing new projects and making acquisitions to grow our
business in the Americas, Europe and Asia.
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We believe that our business offers solutions to public sector
leaders around the world in two related elements of critical
infrastructure: waste disposal and renewable energy generation.
We believe that the environmental benefits of energy-from-waste,
as an alternative to landfilling, are clear and compelling: by
processing municipal solid waste in energy-from-waste facilities
we reduce greenhouse gas (GHG) emissions, lower the
risk of groundwater contamination, and conserve land. At the
same time, energy-from-waste generates clean, reliable energy
from a renewable fuel source, thus reducing dependence on fossil
fuels, the combustion of which is itself a major contributor to
GHG emissions. As public planners in the Americas, Europe and
Asia address their needs for more environmentally sustainable
waste disposal and energy generation in the years ahead, we
believe that energy-from-waste will be an increasingly
attractive alternative. We will also consider, for application
in domestic and international markets, acquiring or developing
new technologies that complement our existing renewable energy
and waste services businesses.
Our business offers sustainable solutions to energy and
environmental problems, and our corporate culture is
increasingly focused on themes of sustainability in all of its
forms. We aspire to continuous improvement in environmental
performance, beyond mere compliance with legally required
standards. This ethos is embodied in our Clean World
Initiative, an umbrella program under which we are:
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investing in research and development of new technologies to
enhance existing operations and create new business
opportunities in renewable energy and waste management;
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exploring and implementing processes and technologies at our
facilities to improve energy efficiency and lessen environmental
impacts; and
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partnering with governments and non-governmental organizations
to pursue sustainable programs, reduce the use of
environmentally harmful materials in commerce and communicate
the benefits of energy-from-waste.
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Our Clean World Initiative is designed to be consistent with our
mission to be the worlds leading energy-from-waste company
by providing environmentally superior solutions, advancing our
technical expertise and creating new business opportunities. It
represents an investment in our future that we believe will
enhance stockholder value.
In order to create new business opportunities and benefits and
enhance stockholder value, we are actively engaged in the
current discussion among policy makers in the United States
regarding the benefits of energy-from-waste and the reduction of
our dependence on landfilling for waste disposal and fossil
fuels for energy. Given the current economic dislocations and
related unemployment, the Obama administration is also expected
to focus on economic stimulus and job creation. We believe that
the construction and permanent jobs created by additional
energy-from-waste development represents the type of green
jobs, on critical infrastructure, that will be consistent
with the administrations focus. The extent to which we are
successful in growing our business will depend in part on our
ability to effectively communicate the benefits of
energy-from-waste to public planners seeking waste disposal
solutions, and to policy makers seeking to encourage renewable
energy technologies (and the associated green jobs)
as viable alternatives to reliance on fossil fuels as a source
of energy.
The United States Congress is currently debating proposals
designed to encourage two broad policy objectives: increased
renewable energy generation, and reduction of fossil fuel usage
and related GHG emissions. The United States House of
Representatives passed a bill known as the America Clean Energy
and Security Act of 2009 (ACES) which addresses both
topics, by means of a phased-in national renewable energy
standard and a
cap-and-trade
system to reduce GHG emissions. Energy-from-waste and biomass
have generally been included in the ACES bill to be among the
technologies that help to achieve both of these policy
objectives. Similar proposals are being considered in the United
States Senate. While legislation is far from final and a
vigorous debate is expected when the House and Senate bills are
reconciled, we believe the direction of Congressional efforts is
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consistent with the Obama administrations objectives on
energy policy reform and could create additional growth
opportunities for our business and increase energy revenue from
existing facilities.
Our senior management team has extensive experience in
developing, constructing, operating, acquiring and integrating
waste and energy services businesses. We intend to continue to
focus our efforts on pursuing development and acquisition-based
growth. We anticipate that a part of our future growth will come
from acquiring or investing in additional energy-from-waste,
waste disposal and renewable energy production businesses in the
Americas, Europe and Asia. Our business is capital intensive
because it is based upon building and operating municipal solid
waste processing and energy generating projects. In order to
provide meaningful growth through development, we must be able
to invest our funds, obtain equity
and/or debt
financing, and provide support to our operating subsidiaries.
Economic
Factors Affecting Business Conditions
The ongoing economic slowdown, both in the United States and
internationally, has reduced demand for goods and services
generally, which tends to reduce overall volumes of waste
requiring disposal, and the pricing at which we can attract
waste to fill available capacity. At the same time, the declines
in global natural gas and other fossil fuel prices have pushed
electricity and steam pricing lower generally which causes lower
revenue for the portion of the energy we sell which is not under
fixed price contracts. Lastly, the downturn in economic activity
tends to reduce global demand for and pricing of certain
commodities, such as the scrap metals we recycle from our
energy-from-waste facilities. The combination of these factors
could reduce our revenue and cash flow.
The same economic slowdown may reduce the demand for the waste
disposal services and the energy that our facilities offer. Many
of our customers are municipalities and public authorities,
which are generally experiencing fiscal pressure as local and
central governments seek to reduce expenses in order to address
declining tax revenues which may result from the slowdown and
increases in unemployment. At the same time, dislocations in the
financial sector may make it more difficult, and more costly, to
finance new projects. These factors, particularly in the absence
of energy policies which encourage renewable technologies such
as energy-from-waste, may make it more difficult for us to sell
waste disposal services or energy at prices sufficient to allow
us to grow our business through developing and building new
projects.
Acquisitions
and Business Development
In our domestic business, we are pursuing additional growth
opportunities through project expansions, new energy-from-waste
and other renewable energy projects, contract extensions,
acquisitions, and businesses ancillary to our existing business,
such as additional waste transfer, transportation, processing
and disposal.
We are also pursuing international waste
and/or
renewable energy business opportunities, particularly in
locations where the market demand, regulatory environment or
other factors encourage technologies such as energy-from-waste
to reduce dependence on landfilling for waste disposal and
fossil fuels for energy production in order to reduce GHG
emissions. In particular, we are focusing on the United Kingdom,
Ireland and China, and are also pursuing opportunities in
certain markets in Europe and in Canada and other markets in the
Americas.
2009
acquisitions, business development and
dispositions
Domestic
Business:
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We signed a definitive agreement to acquire from Veolia
Environmental Services North America Corp. most of its North
American energy-from-waste business for a purchase price of
$450 million, less net debt (consolidated indebtedness net
of cash and restricted funds held in trust) and subject to
certain other adjustments. The operations to be acquired include
seven energy-from-waste facilities, which are located in
California, Florida, New York, Pennsylvania, and Vancouver,
Canada. The operations also include a transfer station located
in Pennsylvania. Each of the operations to be acquired includes
a long-term operating contract with the respective municipal
client. Six of the energy-from-waste facilities and the transfer
station are publicly-owned facilities, and we will acquire a
majority ownership stake in one energy-from-waste facility
(Montgomery, Pennsylvania). Collectively, these seven
energy-from-waste facilities process approximately
3 million tons of waste per year. We expect that the entire
transaction will close by year end. However, the closing of the
transaction may occur in stages and is conditioned upon receipt
of
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customary regulatory and other approvals or consents. The
failure to obtain certain approvals or consents may result in
the removal of certain businesses from the transaction and a
related price reduction.
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Our long-term operating contract with the Greater Detroit
Resource Recovery Authority (GDRRA) to operate the
2,832 tons per day (tpd) energy-from-waste facility
located in Detroit, Michigan (the Detroit Facility)
expired on June 30, 2009. Effective June 30, 2009, we
entered into the following transactions, which extend our
interest in the Detroit Facility:
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We purchased an undivided 30% owner participant interest in the
Detroit Facility and final working capital for total cash
consideration of approximately $7.9 million.
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We entered into an operating and maintenance agreement with
owners of the Detroit Facility, pursuant to which we will
operate, maintain and provide certain other services for the
owners at the Detroit Facility for a term of one year.
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We entered into a waste disposal agreement with GDRRA pursuant
to which we will dispose of the waste of the City of Detroit for
a term of at least one year. The term of the waste disposal
agreement will automatically renew for successive one-year terms
unless either party provides advance written notice of
termination in accordance with the provisions thereof. In
addition, as an owner participant, we have the right, on one or
more occasions, to call upon GDRRA to deliver the waste of the
City of Detroit to the Detroit Facility at
market-based
rates. The call right continues for the duration of the
participation agreement, which expires in 2035.
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We have not finalized negotiation of pricing for a new steam
agreement for the Detroit Facility. Securing a steam agreement
with appropriate pricing is important for the long-term economic
viability of the Detroit Facility.
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We acquired two waste transfer stations with combined capacity
of 4,500 tpd in Philadelphia, Pennsylvania for cash
consideration of approximately $17.5 million, subject to
final working capital adjustments.
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International
Business:
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We entered into agreements to terminate our joint venture with
Guangzhou Development Power Investment Co., Ltd.
(GDPI) and to sell our 40% equity interest in the
joint venture entity, Guangzhou Development Covanta
Environmental Energy Co., Ltd., at book value to an affiliate of
GDPI for approximately $1.2 million. The termination and
sale are conditional upon various regulatory and other
conditions precedent and is expected to close later this year.
Notwithstanding the termination and sale, we intend to continue
to cooperate with GDPI on the development of energy-from-waste
projects in Guangdong Province, Peoples Republic of China
on a project by project basis.
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2008
acquisitions and business development
Domestic
Business:
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We acquired Indeck Maine Energy, LLC which owned and operated
two biomass energy facilities. The two nearly identical
facilities, located in West Enfield and Jonesboro, Maine, added
a total of 49 gross megawatts (MW) to our
renewable energy portfolio. We sell the electric output and
renewable energy credits from these facilities into the New
England market. We acquired these two facilities for cash
consideration of approximately $53.4 million, net of cash
acquired, inclusive of final working capital adjustments.
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We acquired an energy-from-waste facility in Tulsa, Oklahoma for
cash consideration of approximately $12.7 million. The
design capacity of the facility is 1,125 tpd of waste and gross
electric capacity of 16.5 MW. This facility was shut down
by the prior owner in the summer of 2007 and we returned two of
the facilitys three boilers to service in November 2008.
Since the acquisition of this energy-from-waste facility, we
have invested approximately $5.3 million in capital
improvements to restore its operational performance.
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We acquired a landfill for the disposal of ash in Peabody,
Massachusetts from Peabody Monofill Associates, Inc. and others
for cash consideration of approximately $7.4 million.
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We entered into new tip fee contracts which will supply waste to
the Wallingford, Connecticut facility, following the expiration
of the existing service fee contract in 2010. These contracts in
total are expected to supply waste utilizing most or all of the
facilitys capacity through 2020.
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We entered into a new tip fee contract with Kent County in
Michigan which commenced on January 1, 2009 and extended
the existing contract from 2010 to 2023. This contract is
expected to supply waste utilizing most or all of the
facilitys capacity. Previously this was a service fee
contract.
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We entered into a new service fee contract with the Pasco County
Commission in Florida which commenced on January 1, 2009
and extended the existing contract from 2011 to 2016.
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We entered into a new tip fee contract with the City of
Indianapolis for a term of 10 years which commenced upon
expiration of the existing service fee contract in December
2008. This contract represents approximately 50% of the
facilitys capacity.
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We entered into various agreements with multiple partners to
invest in the development, testing or licensing of new
technologies related to the transformation of waste materials
into renewable fuels or the generation of energy. Initial
licensing fees and demonstration unit purchases approximated
$6.5 million and $1.4 million during the year ended
December 31, 2008 and six months ended June 30, 2009,
respectively.
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International
Business:
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We entered into an agreement with Beijing Baoluo Investment Co.,
Ltd. (Beijing Baoluo) to purchase a direct 58%
equity interest in the Fuzhou project, a 1,200 metric tpd
24 MW mass-burn energy-from-waste project in China for
approximately $14 million. We currently hold a
noncontrolling interest in this project. This purchase was
conditional upon various regulatory and other conditions
precedent and was expected to close in the second quarter of
2009. Conditions required for closing were not achieved and
Beijing Baoluo informed us that it no longer desired to proceed
to closing the sale. We continue to hold a noncontrolling
interest in this project.
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Under
Advanced Development/Construction
Domestic
Business:
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We entered into a ten year agreement to maintain and operate an
800 tpd energy-from-waste facility located in Harrisburg,
Pennsylvania and obtained a right of first refusal to purchase
the facility. We have also agreed to provide construction
management services and to advance up to $25.5 million in
funding for certain facility improvements required to enhance
facility performance, the repayment of which is guaranteed by
the City of Harrisburg. As of June 30, 2009, we advanced
$15.9 million under this funding arrangement. The facility
improvements are expected to be completed in the second half of
2009. On July 1, 2009, the first repayment installment on
the advance was due but not paid. We are pursuing efforts to
collect the past due amount, and to ensure that other amounts we
have advanced will be repaid when due.
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We designed, constructed, operate and maintain the 1,200 tpd
mass-burn energy-from-waste facility located in and owned by
Hillsborough County in Florida. In 2005, we entered into
agreements with Hillsborough County to implement an expansion of
this energy-from-waste facility, and to extend the agreement
under which we operate the facility to 2027. Completion of the
expansion, and commencement of the operation of the expanded
project, is expected in the second half of 2009.
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International
Business:
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We have entered into definitive agreements for the development
of a 1,700 metric tpd energy-from-waste project serving the City
of Dublin, Ireland and surrounding communities. The Dublin
project, which marks our most significant entry to date into the
European waste and renewable energy markets, is being developed
and will be owned by Dublin Waste to Energy Limited, which we
control and co-own with DONG Energy Generation A/S.
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We are responsible for the design and construction of the
project, which is estimated to cost approximately
350 million and will require 36 months to
complete, once full construction commences. We will operate
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and maintain the project for Dublin Waste to Energy Limited,
which has a
25-year tip
fee type contract with Dublin to provide disposal service for
approximately 320,000 metric tons of waste annually. The project
is structured on a build-own-operate-transfer model, where
ownership will transfer to Dublin after the
25-year
term, unless extended. The project is expected to sell
electricity into the local grid under short-term arrangements.
We and DONG Energy Generation A/S have committed to provide
financing for all phases of the project, and we expect to
utilize debt financing for the project. The primary approvals
and licenses for the project have been obtained, and any
remaining consents, approvals and conditions necessary to begin
full construction are expected to be obtained in due course. We
have begun to perform preliminary
on-site work
and expect to commence full construction in the second half of
2009.
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Our joint venture, Taixing Covanta Yanjiang Cogeneration Co.,
Ltd., of which we own 85%, entered into a 25 year
concession agreement and waste supply agreements to build, own
and operate a 350 metric tpd energy-from-waste facility for
Taixing Municipality, in Jiangsu Province, Peoples
Republic of China. The project, which will be built on the site
of our existing coal-fired facility in Taixing, will supply
steam to an adjacent industrial park under short-term
arrangements. The Taixing project is expected to commence
construction in the second half of 2009 and be completed in 2011.
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We and Chongqing Iron & Steel Company (Group) Limited
have entered into a 25 year contract to build, own, and
operate an 1,800 metric tpd energy-from-waste facility for
Chengdu Municipality in Sichuan Province, Peoples Republic
of China. In connection with this award, we invested
$17.1 million for a 49% equity interest in the project
joint venture company. The joint venture has obtained project
financing for Rmb 480 million for the project, which we
expect to be 49% guaranteed by us and 51% guaranteed by
Chongqing Iron & Steel Company (Group) Limited until
the project has been constructed and for one year after
operations commence. The Chengdu project is expected to commence
construction in the third quarter of 2009.
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Business
Segments
Our reportable segments are Domestic and International, which
are comprised of our domestic and international waste and energy
services operations, respectively.
Domestic
For all energy-from-waste projects, we receive revenue from two
primary sources: fees charged for operating projects or
processing waste received and payments for electricity and steam
sales. We also operate, and in some cases have ownership
interests in, transfer stations and landfills which generate
revenue from waste and ash disposal fees or operating fees. In
addition, we own and in some cases operate, other renewable
energy projects in the United States which generate electricity
from wood waste (biomass), landfill gas, and hydroelectric
resources. The electricity from these other renewable energy
projects is sold to utilities. For these projects, we receive
revenue from electricity sales, and in some cases cash from
equity distributions.
International
We have ownership interests in
and/or
operate facilities internationally, including independent power
production facilities in the Philippines, Bangladesh and India
where we generate electricity by combusting coal, natural gas
and heavy fuel-oil, and energy-from-waste facilities in China
and Italy. We receive revenue from operating fees, electricity
and steam sales, and in some cases cash from equity
distributions.
Contract
Structures
Most of our energy-from-waste projects were developed and
structured contractually as part of competitive procurement
processes conducted by municipal entities. As a result, many of
these projects have common features. However, each service
agreement is different reflecting the specific needs and
concerns of a client community, applicable regulatory
requirements and other factors. Often, we design the facility,
help to arrange for financing and then we either construct and
equip the facility on a fixed price and schedule basis, or we
undertake an alternative role, such as construction management,
if that better meets the goals of our municipal client.
Following construction and during operations, we receive revenue
from two primary sources: fees we receive for operating projects
or for processing waste received, and payments we receive for
electricity
and/or steam
we sell.
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We have 22 domestic energy-from-waste projects where we charge a
fixed fee (which escalates over time pursuant to contractual
indices that we believe are appropriate to reflect price
inflation) for operation and maintenance services. We refer to
these projects as having a Service Fee structure.
Our contracts at Service Fee projects provide revenue that does
not materially vary based on the amount of waste processed or
energy generated and as such is relatively stable for the
contract term. In addition, at most of our Service Fee projects,
the operating subsidiary retains only a fraction of the energy
revenues generated, with the balance used to provide a credit to
the municipal client against its disposal costs. Therefore, in
these projects, the municipal client derives most of the benefit
and risk of energy production and changing energy prices.
We also have 16 energy-from-waste projects (13 domestic and 3
international) at which we receive a per-ton fee under contracts
for processing waste. We refer to these projects as having a
Tip Fee structure. At Tip Fee projects, we generally
enter into long-term waste disposal contracts for a substantial
portion of project disposal capacity and retain all of the
energy revenue generated. These Tip Fee service agreements
include stated fixed fees earned by us for processing waste up
to certain base contractual amounts during specified periods.
These Tip Fee service agreements also set forth the per-ton fees
that are payable if we accept waste in excess of the base
contractual amounts. The waste disposal and energy revenue from
these projects is more dependent upon operating performance and,
as such, is subject to greater revenue fluctuation to the extent
performance levels fluctuate.
Under both structures, our returns are expected to be stable if
we do not incur material unexpected operation and maintenance
costs or other expenses. In addition, most of our
energy-from-waste project contracts are structured so that
contract counterparties generally bear, or share in, the costs
associated with events or circumstances not within our control,
such as uninsured force majeure events and changes in legal
requirements. The stability of our revenues and returns could be
affected by our ability to continue to enforce these
obligations. Also, at some of our energy-from-waste facilities,
commodity price risk is mitigated by passing through commodity
costs to contract counterparties. With respect to our other
domestic renewable energy projects and international independent
power projects, such structural features generally do not exist
because either we operate and maintain such facilities for our
own account or we do so on a cost-plus basis rather than a
fixed-fee basis.
We generally sell the energy output from our projects to local
utilities pursuant to long-term contracts. Where a Service Fee
structure exists, our client community usually retains most
(generally 90%) of the energy revenues generated and pays the
balance to us. Where Tip Fee structures exist, we generally
retain 100% of the energy revenues. At several of our
energy-from-waste projects, we sell energy output under
short-term contracts or on a spot-basis to our customers. At our
Tip Fee projects, we generally have a greater exposure to energy
market price fluctuation, as well as a greater exposure to
variability in project operating performance.
We receive the majority of our revenue under short and long term
contracts, with little or no exposure to price volatility, but
with adjustments intended to reflect changes in our costs. Where
our revenue is received under other arrangements and depending
upon the revenue source, we have varying amounts of exposure to
price volatility. The largest component of this revenue is
comprised of waste revenue, which has generally not been subject
to material price volatility. Energy and metal pricing tends to
be more volatile. During the second and third quarters of 2008,
pricing for energy and recycled metals reached historically high
levels and has subsequently declined materially.
At some of our domestic renewable energy and international
independent power projects, our operating subsidiaries purchase
fuel in the open markets which exposes us to fuel price risk. At
other plants, fuel costs are contractually included in our
electricity revenues, or fuel is provided by our customers. In
some of our international projects, the project entity (which in
some cases is not our subsidiary) has entered into long-term
fuel purchase contracts that protect the project from fuel
shortages, provided counterparties to such contracts perform
their commitments.
Seasonal
Effects
Our quarterly operating income from domestic and international
operations within the same fiscal year typically differs
substantially due to seasonal factors, primarily as a result of
the timing of scheduled plant maintenance. We typically conduct
scheduled maintenance periodically each year, which requires
that individual boiler units temporarily cease operations.
During these scheduled maintenance periods, we incur material
repair
41
and maintenance expenses and receive less revenue until the
boiler units resume operations. This scheduled maintenance
typically occurs during periods of off-peak electric demand in
the spring and fall. The spring scheduled maintenance period is
typically more extensive than scheduled maintenance conducted
during the fall. As a result, we typically incur the highest
maintenance expense in the first half of the year. Given these
factors, we typically experience lower operating income from our
projects during the first six months of each year and higher
operating income during the second six months of each year.
Contract
Duration
We operate energy-from-waste projects under long-term
agreements. For those projects we own, our contract to sell the
projects energy output (either electricity or steam)
generally expires at or after the date when the initial term of
our contract to operate or receive waste also expires.
Expiration of these contracts will subject us to greater market
risk in maintaining and enhancing revenues as we enter into new
contracts. Following the expiration of the initial contracts, we
intend to enter into replacement or additional contracts for
waste supplies and will sell our energy output either into the
regional electricity grid or pursuant to new contracts. Because
project debt on these facilities will be paid off at such time,
we believe that we will be able to offer disposal services at
rates that will attract sufficient quantities of waste and
provide acceptable revenues. For those projects we operate but
do not own, prior to the expiration of the initial term of our
operating contract, we will seek to enter into renewal or
replacement contracts to continue operating such projects. We
will seek to bid competitively in the market for additional
contracts to operate other facilities as similar contracts of
other vendors expire.
RESULTS
OF OPERATIONS
The comparability of the information provided below with respect
to our revenues, expenses and certain other items was affected
by several factors. As outlined above under Acquisitions and
Business Development, our acquisition and business
development initiatives resulted in various additional projects
which increased comparative 2009 revenues and expenses. These
factors must be taken into account in developing meaningful
comparisons between the periods compared below. The following
general discussions should be read in conjunction with the
condensed consolidated financial statements and the Notes
thereto and other financial information appearing and referred
to elsewhere in this report.
Effective January 1, 2009, we adopted the following
pronouncements which required us to retrospectively restate
previously disclosed condensed consolidated financial
statements. Certain prior period amounts have thus been
reclassified in the unaudited condensed consolidated financial
statements to conform to the current period presentation.
|
|
|
|
|
We adopted Statement of Financial Accounting Standards
(SFAS) No. 160, Noncontrolling Interests
in Consolidated Financial Statements an amendment of
Accounting Research Bulletin (ARB) No. 51
(SFAS 160). SFAS 160 amends the accounting
and reporting for noncontrolling interests in a consolidated
subsidiary and the deconsolidation of a subsidiary. Under SFAS
160, we now report minority interests in subsidiaries (now
referred to as noncontrolling interests in
subsidiaries) as a separate component of equity in our
condensed consolidated financial statements and show both net
income attributable to the noncontrolling interest and net
income attributable to the controlling interest on the face of
the condensed consolidated income statement. SFAS 160
applies prospectively, except for presentation and disclosure
requirements, which are applied retrospectively.
|
|
|
We adopted Financial Accounting Standards Board
(FASB) Staff Position (FSP) No. APB
14-1,
Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement) (FSP APB
14-1).
FSP APB 14-1
is effective for our 1.00% Senior Convertible Debentures
(the Debentures) and requires retrospective
application for all periods presented. The FSP requires the
issuer of convertible debt instruments with cash settlement
features to separately account for the liability and equity
components of the instrument. FSP APB
14-1 also
requires accretion of the resultant debt discount over the
expected life of the Debentures, which is February 1, 2007
to February 1, 2012, the first permitted redemption date of
the Debentures. The condensed consolidated income statements
were
|
42
|
|
|
|
|
retrospectively modified compared to previously reported amounts
as follows (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30, 2008
|
|
|
June 30, 2008
|
|
|
Additional pre-tax non-cash convertible debt related expense
|
|
$
|
(4.5
|
)
|
|
$
|
(8.8
|
)
|
Additional deferred tax benefit
|
|
|
1.9
|
|
|
|
3.7
|
|
|
|
|
|
|
|
|
|
|
Retrospective change in net income and retained earnings
|
|
$
|
(2.6
|
)
|
|
$
|
(5.1
|
)
|
|
|
|
|
|
|
|
|
|
Change to basic earnings per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
Change to diluted earnings per share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
For the three and six months ended June 30, 2009, the
additional pre-tax non-cash convertible debt related expense
recognized in our condensed consolidated income statement
related to the adoption of FSP APB
14-1 was
$4.8 million and $9.5 million, respectively.
Consolidated
Results of Operations Comparison of Results for the
Three and Six Months Ended June 30, 2009 vs. Results for
the Three and Six Months Ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
Variance
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
Increase/(Decrease)
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
Three
|
|
|
Six
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Month
|
|
|
Month
|
|
|
|
|
|
|
(As Adjusted)
|
|
|
|
|
|
(As Adjusted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited, in thousands)
|
|
|
|
|
|
|
|
|
CONSOLIDATED RESULTS OF OPERATIONS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
$
|
375,786
|
|
|
$
|
422,996
|
|
|
$
|
734,546
|
|
|
$
|
811,762
|
|
|
$
|
(47,210
|
)
|
|
$
|
(77,216
|
)
|
Total operating expenses
|
|
|
314,454
|
|
|
|
346,467
|
|
|
|
670,022
|
|
|
|
704,468
|
|
|
|
(32,013
|
)
|
|
|
(34,446
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
61,332
|
|
|
|
76,529
|
|
|
|
64,524
|
|
|
|
107,294
|
|
|
|
(15,197
|
)
|
|
|
(42,770
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
1,156
|
|
|
|
1,052
|
|
|
|
2,184
|
|
|
|
2,692
|
|
|
|
104
|
|
|
|
(508
|
)
|
Interest expense
|
|
|
(8,532
|
)
|
|
|
(11,563
|
)
|
|
|
(16,448
|
)
|
|
|
(25,283
|
)
|
|
|
(3,031
|
)
|
|
|
(8,835
|
)
|
Non-cash convertible debt related expense
|
|
|
(6,395
|
)
|
|
|
(4,453
|
)
|
|
|
(11,097
|
)
|
|
|
(8,827
|
)
|
|
|
1,942
|
|
|
|
2,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(13,771
|
)
|
|
|
(14,964
|
)
|
|
|
(25,361
|
)
|
|
|
(31,418
|
)
|
|
|
(1,193
|
)
|
|
|
(6,057
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense, equity in net income from
unconsolidated investments and noncontrolling interests in
subsidiaries
|
|
|
47,561
|
|
|
|
61,565
|
|
|
|
39,163
|
|
|
|
75,876
|
|
|
|
(14,004
|
)
|
|
|
(36,713
|
)
|
Income tax expense
|
|
|
(17,901
|
)
|
|
|
(24,361
|
)
|
|
|
(14,583
|
)
|
|
|
(30,032
|
)
|
|
|
(6,460
|
)
|
|
|
(15,449
|
)
|
Equity in net income from unconsolidated investments
|
|
|
5,671
|
|
|
|
7,320
|
|
|
|
11,480
|
|
|
|
12,812
|
|
|
|
(1,649
|
)
|
|
|
(1,332
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
|
35,331
|
|
|
|
44,524
|
|
|
|
36,060
|
|
|
|
58,656
|
|
|
|
(9,193
|
)
|
|
|
(22,596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net income attributable to noncontrolling interests in
subsidiaries
|
|
|
(2,164
|
)
|
|
|
(2,225
|
)
|
|
|
(3,544
|
)
|
|
|
(4,094
|
)
|
|
|
(61
|
)
|
|
|
(550
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME ATTRIBUTABLE TO COVANTA HOLDING CORPORATION
|
|
$
|
33,167
|
|
|
$
|
42,299
|
|
|
$
|
32,516
|
|
|
$
|
54,562
|
|
|
|
(9,132
|
)
|
|
|
(22,046
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
153,731
|
|
|
|
153,387
|
|
|
|
153,600
|
|
|
|
153,276
|
|
|
|
344
|
|
|
|
324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
154,953
|
|
|
|
154,848
|
|
|
|
154,846
|
|
|
|
154,710
|
|
|
|
105
|
|
|
|
136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.22
|
|
|
$
|
0.28
|
|
|
$
|
0.21
|
|
|
$
|
0.36
|
|
|
$
|
(0.06
|
)
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.21
|
|
|
$
|
0.27
|
|
|
$
|
0.21
|
|
|
$
|
0.35
|
|
|
$
|
(0.06
|
)
|
|
$
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
The following general discussions should be read in conjunction
with the above table, the consolidated financial statements and
the Notes thereto and other financial information appearing and
referred to elsewhere in this report. Additional detail relating
to changes in operating revenues and operating expenses, and the
quantification of specific factors affecting or causing such
changes, is provided in the Domestic and International segment
discussions below.
Operating revenues decreased by $47.2 million and
$77.2 million for the three and six month comparative
periods, respectively, primarily due to the following:
|
|
|
|
|
decreased electricity and steam sales revenue due to lower fuel
pass throughs at our Indian facilities and foreign exchange
impacts in 2009, and
|
|
|
decreased waste and service revenues and decreased recycled
metal revenues at our existing energy-from-waste facilities in
our Domestic segment, offset by
|
|
|
increased electricity and steam sales in our Domestic segment
due to acquired businesses and new contracts at our Indianapolis
and Kent facilities.
|
Operating expenses decreased by $32.0 million and
$34.4 million for the three and six month comparative
periods, respectively, primarily due to the following:
|
|
|
|
|
decreased plant operating expenses at our Indian facilities
resulting primarily from lower fuel costs and foreign exchange
impacts in 2009, and
|
|
|
decreased plant operating expenses at our existing
energy-from-waste facilities resulting primarily from lower
energy costs and reduced maintenance expense due to less
unscheduled down time, offset by
|
|
|
increased plant operating expenses resulting from cost
escalations, and
|
|
|
$5.2 million of business interruption insurance recoveries
at our SEMASS facility recorded in the second quarter of
2008, and
|
|
|
higher costs resulting from the transition of the Indianapolis
and Kent facilities from Service Fee to Tip Fee
contracts, and
|
|
|
additional operating costs, net of contra expenses recorded
related to the generation of renewable energy credits, from new
businesses acquired in the Domestic segment.
|
Investment income increased by $0.1 million and decreased
by $0.5 million for the three and six month comparative
periods, respectively, primarily due to lower interest rates on
invested funds. Interest expense decreased by $3.0 million
and $8.8 million for the three and six month comparative
periods, respectively, primarily due to lower floating interest
rates on the Term Loan Facility (as defined in the Liquidity
section below). Non-cash convertible debt related expense
increased by $1.9 million and $2.3 million for the
three and six month comparative periods, respectively, primarily
due to amortization of the debt discount related to the 3.25%
Cash Convertible Senior Notes issued during the quarter ended
June 30, 2009.
Income tax expense decreased by $6.5 million and
$15.4 million for the three and six month comparative
periods, respectively, primarily due to lower pre-tax income
resulting from decreased waste and service revenues and recycled
metal revenue at our energy-from-waste facilities.
Equity in net income from unconsolidated investments decreased
by $1.6 million and $1.3 million for the three and six
month comparative periods, respectively, primarily due to higher
taxes for Quezon Power, Inc.
44
Domestic
Business Results of
Operations
Comparison of Results for the Three and Six Months Ended
June 30, 2009 vs. Results for the Three and Six Months
Ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
Variance
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
Increase/(Decrease)
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Three Month
|
|
|
Six Month
|
|
|
|
(Unaudited, in thousands)
|
|
|
Waste and service revenues
|
|
$
|
226,881
|
|
|
$
|
241,736
|
|
|
$
|
432,233
|
|
|
$
|
458,555
|
|
|
$
|
(14,855
|
)
|
|
$
|
(26,322
|
)
|
Electricity and steam sales
|
|
|
95,995
|
|
|
|
95,633
|
|
|
|
197,244
|
|
|
|
186,723
|
|
|
|
362
|
|
|
|
10,521
|
|
Other operating revenues
|
|
|
6,579
|
|
|
|
13,360
|
|
|
|
13,151
|
|
|
|
28,735
|
|
|
|
(6,781
|
)
|
|
|
(15,584
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
329,455
|
|
|
|
350,729
|
|
|
|
642,628
|
|
|
|
674,013
|
|
|
|
(21,274
|
)
|
|
|
(31,385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plant operating expenses
|
|
|
183,092
|
|
|
|
180,504
|
|
|
|
405,492
|
|
|
|
385,798
|
|
|
|
2,588
|
|
|
|
19,694
|
|
Depreciation and amortization expense
|
|
|
49,384
|
|
|
|
49,228
|
|
|
|
99,106
|
|
|
|
95,385
|
|
|
|
156
|
|
|
|
3,721
|
|
Net interest expense on project debt
|
|
|
11,165
|
|
|
|
12,256
|
|
|
|
22,835
|
|
|
|
24,366
|
|
|
|
(1,091
|
)
|
|
|
(1,531
|
)
|
General and administrative expenses
|
|
|
19,888
|
|
|
|
19,664
|
|
|
|
39,381
|
|
|
|
39,282
|
|
|
|
224
|
|
|
|
99
|
|
Other operating expense
|
|
|
6,122
|
|
|
|
15,524
|
|
|
|
11,575
|
|
|
|
30,275
|
|
|
|
(9,402
|
)
|
|
|
(18,700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
269,651
|
|
|
|
277,176
|
|
|
|
578,389
|
|
|
|
575,106
|
|
|
|
(7,525
|
)
|
|
|
3,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
59,804
|
|
|
$
|
73,553
|
|
|
$
|
64,239
|
|
|
$
|
98,907
|
|
|
|
(13,749
|
)
|
|
|
(34,668
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenues
Operating revenues for the domestic segment decreased by
$21.3 million and $31.4 million for the three and six
month comparative periods, respectively, as reflected in the
comparison of existing business and new business in the chart
below and the discussion of key variance drivers which follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Segment Operating Revenue Variances
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Existing
|
|
|
New
|
|
|
|
|
|
Existing
|
|
|
New
|
|
|
|
|
|
|
Business
|
|
|
Business (A)
|
|
|
Total
|
|
|
Business
|
|
|
Business (B)
|
|
|
Total
|
|
|
Waste and service revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fee
|
|
$
|
(11.2
|
)
|
|
$
|
|
|
|
$
|
(11.2
|
)
|
|
$
|
(19.7
|
)
|
|
$
|
|
|
|
$
|
(19.7
|
)
|
Tip fee
|
|
|
6.4
|
|
|
|
3.1
|
|
|
|
9.5
|
|
|
|
8.5
|
|
|
|
4.2
|
|
|
|
12.7
|
|
Recycled metal
|
|
|
(13.3
|
)
|
|
|
0.1
|
|
|
|
(13.2
|
)
|
|
|
(19.4
|
)
|
|
|
0.1
|
|
|
|
(19.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total waste and service revenues
|
|
|
(18.1
|
)
|
|
|
3.2
|
|
|
|
(14.9
|
)
|
|
|
(30.6
|
)
|
|
|
4.3
|
|
|
|
(26.3
|
)
|
Electricity and steam sales
|
|
|
(2.9
|
)
|
|
|
3.3
|
|
|
|
0.4
|
|
|
|
1.1
|
|
|
|
9.4
|
|
|
|
10.5
|
|
Other operating revenues
|
|
|
(6.8
|
)
|
|
|
|
|
|
|
(6.8
|
)
|
|
|
(15.6
|
)
|
|
|
|
|
|
|
(15.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
$
|
(27.8
|
)
|
|
$
|
6.5
|
|
|
$
|
(21.3
|
)
|
|
$
|
(45.1
|
)
|
|
$
|
13.7
|
|
|
$
|
(31.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
This column represents the results of operations for the three
months ended June 30, 2009 for businesses acquired and
operated after June 30, 2008.
|
|
|
(B) |
This column represents the results of operations for the six
months ended June 30, 2009 for businesses acquired and
operated after June 30, 2008 plus the results of operations
for the three months ended March 31, 2009 for businesses
acquired after March 31, 2008.
|
|
|
|
|
|
Revenues from Service Fee arrangements for existing business
decreased primarily due to the new contracts at our Indianapolis
and Kent facilities and lower revenues earned explicitly to
service project debt of $4.4 million and $8.6 million
for the three and six month comparative periods, respectively,
partially offset by contractual escalations.
|
|
|
Revenues from Tip Fee arrangements for existing business
increased primarily due to the new contracts at our Indianapolis
and Kent facilities and higher waste volume, offset by lower
pricing for the three months and six months ended June 30,
2009.
|
45
|
|
|
|
|
Recycled metal revenues were $5.8 million and
$11.0 million for the three and six months ended
June 30, 2009, respectively, which decreased compared to
the same prior year periods due to lower pricing, partially
offset by increased recovered metal volume. During the second
and third quarters of 2008, we experienced historically high
prices for recycled metal which declined significantly during
the fourth quarter of 2008 and the impact on revenue is
reflected in the table below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
Quarters Ended
|
|
Total Recycled Metal Revenues
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
March 31,
|
|
$
|
5.2
|
|
|
$
|
11.4
|
|
|
$
|
7.0
|
|
June 30,
|
|
|
5.8
|
|
|
|
19.0
|
|
|
|
7.5
|
|
September 30,
|
|
|
N/A
|
|
|
|
17.3
|
|
|
|
7.9
|
|
December 31,
|
|
|
N/A
|
|
|
|
5.9
|
|
|
|
9.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total for the Year Ended December 31,
|
|
|
N/A
|
|
|
$
|
53.6
|
|
|
$
|
31.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electricity and steam sales for existing business decreased for
the three months ended June 30, 2009 by $2.9 million.
This was due to a decrease of $8.2 million primarily due to
lower energy pricing offset by increased revenue of
$5.2 million related to contract changes at our
Indianapolis and Kent facilities. Electricity and steam sales
increased for the six months ended June 30, 2009 primarily
due to contract changes at our Indianapolis and Kent facilities
partially offset by lower energy pricing and production.
|
|
|
Other operating revenues for existing business decreased
primarily due to the timing of construction activity.
|
Operating
Expenses
Variances in plant operating expenses for the domestic segment
are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Segment Plant Operating Expense Variances
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Existing
|
|
|
New
|
|
|
|
|
|
Existing
|
|
|
New
|
|
|
|
|
|
|
Business
|
|
|
Business (A)
|
|
|
Total
|
|
|
Business
|
|
|
Business (B)
|
|
|
Total
|
|
|
Total plant operating expenses
|
|
$
|
(5.4
|
)
|
|
$
|
8.0
|
|
|
$
|
2.6
|
|
|
$
|
(0.6
|
)
|
|
$
|
20.3
|
|
|
$
|
19.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
This column represents the results of operations for the three
months ended June 30, 2009 for businesses acquired and
operated after June 30, 2008.
|
|
|
(B) |
This column represents the results of operations for the six
months ended June 30, 2009 for businesses acquired and
operated after June 30, 2008 plus the results of operations
for the three months ended March 31, 2009 for businesses
acquired and operated after March 31, 2008.
|
Existing business plant operating expenses decreased by
$5.4 million and $0.6 million for the three and six
month comparative periods, respectively. For the three months
ended June 30, 2009, existing business plant operating
expense declined by $10.6 million primarily due to the
impact of lower energy related costs and reduced maintenance
expense due to less unscheduled down time, partially offset by
cost escalations, $5.2 million of business interruption
insurance recoveries at our SEMASS facility recorded in the
second quarter of 2008 and higher costs resulting from the new
contracts at our Indianapolis and Kent facilities.
Depreciation and amortization expense increased by
$0.2 million and $3.7 million for the three and six
month comparative periods, respectively, primarily due to
capital expenditures and new business.
Other operating expense decreased by $9.4 million and
$18.7 million for the three and six month comparative
periods, respectively, primarily due to timing of construction
activity and lower losses on retirement of assets.
46
International
Business Results of
Operations
Comparison of Results for the Three and Six Months Ended
June 30, 2009 vs. Results for the Three and Six Months
Ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
Variance
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
Increase/(Decrease)
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Three Month
|
|
|
Six Month
|
|
|
|
(Unaudited, in thousands)
|
|
|
Waste and service revenues
|
|
$
|
961
|
|
|
$
|
953
|
|
|
$
|
1,878
|
|
|
$
|
1,757
|
|
|
$
|
8
|
|
|
$
|
(121
|
)
|
Electricity and steam sales
|
|
|
40,545
|
|
|
|
68,199
|
|
|
|
81,165
|
|
|
|
130,174
|
|
|
|
(27,654
|
)
|
|
|
(49,009
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
41,506
|
|
|
|
69,152
|
|
|
|
83,043
|
|
|
|
131,931
|
|
|
|
(27,646
|
)
|
|
|
(48,888
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plant operating expenses
|
|
|
31,464
|
|
|
|
58,104
|
|
|
|
65,106
|
|
|
|
111,821
|
|
|
|
(26,640
|
)
|
|
|
(46,715
|
)
|
Depreciation and amortization expense
|
|
|
1,760
|
|
|
|
2,340
|
|
|
|
3,509
|
|
|
|
4,745
|
|
|
|
(580
|
)
|
|
|
(1,236
|
)
|
Net interest expense on project debt
|
|
|
943
|
|
|
|
1,520
|
|
|
|
2,042
|
|
|
|
3,171
|
|
|
|
(577
|
)
|
|
|
(1,129
|
)
|
General and administrative expenses
|
|
|
6,389
|
|
|
|
3,264
|
|
|
|
11,817
|
|
|
|
7,054
|
|
|
|
3,125
|
|
|
|
4,763
|
|
Other operating expense
|
|
|
(1,089
|
)
|
|
|
418
|
|
|
|
(611
|
)
|
|
|
(4,204
|
)
|
|
|
(1,507
|
)
|
|
|
3,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
39,467
|
|
|
|
65,646
|
|
|
|
81,863
|
|
|
|
122,587
|
|
|
|
(26,179
|
)
|
|
|
(40,724
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
2,039
|
|
|
$
|
3,506
|
|
|
$
|
1,180
|
|
|
$
|
9,344
|
|
|
|
(1,467
|
)
|
|
|
(8,164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decreases in revenues and plant operating expenses resulted
primarily from lower fuel costs at our Indian facilities, which
are a pass through at both facilities, and foreign exchange
impacts in 2009, partially offset by increased demand from the
electricity offtaker and resulting higher electricity generation.
General and administrative expenses increased by
$3.1 million and $4.8 million for the three and six
month comparative periods, respectively, primarily due to
additional business development spending, and normal wage and
benefit escalations.
Other operating expense decreased by $1.5 million for the
three month comparative period primarily due to foreign currency
gains recorded during the three months ended June 30, 2009,
compared to foreign currency losses in the comparative period in
2008. Other operating expense increased by $3.6 million for
the six month comparative period primarily due to insurance
recoveries received during the six months ended June 30,
2008 and unfavorable foreign exchange impacts in 2009.
LIQUIDITY
AND CAPITAL RESOURCES
We generate substantial cash flow from our ongoing business,
which we believe will allow us to meet our liquidity needs,
invest in our business, pay down debt, and pursue strategic
growth opportunities. In addition to our ongoing cash flow, we
have access to several sources of liquidity, as discussed in
Available Sources of Liquidity below, including our
existing cash on hand of $551.2 million, restricted cash
available to service project debt of $278.9 million, and
the Revolving Loan Facility, which had undrawn and available
capacity of $300 million as of June 30, 2009.
We derive our cash flows principally from our operations at our
domestic and international projects, which allow us to satisfy
project debt covenants and payments, and distribute cash. We
typically receive cash distributions from our domestic projects
on either a monthly or quarterly basis, whereas a material
portion of cash from our international projects is received
semi-annually, during the second and fourth quarters. The
frequency and predictability of our receipt of cash from
projects differs, depending upon various factors, including
whether restrictions on distributions exist in applicable
project debt arrangements, whether a project is domestic or
international, and whether a project has been able to operate at
historical levels of production.
Our primary future cash requirements will be to fund capital
expenditures to maintain our existing businesses, make debt
service payments and grow our business through acquisitions and
business development, both
47
domestically and internationally. We will also seek to enhance
our cash flow from renewals or replacement of existing
contracts, from new contracts to expand existing facilities or
operate additional facilities and by investing in new projects.
Sources
and Uses of Cash Flow for the Six Months Ended June 30,
2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months
|
|
|
Increase
|
|
|
|
Ended June 30,
|
|
|
(Decrease)
|
|
|
|
2009
|
|
|
2008
|
|
|
2009 vs 2008
|
|
|
|
(Unaudited, in thousands)
|
|
|
Net cash provided by operating activities
|
|
$
|
137,322
|
|
|
$
|
161,351
|
|
|
$
|
(24,029
|
)
|
Net cash used in investing activities
|
|
|
(76,725
|
)
|
|
|
(80,155
|
)
|
|
|
(3,430
|
)
|
Net cash provided by (used) in financing activities
|
|
|
297,788
|
|
|
|
(87,007
|
)
|
|
|
384,795
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
388
|
|
|
|
111
|
|
|
|
277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
358,773
|
|
|
$
|
(5,700
|
)
|
|
|
364,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities for the six months
ended June 30, 2009 was $137.3 million, a decrease of
$24.0 million from the prior year period. The decrease was
primarily due to results of operations offset by the timing of
working capital and reduced interest expense.
Net cash used in investing activities for the six months ended
June 30, 2009 was $76.7 million, a decrease of
$3.4 million from the prior year period. The decrease was
primarily comprised of lower cash outflows of:
|
|
|
|
|
$11.7 million in purchases of property, plant and equipment
primarily due to timing of maintenance capital expenditures in
the six months ended June 30, 2009 and higher refurbishment
expenditures in the six months ended June 30, 2008 for two
California biomass facilities acquired in 2007; and
|
|
|
$9.5 million related to lower purchases of equity interests
in 2009; and
|
|
|
$3.1 million related to lower acquisition of businesses in
2009 and other activities;
|
Offset by:
|
|
|
|
|
$8.0 million related to net investments in fixed maturities
at our insurance subsidiary; and
|
|
|
$6.6 million related to a loan issued for the Harrisburg
energy-from-waste facility; and
|
|
|
$6.3 million of property insurance proceeds received in the
first six months of 2008.
|
Net cash provided by financing activities for the six months
ended June 30, 2009 was $297.8 million, an increase of
$384.8 million from the prior year period, of which
$388.9 million related to the proceeds received from the
issuance of the Notes, offset by a net use of cash of
$4.1 million, described below:
The Notes and related transactions resulted in net proceeds of
$388.9 million, consisting of:
|
|
|
|
|
proceeds of $460 million from the sale of the Notes;
|
|
|
proceeds of $54.0 million from the sale of Warrants;
|
|
|
use of cash of $112.4 million to purchase the Note
Hedge; and
|
|
|
use of cash of $12.7 million for transaction related costs.
|
The remaining net increase in uses of cash of $4.1 million
was primarily driven by:
|
|
|
|
|
payment of $55.1 million of the Hempstead energy-from-waste
facility project debt; offset by a
|
|
|
release of $52 million from restricted funds.
|
Available
Sources of Liquidity
Cash
and Cash Equivalents
Cash and cash equivalents include all cash balances and highly
liquid investments having maturities of three months or less
from the date of purchase. These short-term investments are
stated at cost, which approximates market value. As of
June 30, 2009, we had unrestricted cash and cash
equivalents of $551.2 million.
48
Restricted
Funds Held in Trust
Restricted funds held in trust are primarily amounts received by
third party trustees relating to certain projects we own which
may be used only for specified purposes. We generally do not
control these accounts. They primarily include debt service
reserves for payment of principal and interest on project debt,
and deposits of revenues received with respect to projects prior
to their disbursement, as provided in the relevant indenture or
other agreements. Such funds are invested principally in United
States Treasury bills and notes, United States government agency
securities and AAA- rated money market funds.
Restricted fund balances are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009
|
|
|
As of December 31, 2008
|
|
|
|
Current
|
|
|
Noncurrent
|
|
|
Current
|
|
|
Noncurrent
|
|
|
Debt service funds
|
|
$
|
73,693
|
|
|
$
|
95,383
|
|
|
$
|
103,371
|
|
|
$
|
97,761
|
|
Revenue funds
|
|
|
22,284
|
|
|
|
|
|
|
|
25,105
|
|
|
|
|
|
Other funds
|
|
|
43,230
|
|
|
|
44,292
|
|
|
|
46,617
|
|
|
|
52,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
139,207
|
|
|
$
|
139,675
|
|
|
$
|
175,093
|
|
|
$
|
149,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the $278.9 million in total restricted funds as of
June 30, 2009, approximately $159.3 million was
designated for future payment of project debt principal.
On June 22, 2009, we redeemed approximately
$55.1 million of the outstanding serial revenue bonds
related to the Hempstead energy-from-waste facility which were
due on December 1, 2009 in the accordance with the terms of
our indenture. The redemption was made from debt service
reserves and included accrued and unpaid interest to the date of
redemption.
Short-Term
Liquidity
The credit facilities are comprised of a $300 million
revolving credit facility (the Revolving Loan
Facility), a $320 million funded letter of credit
facility (the Funded L/C Facility), and a
$650 million term loan (the Term Loan Facility)
(collectively referred to as the Credit Facilities).
As of June 30, 2009, we had available credit for liquidity
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
Outstanding Letters
|
|
|
|
|
|
|
Available
|
|
|
|
|
|
of Credit as of
|
|
|
Available as of
|
|
|
|
Under Facility
|
|
|
Maturing
|
|
|
June 30, 2009
|
|
|
June 30, 2009
|
|
|
Revolving Loan Facility(1)
|
|
$
|
300,000
|
|
|
|
2013
|
|
|
$
|
|
|
|
$
|
300,000
|
|
Funded L/C Facility
|
|
$
|
320,000
|
|
|
|
2014
|
|
|
$
|
283,031
|
|
|
$
|
36,969
|
|
|
|
(1) |
Up to $200 million of which may be utilized for letters of
credit.
|
In July 2009, the 6.8% pro rata commitment previously provided
by Lehman Brothers Commercial Bank under the Revolving Loan
Facility was assigned to another financial institution.
Credit
Agreement Financial Covenants
The loan documentation under the Credit Facilities contains
customary affirmative and negative covenants and financial
covenants as discussed in Note 6. Long-Term Debt of the
Notes to the Consolidated Financial Statements included in our
Form 8-K
for the year ended December 31, 2008 filed on May 18,
2009. As of June 30, 2009, we were in compliance with the
covenants under the Credit Facilities.
The financial covenants of the Credit Facilities, which are
measured on a trailing four quarter period basis, include the
following:
|
|
|
|
|
maximum Covanta Energy leverage ratio of 4.00 to 1.00 for the
four quarter period ended June 30, 2009, which measures
Covanta Energys principal amount of consolidated debt less
certain restricted funds dedicated to repayment of project debt
principal and construction costs (Consolidated Adjusted
Debt) to its adjusted earnings before interest, taxes,
depreciation and amortization, as calculated under the Credit
Facilities (Adjusted EBITDA). The definition of
Adjusted EBITDA in the Credit Facilities excludes
|
49
|
|
|
|
|
certain non-cash charges. The maximum Covanta Energy leverage
ratio allowed under the Credit Facilities adjusts in future
periods as follows:
|
|
|
|
|
|
4.00 to 1.00 for each of the four quarter periods ended
September 30, 2009;
|
|
|
3.75 to 1.00 for each of the four quarter periods ended
December 31, 2009, March 31, June 30 and
September 30, 2010;
|
|
|
3.50 to 1.00 for each four quarter period thereafter;
|
|
|
|
|
|
maximum Covanta Energy capital expenditures incurred to maintain
existing operating businesses of $100 million per fiscal
year, subject to adjustment due to an acquisition by Covanta
Energy; and
|
|
|
minimum Covanta Energy interest coverage ratio of 3.00 to 1.00,
which measures Covanta Energys Adjusted EBITDA to its
consolidated interest expense plus certain interest expense of
ours, to the extent paid by Covanta Energy.
|
Long-Term
Debt
Long-term debt is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
3.25% Cash Convertible Senior Notes due 2014
|
|
$
|
460,000
|
|
|
$
|
|
|
Debt discount related to Cash Convertible Senior Notes
|
|
|
(122,206
|
)
|
|
|
|
|
Cash conversion option derivative at fair value
|
|
|
130,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.25% Cash Convertible Senior Notes, net
|
|
|
468,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.00% Senior Convertible Debentures due 2027
|
|
|
373,750
|
|
|
|
373,750
|
|
Debt discount related to Senior Convertible Debentures
|
|
|
(54,880
|
)
|
|
|
(64,369
|
)
|
|
|
|
|
|
|
|
|
|
1.00% Senior Convertible Debentures, net
|
|
|
318,870
|
|
|
|
309,381
|
|
|
|
|
|
|
|
|
|
|
Term Loan Facility due 2014
|
|
|
635,375
|
|
|
|
638,625
|
|
Other long-term debt
|
|
|
416
|
|
|
|
512
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,423,406
|
|
|
|
948,518
|
|
Less: current portion
|
|
|
(6,639
|
)
|
|
|
(6,922
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
1,416,767
|
|
|
$
|
941,596
|
|
|
|
|
|
|
|
|
|
|
See Managements Discussion and Analysis of Financial
Condition and Results of Operations above for a discussion
of the liability component associated with the Debentures and
the retrospective accounting change resulting from the adoption
of FSP APB
14-1
effective January 1, 2009.
3.25%
Cash Convertible Senior Notes due 2014
During the three months ended June 30, 2009, we issued
$460 million aggregate principal amount of 3.25% Cash
Convertible Senior Notes (the Notes) due 2014 in a
private transaction exempt from registration under the
Securities Act of 1933, as amended. The Notes are convertible by
the holders into cash only, based on an initial conversion rate
of 53.9185 shares of our common stock per $1,000 principal
amount of Notes (which represents an initial conversion price of
approximately $18.55 per share) and only in certain limited
circumstances. This Cash Conversion Option is an embedded
derivative and is recorded at fair value quarterly as a
component of our long-term debt.
In order to reduce our exposure to potential cash payments in
excess of the principal amount of the Notes resulting from the
Cash Conversion Option, we entered into two separate privately
negotiated transactions with affiliates of certain of the
initial purchasers of the Notes (the Option
Counterparties) for a net cash outflow of
$58.4 million.
50
|
|
|
|
|
We purchased, for $112.4 million, cash settled call options
on our common stock (the Note Hedge) initially
correlating to the same number of shares as those initially
underlying the Notes subject to generally similar customary
adjustments, which have economic characteristics similar to
those of the Cash Conversion Option embedded in the Notes. The
Note Hedge is a derivative which is recorded at fair value
quarterly and is recorded in Other Assets.
|
|
|
|
We sold, for $54.0 million, warrants (the
Warrants) correlating to the same number of shares
as those initially underlying the Notes, which are net share
settled and could have a dilutive effect to the extent that the
market price of our common stock exceeds the then effective
strike price of the Warrants. The strike price of the Warrants
is approximately $25.74 per share and is subject to customary
adjustments. The Warrants are recorded at the amounts received
net of expenses within additional paid-in capital.
|
When combined with the Note Hedge and Warrants, we believe that
the net financial impact upon maturity of the Notes will consist
of cash payments of the face value of $460 million and net
share settlement of the Warrants to the extent that the stock
price exceeds $25.74 at that time.
Net proceeds from the above transactions were
$388.9 million, consisting of gross proceeds of
$460.0 million from the Notes and $54.0 million of
proceeds from the Warrants, less the $112.4 million
purchase price for the Note Hedge and $12.7 million of
purchase discounts and other offering expenses.
We have used and will use the net proceeds from the offering,
together with the proceeds from the Warrant transactions, for
general corporate purposes, which may include capital
expenditures, potential permitted investments or permitted
acquisitions.
The Notes constitute general unsecured senior obligations and
rank equally in right of payment with our existing and future
senior unsecured indebtedness. The Notes are effectively junior
to our existing and future secured indebtedness to the extent of
the value of the assets securing such indebtedness. The Notes
are not guaranteed by any of our subsidiaries and are
effectively subordinated to all existing and future indebtedness
and liabilities (including trade payables) of our subsidiaries.
For a more detailed description of the terms of the Notes, the
Note Hedge, the Cash Conversion Option, and the Warrants (each
of which is defined above) and their accounting treatment, see
Note 6. Changes in Capitalization, Note 11. Financial
Instruments and Note 12. Derivative Instruments in the
Notes to the Condensed Consolidated Financial Statements.
1.00% Senior
Convertible Debentures due 2027
See Managements Discussion and Analysis of Financial
Condition and Results of Operations above for a discussion
of the liability component associated with the Debentures and
the retrospective accounting change resulting from the adoption
of FSP APB
14-1
effective January 1, 2009.
For specific criteria related to contingent interest, conversion
or redemption features of the Debentures, refer to Note 6
of the Notes to Consolidated Financial Statements in our Audited
Consolidated Financial Statements and accompanying Notes in our
Form 8-K
for the year ended December 31, 2008 filed on May 18,
2009.
Project
Debt
Domestic
Project Debt
Financing for the energy-from-waste projects is generally
accomplished through tax-exempt and taxable municipal revenue
bonds issued by or on behalf of the municipal client. For such
facilities that are owned by a subsidiary of ours, the municipal
issuers of the bond loans the bond proceeds to our subsidiary to
pay for facility construction. For such facilities,
project-related debt is included as Project debt (short-
and long-term) in our condensed consolidated financial
statements. Generally, such project debt is secured by the
revenues generated by the project and other project assets
including the related facility. The only potential recourse to
us with respect to project debt arises under the operating
performance guarantees described below under Other
Commitments. Certain subsidiaries had recourse liability for
project debt which is recourse to Covanta ARC LLC, but is
non-recourse to us, which as of June 30, 2009 aggregated to
$251.2 million.
51
International
Project Debt
Financing for projects in which we have an ownership or
operating interest is generally accomplished through commercial
loans from local lenders or financing arranged through
international banks, bonds issued to institutional investors and
from multilateral lending institutions based in the United
States. Such debt is generally secured by the revenues generated
by the project and other project assets and is without recourse
to us. Project debt relating to two international projects in
India is included as Project debt (short- and
long-term) in our condensed consolidated financial
statements. In most projects, the instruments defining the
rights of debt holders generally provide that the project
subsidiary may not make distributions to its parent until
periodic debt service obligations are satisfied and other
financial covenants are complied with.
Capital
Requirements
Except for amounts related to the issuance of the 3.25% Cash
Convertible Senior Notes due 2014 during the three months ended
June 30, 2009, our projected contractual obligations are
consistent with amounts disclosed in our
Form 8-K
for the year ended December 31, 2008 filed on May 18,
2009.
During the three months ended June 30, 2009, we issued the
following aggregate principal amount of 3.25% Cash Convertible
Senior Notes due 2014 for resale to certain qualified
institutional buyers (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Remainder of
|
|
|
2010 and
|
|
|
2012 and
|
|
|
2014 and
|
|
|
|
Total
|
|
|
2009
|
|
|
2011
|
|
|
2013
|
|
|
Beyond
|
|
|
3.25% Cash Convertible Senior Notes due 2014(1)
|
|
$
|
460,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
460,000
|
|
Interest payments on 3.25% Cash Convertible Senior Notes
|
|
$
|
75,149
|
|
|
$
|
7,874
|
|
|
$
|
29,900
|
|
|
$
|
29,900
|
|
|
$
|
7,475
|
|
|
|
|
(1) |
|
The Notes bear interest at a rate of 3.25% per year, payable
semi-annually in arrears, on June 1 and December 1 of each year,
commencing on December 1, 2009, and will mature on
June 1, 2014. Under limited circumstances, the Notes are
convertible by the holders thereof, at any time prior to
March 1, 2014, into cash only, based on an initial
conversion rate of 53.9185 shares of our common stock per
$1,000 principal amount of Notes, (which represents an initial
conversion price of approximately $18.55 per share). |
Other
Commitments
Other commitments as of June 30, 2009 were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments Expiring by Period
|
|
|
|
|
|
|
Less Than
|
|
|
More Than
|
|
|
|
Total
|
|
|
One Year
|
|
|
One Year
|
|
|
Letters of credit
|
|
$
|
289,888
|
|
|
$
|
31,344
|
|
|
$
|
258,544
|
|
Surety bonds
|
|
|
67,158
|
|
|
|
|
|
|
|
67,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other commitments net
|
|
$
|
357,046
|
|
|
$
|
31,344
|
|
|
$
|
325,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The letters of credit were issued under various credit
facilities (primarily the Funded L/C Facility) to secure our
performance under various contractual undertakings related to
our domestic and international projects, or to secure
obligations under our insurance program. Each letter of credit
relating to a project is required to be maintained in effect for
the period specified in related project contracts, and generally
may be drawn if it is not renewed prior to expiration of that
period.
We believe that we will be able to fully perform under our
contracts to which these existing letters of credit relate and
that it is unlikely that letters of credit would be drawn
because of a default of our performance obligations. If any of
these letters of credit were to be drawn by the beneficiary, the
amount drawn would be immediately repayable by us to the issuing
bank. If we do not immediately repay such amounts drawn under
these letters of credit, unreimbursed amounts would be treated
under the Credit Facilities as additional term loans in the case
of letters of credit issued under the Funded L/C Facility, or as
revolving loans in the case of letters of credit issued under
the Revolving Loan Facility.
52
The surety bonds listed on the table above relate primarily to
performance obligations ($58.2 million) and support for
closure obligations of various energy projects when such
projects cease operating ($9.0 million). Were these bonds
to be drawn upon, we would have a contractual obligation to
indemnify the surety company.
We have certain contingent obligations related to the
Debentures. These are:
|
|
|
|
|
holders may require us to repurchase their Debentures on
February 1, 2012, February 1, 2017 and
February 1, 2022;
|
|
|
holders may require us to repurchase their Debentures, if a
fundamental change occurs; and
|
|
|
holders may exercise their conversion rights upon the occurrence
of certain events, which would require us to pay the conversion
settlement amount in cash
and/or our
common stock.
|
For specific criteria related to contingent interest, conversion
or redemption features of the Debentures, see Note 6.
Long-Term Debt of the Notes to Consolidated Financial Statements
included in our Audited Consolidated Financial Statements and
accompanying Notes in our
Form 8-K
for the year ended December 31, 2008 filed on May 18,
2009.
We have certain contingent obligations related to the Notes.
These are:
|
|
|
|
|
holders may require us to repurchase their Notes, if a
fundamental change occurs; and
|
|
|
holders may exercise their conversion rights upon the occurrence
of certain events, which would require us to pay the conversion
settlement amount in cash.
|
For specific criteria related to contingent interest, conversion
or redemption features of the Notes, see Liquidity and
Capital Resources above.
We have issued or are party to guarantees and related
contractual support obligations undertaken pursuant to
agreements to construct and operate certain domestic and
international energy and waste facilities. For some projects,
such performance guarantees include obligations to repay certain
financial obligations if the project revenues are insufficient
to do so, or to obtain or guarantee financing for a project.
With respect to our domestic and international businesses, we
have issued guarantees to municipal clients and other parties
that our subsidiaries will perform in accordance with
contractual terms, including, where required, the payment of
damages or other obligations. Additionally, damages payable
under such guarantees on our energy-from-waste facilities could
expose us to recourse liability on project debt. If we must
perform under one or more of such guarantees, our liability for
damages upon contract termination would be reduced by funds held
in trust and proceeds from sales of the facilities securing the
project debt and is presently not estimable. Depending upon the
circumstances giving rise to such domestic and international
damages, the contractual terms of the applicable contracts, and
the contract counterpartys choice of remedy at the time a
claim against a guarantee is made, the amounts owed pursuant to
one or more of such guarantees could be material. To date, we
have not incurred material liabilities under such performance
guarantees, either on domestic or international projects.
Discussion
of Critical Accounting Policies and Estimates
In preparing our condensed consolidated financial statements in
accordance with United States generally accepted accounting
principles, we are required to use judgment in making estimates
and assumptions that affect the amounts reported in our
financial statements and related notes. We base our estimates on
historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. These
estimates form the basis for making judgments about the carrying
value of assets and liabilities that are not readily apparent
from other sources. Many of our critical accounting policies are
subject to significant judgments and uncertainties which could
potentially result in materially different results under
different conditions and assumptions. Future events rarely
develop exactly as forecast, and the best estimates routinely
require adjustment. Except for the adoption of the
pronouncements discussed below, management believes there have
been no material changes during the six months ended
June 30, 2009 to the items discussed in Discussion of
Critical Accounting Policies in Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations in our
Form 8-K
for the year ended December 31, 2008 filed on May 18,
2009.
Effective January 1, 2009, we adopted FSP APB
14-1. FSP
APB 14-1 is
effective for our Debentures and requires retrospective
application for all periods presented. The FSP requires the
issuer of convertible debt
53
instruments with cash settlement features to separately account
for the liability and equity components of the instrument. The
debt component was recognized at the present value of its cash
flows discounted using a 7.25% discount rate, our estimated
borrowing rate at the date of the issuance of the Debentures for
a similar debt instrument without the conversion feature
For the quarter ended June 30, 2009, we adopted FSP
SFAS No. 157-4,
Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly, FSP
SFAS No. 107-1
and APB
No. 28-1,
Interim Disclosures about Fair Value of Financial
Instruments, and FSP
SFAS No. 115-2
and
SFAS No. 124-2,
Recognition and Presentation of
Other-Than-Temporary
Impairments. These FSPs are intended to provide additional
application guidance and enhance disclosures regarding fair
value measurements. They require management to use judgment to
determine whether a market is distressed or not orderly,
disclose methods and significant assumptions used to estimate
fair value and use judgment to determine whether a debt security
is
other-than-temporarily
impaired. The adoption of these FSPs did not have a material
impact on our condensed consolidated financial statements and
resulted primarily in additional financial reporting disclosures.
Fair values of derivative instruments are determined using
available market information and appropriate valuation
methodologies. However, considerable judgment is necessarily
required in interpreting market data to develop estimates of
fair value. We recognize derivative instruments on the balance
sheet at their fair value. The Cash Conversion Option is valued
quarterly using a Black Scholes model incorporating our common
stock closing price at the reporting date and an implied
volatility factor for our common stock; to determine the value
of the Note Hedge, the Cash Conversion Option amount is then
discounted at a discount rate reflecting the Option
Counterparties credit standing. The Option Counterparties
are highly rated financial institutions, none of whom
experienced any significant downgrades during the three months
ended June 30, 2009 which could reduce any receivable
amount owed to us. The contingent interest features related to
the Debentures and the Notes are valued quarterly using the
present value of expected cash flow models incorporating the
probabilities of the contingent events occurring.
Recent
Accounting Pronouncements
See Note 2. Recent Accounting Pronouncements of the Notes
to the Condensed Consolidated Financial Statements for
information related to new accounting pronouncements.
|
|
Item 3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
In the normal course of business, our subsidiaries are party to
financial instruments that are subject to market risks arising
from changes in interest rates, foreign currency exchange rates,
and commodity prices. Our use of derivative instruments is very
limited and we do not enter into derivative instruments for
trading purposes.
Except as described below, there has been no material changes
during the six months ended June 30, 2009 to the items
discussed in Item 7A. Quantitative and Qualitative
Disclosures About Market Risk in our Annual Report on
Form 10-K
for the year ended December 31, 2008.
Cash
Conversion Option and Note Hedge related to the 3.25% Cash
Convertible Senior Notes
The Cash Conversion Option is a derivative instrument which is
recorded at fair value quarterly with any change in fair value
being recognized in our condensed consolidated income statement
as non-cash convertible debt related expense. The fair value of
the Cash Conversion Option was $131.0 million as of
June 30, 2009. The Note Hedge is accounted for as a
derivative instrument under SFAS 133 and as such, is
recorded at fair value quarterly with any change in fair value
being recognized in our condensed consolidated income statement
as non-cash convertible debt related expense. The fair value of
the Note Hedge was $119.5 million as of June 30, 2009.
The contingent interest features of the Notes are embedded
derivative instruments. The fair value of the contingent
interest features of the Notes was zero as of June 30, 2009.
We expect the gain or loss from the Note Hedge transactions to
offset the gain or loss associated with changes to the valuation
of the Cash Conversion Option. Accordingly, we do not expect
there to be a material net impact to
54
our condensed consolidated statement of income as a result of
our issuing the Notes and entering into the Note Hedge
transactions. Our most significant credit exposure arises from
the Note Hedge of the Notes. The fair value of the Note Hedge
reflects the maximum loss that would be incurred should the
Option Counterparties fail to perform according to the terms of
the Note Hedge agreement. The Option Counterparties are highly
rated financial institutions and we believe that the credit risk
associated with their non-performance is not significant.
For additional information related to the Notes, Cash Conversion
Option, and Note Hedge, see Liquidity and Capital Resources
above.
|
|
Item 4.
|
CONTROLS
AND PROCEDURES
|
Our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, has evaluated the
effectiveness of Covantas disclosure controls and
procedures, as required by
Rule 13a-15(b)
and
15d-15(b)
under the Securities Exchange Act of 1934 (the Exchange
Act) as of June 30, 2009. Our disclosure controls and
procedures are designed to reasonably assure that information
required to be disclosed by us in reports we file or submit
under the Exchange Act is accumulated and communicated to our
management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions
regarding disclosure and is recorded, processed, summarized and
reported within the time periods specified in the Securities and
Exchange Commissions (SEC) rules and forms.
Our Chief Executive Officer and Chief Financial Officer have
concluded that, based on their review, our disclosure controls
and procedures are effective to provide such reasonable
assurance.
Our management, including our Chief Executive Officer and Chief
Financial Officer, believes that any disclosure controls and
procedures or internal controls and procedures, no matter how
well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must consider
the benefits of controls relative to their costs. Inherent
limitations within a control system include the realities that
judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by unauthorized
override of the control. While the design of any system of
controls is to provide reasonable assurance of the effectiveness
of disclosure controls, such design is also based in part upon
certain assumptions about the likelihood of future events, and
such assumptions, while reasonable, may not take into account
all potential future conditions. Accordingly, because of the
inherent limitations in a cost effective control system,
misstatements due to error or fraud may occur and may not be
prevented or detected.
Changes
in Internal Control over Financial Reporting
There has not been any change in our system of internal control
over financial reporting during the most recent fiscal quarter
that has materially affected, or is reasonably likely to
materially affect, internal control over financial reporting.
55
PART II
OTHER INFORMATION
|
|
Item 1.
|
LEGAL
PROCEEDINGS
|
See Note 14. Commitments and Contingencies of the Notes to
the Condensed Consolidated Financial Statements.
Except as described below, there have been no material changes
during the six months ended June 30, 2009 to the risk
factors discussed in Item 1A. Risk Factors in our Annual
Report on
Form 10-K
for the year ended December 31, 2008.
We are
subject to counterparty risk with respect to the cash
convertible note hedge transactions.
The option counterparties to our cash convertible note hedge
transactions are financial institutions or affiliates of
financial institutions, and we are subject to risks that these
option counterparties default under these transactions. Our
exposure to counterparty credit risk is not secured by any
collateral.
Recent global economic conditions have resulted in the actual or
perceived failure or financial difficulties of many financial
institutions, including a bankruptcy filing by Lehman Brothers
Holdings Inc. and its various affiliates. If one or more of the
option counterparties to one or more of our cash convertible
note hedge transactions becomes subject to insolvency
proceedings, we will become an unsecured creditor in those
proceedings with a claim equal to our exposure at the time under
those transactions. Our exposure will depend on many factors
but, generally, the increase in our exposure will be correlated
to the increase in our stock price and in volatility of our
stock. We may also suffer adverse tax consequences as a result
of a default by one of the option counterparties. In addition, a
default by an option counterparty many result in our inability
to repay the 3.25% Cash Convertible Senior Notes under the
negative covenants in the credit agreement or otherwise. We can
provide no assurances as to the financial stability or viability
of any of our counterparties.
|
|
Item 2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
On May 22, 2009, we issued $400 million aggregate
principal amount of 3.25% Cash Convertible Senior Notes (the
Notes) due 2014 in a private transaction exempt from
registration under the Securities Act of 1933, as amended. On
June 15, 2009, we issued an additional $60 million
aggregate principal amount of Notes to the same qualified
institutional buyers to cover over-allotments. See Note 6.
Changes in Capitalization of the Notes to the Condensed
Consolidated Financial Statements.
|
|
Item 3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
None.
56
|
|
Item 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
We held our Annual Meeting of Stockholders on May 7, 2009.
At that meeting, stockholders voted on the following proposals:
1. To elect twelve directors to serve a one-year term that
will expire at the next Annual Meeting of Stockholders. The
votes cast for each director were as follows:
|
|
|
|
|
|
|
|
|
Directors
|
|
For
|
|
|
Withheld
|
|
|
David M. Barse
|
|
|
117,031,663
|
|
|
|
3,975,732
|
|
Ronald J. Broglio
|
|
|
120,685,764
|
|
|
|
321,631
|
|
Peter C.B. Bynoe
|
|
|
120,605,293
|
|
|
|
402,102
|
|
Linda J. Fisher
|
|
|
120,685,956
|
|
|
|
321,439
|
|
Joseph M. Holsten
|
|
|
120,684,451
|
|
|
|
322,944
|
|
Richard L. Huber
|
|
|
116,404,622
|
|
|
|
4,602,773
|
|
Anthony J. Orlando
|
|
|
120,684,847
|
|
|
|
322,548
|
|
William C. Pate
|
|
|
120,681,392
|
|
|
|
326,003
|
|
Robert S. Silberman
|
|
|
120,593,377
|
|
|
|
414,018
|
|
Jean Smith
|
|
|
120,688,351
|
|
|
|
319,044
|
|
Clayton Yeutter
|
|
|
116,640,523
|
|
|
|
4,366,872
|
|
Samuel Zell
|
|
|
116,593,314
|
|
|
|
4,414,081
|
|
2. To amend the Equity Award Plan for Employees and
Officers to provide for additional types of long-term incentive
performance awards in the form of restricted stock units,
performance shares and performance units.
|
|
|
|
|
|
|
|
|
|
|
|
|
Votes For
|
|
Votes Against
|
|
Abstentions
|
|
Broker Non-Vote
|
|
104,458,048
|
|
|
1,778,198
|
|
|
|
111,676
|
|
|
|
14,659,473
|
|
3. To ratify the appointment of Ernst & Young
LLP, the independent registered public accountants, as our
independent auditors for the 2009 fiscal year.
|
|
|
|
|
|
|
|
|
|
|
Votes For
|
|
Votes Against
|
|
Abstentions
|
|
|
120,858,965
|
|
|
|
91,232
|
|
|
|
57,198
|
|
|
|
Item 5.
|
OTHER
INFORMATION
|
(a) None.
(b) Not applicable.
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
31
|
.1
|
|
Certification pursuant to Section 302 of Sarbanes-Oxley Act
of 2002 by the Chief Executive Officer.
|
|
31
|
.2
|
|
Certification pursuant to Section 302 of Sarbanes-Oxley Act
of 2002 by the Chief Financial Officer.
|
|
32
|
|
|
Certification of periodic financial report pursuant to
Section 906 of Sarbanes-Oxley Act of 2002 by the Chief
Executive Officer and Chief Financial Officer.
|
57
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
COVANTA HOLDING CORPORATION
(Registrant)
Mark A. Pytosh
Executive Vice President and Chief Financial Officer
Thomas E. Bucks
Vice President and Chief Accounting Officer
Date: July 22, 2009
58