e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
|
|
|
þ
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
|
|
|
For the quarterly period ended March 31,
2010
|
|
|
|
|
|
or
|
|
|
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
|
|
|
For the transition period
from to
|
Commission file number 1-06732
COVANTA HOLDING
CORPORATION
(Exact name of registrant as
specified in its charter)
|
|
|
Delaware
|
|
95-6021257
|
(State or Other Jurisdiction of
Incorporation or Organization)
|
|
(I.R.S. Employer
Identification Number)
|
|
|
|
40 Lane Road, Fairfield, NJ
|
|
07004
|
(Address of Principal Executive Office)
|
|
(Zip Code)
|
(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):
|
|
|
|
|
|
|
Large accelerated
filer þ
|
|
Accelerated
filer o
|
|
Non-accelerated
filer o
(Do not check if a smaller reporting company)
|
|
Smaller reporting
company o
|
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.
|
|
|
Class
|
|
Outstanding at April 15, 2010
|
Common Stock, $0.10 par value
|
|
155,651,325 shares
|
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTERLY REPORT
For the Quarter Ended March 31, 2010
PART I.
FINANCIAL INFORMATION
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, 2009 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
Item 1.
FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except per share amounts)
|
|
|
OPERATING REVENUES:
|
|
|
|
|
|
|
|
|
Waste and service revenues
|
|
$
|
242,000
|
|
|
$
|
206,269
|
|
Electricity and steam sales
|
|
|
149,246
|
|
|
|
141,869
|
|
Other operating revenues
|
|
|
25,549
|
|
|
|
10,622
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
416,795
|
|
|
|
358,760
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
Plant operating expenses
|
|
|
304,226
|
|
|
|
256,042
|
|
Depreciation and amortization expense
|
|
|
49,922
|
|
|
|
51,498
|
|
Net interest expense on project debt
|
|
|
10,977
|
|
|
|
12,769
|
|
General and administrative expenses
|
|
|
26,189
|
|
|
|
25,515
|
|
Other operating expenses
|
|
|
23,510
|
|
|
|
9,744
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
414,824
|
|
|
|
355,568
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
1,971
|
|
|
|
3,192
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
586
|
|
|
|
1,028
|
|
Interest expense
|
|
|
(10,588
|
)
|
|
|
(7,916
|
)
|
Non-cash convertible debt related expense
|
|
|
(8,247
|
)
|
|
|
(4,702
|
)
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
(18,249
|
)
|
|
|
(11,590
|
)
|
|
|
|
|
|
|
|
|
|
Loss before income tax benefit and
equity in net income from unconsolidated investments
|
|
|
(16,278
|
)
|
|
|
(8,398
|
)
|
Income tax benefit
|
|
|
7,875
|
|
|
|
3,318
|
|
Equity in net income from unconsolidated investments
|
|
|
3,670
|
|
|
|
5,809
|
|
|
|
|
|
|
|
|
|
|
NET (LOSS) INCOME
|
|
|
(4,733
|
)
|
|
|
729
|
|
|
|
|
|
|
|
|
|
|
Less: Net income attributable to noncontrolling interests in
subsidiaries
|
|
|
(2,500
|
)
|
|
|
(1,380
|
)
|
|
|
|
|
|
|
|
|
|
NET LOSS ATTRIBUTABLE TO COVANTA HOLDING CORPORATION
|
|
$
|
(7,233
|
)
|
|
$
|
(651
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
153,894
|
|
|
|
153,467
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
153,894
|
|
|
|
153,467
|
|
|
|
|
|
|
|
|
|
|
Loss Per Share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.05
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.05
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed
consolidated financial statements.
4
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(In thousands, except per
|
|
|
|
share amounts)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
329,363
|
|
|
$
|
433,683
|
|
Restricted funds held in trust
|
|
|
154,956
|
|
|
|
131,223
|
|
Receivables (less allowances of $3,060 and $2,978)
|
|
|
261,140
|
|
|
|
306,631
|
|
Unbilled service receivables
|
|
|
30,996
|
|
|
|
37,692
|
|
Deferred income taxes
|
|
|
6,126
|
|
|
|
9,509
|
|
Prepaid expenses and other current assets
|
|
|
134,467
|
|
|
|
126,139
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
917,048
|
|
|
|
1,044,877
|
|
Property, plant and equipment, net
|
|
|
2,587,143
|
|
|
|
2,582,841
|
|
Investments in fixed maturities at market (cost: $30,972 and
$27,500, respectively)
|
|
|
31,635
|
|
|
|
28,142
|
|
Restricted funds held in trust
|
|
|
121,123
|
|
|
|
146,529
|
|
Unbilled service receivables
|
|
|
34,344
|
|
|
|
37,389
|
|
Waste, service and energy contracts, net
|
|
|
501,471
|
|
|
|
380,359
|
|
Other intangible assets, net
|
|
|
83,138
|
|
|
|
84,610
|
|
Goodwill
|
|
|
227,734
|
|
|
|
202,996
|
|
Investments in investees and joint ventures
|
|
|
122,935
|
|
|
|
120,173
|
|
Other assets
|
|
|
265,824
|
|
|
|
306,366
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
4,892,395
|
|
|
$
|
4,934,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
6,801
|
|
|
$
|
7,027
|
|
Current portion of project debt
|
|
|
229,028
|
|
|
|
191,993
|
|
Accounts payable
|
|
|
46,516
|
|
|
|
27,831
|
|
Deferred revenue
|
|
|
50,950
|
|
|
|
60,256
|
|
Accrued expenses and other current liabilities
|
|
|
221,100
|
|
|
|
217,721
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
554,395
|
|
|
|
504,828
|
|
Long-term debt
|
|
|
1,400,399
|
|
|
|
1,430,679
|
|
Project debt
|
|
|
726,880
|
|
|
|
767,371
|
|
Deferred income taxes
|
|
|
559,186
|
|
|
|
571,122
|
|
Waste and service contracts
|
|
|
98,187
|
|
|
|
101,353
|
|
Other liabilities
|
|
|
142,512
|
|
|
|
141,760
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
3,481,559
|
|
|
|
3,517,113
|
|
|
|
|
|
|
|
|
|
|
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 156,378 and 155,615 shares;
outstanding 155,651 and 154,936 shares)
|
|
|
15,638
|
|
|
|
15,562
|
|
Additional paid-in capital
|
|
|
911,628
|
|
|
|
909,205
|
|
Accumulated other comprehensive income
|
|
|
6,154
|
|
|
|
7,443
|
|
Accumulated earnings
|
|
|
443,631
|
|
|
|
450,864
|
|
Treasury stock, at par
|
|
|
(73
|
)
|
|
|
(68
|
)
|
|
|
|
|
|
|
|
|
|
Total Covanta Holding Corporation stockholders equity
|
|
|
1,376,978
|
|
|
|
1,383,006
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interests in subsidiaries
|
|
|
33,858
|
|
|
|
34,163
|
|
|
|
|
|
|
|
|
|
|
Total Equity
|
|
|
1,410,836
|
|
|
|
1,417,169
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity
|
|
$
|
4,892,395
|
|
|
$
|
4,934,282
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed
consolidated financial statements.
5
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(4,733
|
)
|
|
$
|
729
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
49,922
|
|
|
|
51,498
|
|
Amortization of long-term debt deferred financing costs
|
|
|
1,682
|
|
|
|
904
|
|
Amortization of debt premium and discount
|
|
|
(1,851
|
)
|
|
|
(2,082
|
)
|
Non-cash convertible debt related expense
|
|
|
8,247
|
|
|
|
4,702
|
|
Stock-based compensation expense
|
|
|
3,500
|
|
|
|
3,907
|
|
Equity in net income from unconsolidated investments
|
|
|
(3,670
|
)
|
|
|
(5,809
|
)
|
Dividends from unconsolidated investments
|
|
|
447
|
|
|
|
266
|
|
Deferred income taxes
|
|
|
(8,537
|
)
|
|
|
(5,643
|
)
|
Other, net
|
|
|
278
|
|
|
|
462
|
|
Increase in restricted funds held in trust
|
|
|
(6,140
|
)
|
|
|
(9,413
|
)
|
Change in working capital, net of effects of acquisitions
|
|
|
79,882
|
|
|
|
11,874
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
119,027
|
|
|
|
51,395
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from the sale of investment securities
|
|
|
1,228
|
|
|
|
3,405
|
|
Purchase of investment securities
|
|
|
(6,411
|
)
|
|
|
(3,779
|
)
|
Purchase of property, plant and equipment
|
|
|
(37,982
|
)
|
|
|
(26,833
|
)
|
Purchase of equity interest
|
|
|
|
|
|
|
(1,083
|
)
|
Acquisition of noncontrolling interests in subsidiaries
|
|
|
(2,000
|
)
|
|
|
|
|
Acquisition of businesses, net of cash acquired
|
|
|
(128,254
|
)
|
|
|
|
|
Loan issued to client community to
fund certain facility improvements, net of repayments
|
|
|
(400
|
)
|
|
|
(6,192
|
)
|
Other, net
|
|
|
(10,440
|
)
|
|
|
(238
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(184,259
|
)
|
|
|
(34,720
|
)
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Principal payments on long-term debt
|
|
|
(1,857
|
)
|
|
|
(1,675
|
)
|
Principal payments on project debt
|
|
|
(47,357
|
)
|
|
|
(45,268
|
)
|
Proceeds from borrowings on project debt
|
|
|
922
|
|
|
|
|
|
Decrease in restricted funds held in trust
|
|
|
15,488
|
|
|
|
4,321
|
|
Proceeds from the exercise of options for common stock, net
|
|
|
278
|
|
|
|
147
|
|
Financings of insurance premiums, net
|
|
|
(3,200
|
)
|
|
|
(3,112
|
)
|
Distributions to partners of noncontrolling interests in
subsidiaries
|
|
|
(3,054
|
)
|
|
|
(3,716
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(38,780
|
)
|
|
|
(49,303
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(308
|
)
|
|
|
(293
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(104,320
|
)
|
|
|
(32,921
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
433,683
|
|
|
|
192,393
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
329,363
|
|
|
$
|
159,472
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
Income
|
|
|
Earnings
|
|
|
Shares
|
|
|
Amount
|
|
|
Subsidiaries
|
|
|
Total
|
|
|
|
(Unaudited, in thousands)
|
|
|
Balance as of December 31, 2009
|
|
|
155,615
|
|
|
$
|
15,562
|
|
|
$
|
909,205
|
|
|
$
|
7,443
|
|
|
$
|
450,864
|
|
|
|
679
|
|
|
$
|
(68
|
)
|
|
$
|
34,163
|
|
|
$
|
1,417,169
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
3,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,500
|
|
Shares forfeited for terminated employees
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
48
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
Exercise of options to purchase common stock
|
|
|
37
|
|
|
|
3
|
|
|
|
275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
278
|
|
Shares issued in non-vested stock award
|
|
|
726
|
|
|
|
73
|
|
|
|
(73
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of noncontrolling interests in subsidiaries
|
|
|
|
|
|
|
|
|
|
|
(1,284
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(716
|
)
|
|
|
(2,000
|
)
|
Distributions to partners of noncontrolling interests in
subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,054
|
)
|
|
|
(3,054
|
)
|
Comprehensive income, net of income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,233
|
)
|
|
|
|
|
|
|
|
|
|
|
2,500
|
|
|
|
(4,733
|
)
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,391
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
965
|
|
|
|
(426
|
)
|
Pension and other postretirement plan unrecognized net loss, net
of income tax benefit of $29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(74
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(74
|
)
|
Net unrealized gain on
available-for-sale
securities, net of income tax expense of $70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,289
|
)
|
|
|
(7,233
|
)
|
|
|
|
|
|
|
|
|
|
|
3,465
|
|
|
|
(5,057
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2010
|
|
|
156,378
|
|
|
$
|
15,638
|
|
|
$
|
911,628
|
|
|
$
|
6,154
|
|
|
$
|
443,631
|
|
|
|
727
|
|
|
$
|
(73
|
)
|
|
$
|
33,858
|
|
|
$
|
1,410,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
154,797
|
|
|
$
|
15,480
|
|
|
$
|
832,595
|
|
|
$
|
(8,205
|
)
|
|
$
|
349,219
|
|
|
|
517
|
|
|
$
|
(52
|
)
|
|
$
|
35,014
|
|
|
$
|
1,224,051
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
3,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,907
|
|
Shares forfeited for terminated employees
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
Shares repurchased for tax withholdings for vested stock awards
|
|
|
|
|
|
|
|
|
|
|
(1,911
|
)
|
|
|
|
|
|
|
|
|
|
|
140
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
(1,925
|
)
|
Exercise of options to purchase common stock
|
|
|
25
|
|
|
|
3
|
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147
|
|
Shares issued in non-vested stock award
|
|
|
684
|
|
|
|
68
|
|
|
|
(68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to partners of noncontrolling interests in
subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,677
|
)
|
|
|
(4,677
|
)
|
Comprehensive income, net of income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(651
|
)
|
|
|
|
|
|
|
|
|
|
|
1,380
|
|
|
|
729
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,801
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(530
|
)
|
|
|
(2,331
|
)
|
Pension and other postretirement plan unrecognized net loss, net
of income tax benefit of $17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(42
|
)
|
Net unrealized loss on
available-for-sale
securities, net of income tax benefit of $114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(284
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(284
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,127
|
)
|
|
|
(651
|
)
|
|
|
|
|
|
|
|
|
|
|
850
|
|
|
|
(1,928
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2009
|
|
|
155,506
|
|
|
$
|
15,551
|
|
|
$
|
834,668
|
|
|
$
|
(10,332
|
)
|
|
$
|
348,568
|
|
|
|
665
|
|
|
$
|
(67
|
)
|
|
$
|
31,187
|
|
|
$
|
1,219,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 65 energy generation facilities, 57 of which are in the
Americas and eight of which are located outside the Americas.
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, four landfills, which we use
primarily for ash disposal, and several waste transfer stations.
We have two reportable segments, Americas and International. The
Americas segment is comprised of waste and energy services
operations primarily in the United States and Canada. The
International segment is comprised of international waste and
energy services.
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. All intercompany
accounts and transactions have been eliminated. Operating
results for the interim period are not necessarily indicative of
the results that may be expected for the fiscal year ended
December 31, 2010. This
Form 10-Q
should be read in conjunction with the Audited Consolidated
Financial Statements and accompanying Notes in our Annual Report
on
Form 10-K
for the year ended December 31, 2009
(Form 10-K).
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.
NOTE 2. RECENT
ACCOUNTING PRONOUNCEMENTS
In October 2009, the Financial Accounting Standards Board
(FASB) issued an accounting standard related to
multiple-deliverable revenue arrangements which we are required
to adopt by January 1, 2011, although earlier application
is permitted. The standard provides amendments to criteria for
separating consideration in multiple element arrangements. As a
result, multiple deliverable arrangements generally will be
separated in more circumstances than under existing
U.S. GAAP. We are currently evaluating the potential
effects of this standard (which may be adopted either on a
prospective or retrospective basis) on our condensed
consolidated financial statements.
NOTE 3. ACQUISITIONS
AND BUSINESS DEVELOPMENT
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. The results of operations reflect the period
of ownership of the acquired businesses and business development
projects. The acquisitions in the section below are not material
to our condensed consolidated financial statements individually
or in the aggregate and therefore, disclosures of pro forma
financial information have not been presented.
8
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Acquisitions
and Business Development
Americas
Covanta
Huntington Limited Partnership
In March 2010, for cash consideration of $2.0 million, we
acquired a nominal limited partnership interest held by a third
party in Covanta Huntington Limited Partnership, our subsidiary
which owns and operates an energy-from-waste facility in
Huntington, New York.
Honolulu
Energy-from-Waste Facility
We operate and maintain the energy-from-waste facility located
in and owned by the City and County of Honolulu, Hawaii. In
December 2009, we entered into agreements with the City and
County of Honolulu to expand the facilitys waste
processing capacity from 2,160 tons per day (tpd) to
3,060 tpd and to increase gross electricity capacity from 57
megawatts (MW) to 90 MW. The agreements also
extend the contract term by 20 years. The $302 million
expansion project is a fixed-price construction contract which
will be funded and owned by the City and County of Honolulu.
Environmental and other project-related permits have been
received and expansion construction has commenced.
Veolia
Energy-from-Waste Businesses
We completed the following transactions with Veolia
Environmental Services North America Corp. (collectively
referred to as the Veolia EfW Acquisition). The
acquired businesses have a combined capacity of 9,600 tpd. Each
of the operations acquired includes a long-term operating
contract with their respective municipal client. Six of the
energy-from-waste facilities and the transfer station are
publicly-owned facilities.
|
|
|
|
|
Between August 2009 and February 2010, we acquired one transfer
station business and seven energy-from-waste businesses located
in New York, Pennsylvania, California, Florida and British
Columbia. We paid cash consideration of $259.3 million in
August 2009 for six energy-from-waste businesses and one
transfer station, and in February 2010, we paid
$128.3 million for the seventh energy-from-waste business.
|
|
|
The businesses acquired in August 2009 included a majority
ownership stake in one energy-from-waste facility and in
November 2009, we acquired the remaining ownership stake in that
facility for cash consideration of $23.7 million.
|
The cash consideration is subject to certain post-closing
adjustments. The preliminary purchase price allocation included
$139.8 million of property, plant and equipment,
$329.2 million of intangible assets related to long-term
operating contracts at each acquired Veolia business except for
the facility which we own, $24.7 million related to
goodwill and $113.9 million of assumed debt. The acquired
intangible assets will be amortized over an average remaining
useful facility life of 31 years. The preliminary purchase
price allocation of the businesses acquired was based on
estimates and assumptions, any changes to which could affect the
reported amounts of assets and liabilities resulting from this
acquisition.
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 tpd energy-from-waste facility located in
Detroit, Michigan (the Detroit Facility) expired.
Effective June 30, 2009, we entered into the following
transactions, which extended our interest in the Detroit
Facility:
|
|
|
|
|
A newly-formed Covanta subsidiary purchased an undivided 30%
owner-participant interest in the Detroit Facility for total
cash consideration of $7.9 million.
|
|
|
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 a term
of one year. Under this agreement, we will earn a fixed fee and
pass through to the owners of the Detroit Facility (or pay from
the project revenues) all expenses associated with operations
and maintenance of the facility. After paying all expenses,
excess net revenues flow to the owners.
|
|
|
The project company 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 agreements which expire in 2035, and the City of
Detroit stands behind GDRRAs waste delivery obligation
following exercise of the call until 2021.
|
In December 2009, we entered into a short-term steam agreement
for the Detroit Facility which remains in effect until June
2010. Negotiations with all stakeholders are in progress for
arrangements to continue operating the Detroit Facility beyond
June 30, 2010. Securing a long-term steam agreement with
appropriate pricing remains an important factor to the overall
Detroit Facility long-term economic viability.
9
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 $17.5 million,
inclusive of final working capital adjustments. The final
purchase price allocation included $5.9 million of
identifiable intangible assets related primarily to customer
relationships and goodwill of $1.3 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. Licensing fees
and demonstration unit purchases aggregated $1.6 million
during the quarter ended March 31, 2010 and,
$4.7 million and $6.5 million during the years ended
December 31, 2009 and 2008, 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, which are
expected to be completed during 2010. The repayment of this
funding is guaranteed by the City of Harrisburg, but is
otherwise unsecured, and is junior to project bondholders
rights. We have advanced $21.7 million, of which
$19.8 million is outstanding as of March 31, 2010
under this funding arrangement. The first three repayment
installments under this funding arrangement have been paid, but
the repayment installment of $0.6 million which was due to
us on April 1, 2010 has not been paid, and the City of
Harrisburg has requested a forbearance period. We are discussing
the proposed terms of the forbearance period with
representatives of the City and certain other stakeholders. The
City of Harrisburg is in a precarious financial condition with
substantial obligations, and it has reported consideration of
various future options (including seeking bankruptcy
protection). We intend to work with the City of Harrisburg and
other stakeholders to maintain our position in the project and
to protect the recovery of our advance.
Hillsborough
County Energy-from-Waste Facility
In 2005, we entered into agreements with Hillsborough County to
implement a 600 tpd expansion of this energy-from-waste
facility, and to extend the agreement under which we operate the
facility through 2027. During the third quarter of 2009,
construction of the expansion was successfully completed and
commercial operation commenced.
International
China
Joint Ventures and Energy-from-Waste Facilities
On March 24, 2009, 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. We will continue to operate our existing
coal-fired facility. The project company has obtained Rmb
165 million in project financing which, together with
available cash from existing operations, will fund construction
costs. The Taixing project commenced construction in late 2009.
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
company. Construction of the facility has commenced and
operation is expected to begin in 2011. The project company has
obtained financing for Rmb 480 million for the project, of
which 49% is guaranteed by us and 51% is guaranteed by Chongqing
Iron & Steel Company (Group) Limited until the project
has been constructed and for one year after operations commence.
Dublin
Joint Venture
On September 6, 2007, we entered into agreements to build,
own, and operate a 1,700 metric tpd energy-from-waste project
serving the City of Dublin, Ireland and surrounding communities
at an estimated cost of 350 million. 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. Dublin Waste to Energy Limited has a
25 year tip fee type contract to provide disposal service
for 320,000 metric tons of waste annually, representing
approximately 50% of the facilitys processing capacity.
The project is expected to sell electricity into the local
electricity grid. A portion of the electricity is expected to be
eligible for a preferential renewable tariff. We and DONG Energy
Generation A/S have committed to provide financing for all
phases of the project.
10
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We expect to fund construction through existing sources of
liquidity, and effect project financing as the project
progresses. The primary approvals and licenses for the project
have been obtained and construction commenced in December 2009.
The parties are working to satisfy remaining conditions and
obtain remaining approvals for the balance of construction
activity, pending receipt of which we expect to curtail project
spending.
NOTE 4. LOSS
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).
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Net loss attributable to Covanta Holding Corporation
|
|
$
|
(7,233
|
)
|
|
$
|
(651
|
)
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
Weighted average basic common shares outstanding
|
|
|
153,894
|
|
|
|
153,467
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share
|
|
$
|
(0.05
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
Weighted average basic common shares outstanding
|
|
|
153,894
|
|
|
|
153,467
|
|
Dilutive effect of stock options
|
|
|
|
|
|
|
|
|
Dilutive effect of restricted stock
|
|
|
|
|
|
|
|
|
Dilutive effect of convertible debentures
|
|
|
|
|
|
|
|
|
Dilutive effect of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding
|
|
|
153,894
|
|
|
|
153,467
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share
|
|
$
|
(0.05
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Stock options excluded from the weighted average dilutive common
shares outstanding because their inclusion would have been
antidilutive
|
|
|
1,915
|
|
|
|
2,026
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards excluded from the weighted average
dilutive common shares outstanding because their inclusion would
have been antidilutive
|
|
|
1,327
|
|
|
|
1,128
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units excluded from the weighted average
dilutive common shares outstanding because their inclusion would
have been antidilutive
|
|
|
986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants excluded from the weighted average dilutive common
shares outstanding because their inclusion would have been
antidilutive
|
|
|
24,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 March 31, 2010, the warrants did not have a
dilutive effect on earnings per share.
On January 31, 2007, we issued 1.00% Senior
Convertible Debentures due 2027 (Debentures). 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
March 31, 2010, the Debentures did not have a dilutive
effect on earnings per share.
NOTE 5. FINANCIAL
INFORMATION BY BUSINESS SEGMENTS
Our reportable segments are Americas and International. The
Americas segment is comprised of waste and energy services
operations primarily in the United States and Canada. The
International segment is comprised of waste and energy
11
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
services operations in other markets, currently the United
Kingdom, Ireland, Italy, China, The Philippines, India, and
Bangladesh. The results of our reportable segments are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable Segments
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
International
|
|
|
All Other(1)
|
|
|
Total
|
|
|
Three Months Ended March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
357,287
|
|
|
$
|
54,774
|
|
|
$
|
4,734
|
|
|
$
|
416,795
|
|
Operating income (loss)
|
|
|
1,727
|
|
|
|
(247
|
)
|
|
|
491
|
|
|
|
1,971
|
|
Three Months Ended March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
313,173
|
|
|
$
|
41,537
|
|
|
$
|
4,050
|
|
|
$
|
358,760
|
|
Operating income (loss)
|
|
|
4,435
|
|
|
|
(859
|
)
|
|
|
(384
|
)
|
|
|
3,192
|
|
|
|
|
(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 March 31, 2010, 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
|
|
|
March 31, 2010
|
|
|
March 31, 2010
|
|
|
Revolving Loan Facility(1)
|
|
$
|
300,000
|
|
|
|
2013
|
|
|
$
|
|
|
|
$
|
300,000
|
|
Funded L/C Facility
|
|
$
|
320,000
|
|
|
|
2014
|
|
|
$
|
295,339
|
|
|
$
|
24,661
|
|
|
|
|
(1) |
|
Up to $200 million of which may be utilized for letters of
credit. |
Long-Term
Debt
Long-term debt is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
3.25% Cash Convertible Senior Notes due 2014
|
|
$
|
460,000
|
|
|
$
|
460,000
|
|
Debt discount related to Cash Convertible Senior Notes
|
|
|
(107,359
|
)
|
|
|
(112,475
|
)
|
Cash conversion option derivative at fair value
|
|
|
89,785
|
|
|
|
128,603
|
|
|
|
|
|
|
|
|
|
|
3.25% Cash Convertible Senior Notes, net
|
|
|
442,426
|
|
|
|
476,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.00% Senior Convertible Debentures due 2027
|
|
|
373,750
|
|
|
|
373,750
|
|
Debt discount related to Convertible Debentures
|
|
|
(39,988
|
)
|
|
|
(45,042
|
)
|
|
|
|
|
|
|
|
|
|
1.00% Senior Convertible Debentures, net
|
|
|
333,762
|
|
|
|
328,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loan Facility due 2014
|
|
|
630,500
|
|
|
|
632,125
|
|
Other long-term debt
|
|
|
512
|
|
|
|
745
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,407,200
|
|
|
|
1,437,706
|
|
Less: current portion
|
|
|
(6,801
|
)
|
|
|
(7,027
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
1,400,399
|
|
|
$
|
1,430,679
|
|
|
|
|
|
|
|
|
|
|
3.25%
Cash Convertible Senior Notes due 2014
(Notes)
Under limited circumstances, 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) upon conversion under any circumstances.
For specific criteria related to contingent interest, conversion
or redemption features of the Notes and details related to the
cash conversion option, cash convertible note hedge and warrants
related to the Notes, refer to Note 11 of the Notes to
Consolidated Financial Statements in our
Form 10-K.
12
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For details related to the fair value for the contingent
interest feature, cash conversion option, and cash convertible
note hedge related to the Notes, see Note 12. Derivative
Instruments.
1.00% Senior
Convertible Debentures due 2027
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 March 31, 2010, 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 11
of the Notes to Consolidated Financial Statements in our
Form 10-K.
For details related to the fair value for the contingent
interest feature related to the Debentures, see Note 12.
Derivative Instruments.
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 following table details the amount of the accretion of debt
discount as of March 31, 2010 included or expected to be
included in our condensed consolidated financial statements for
each of the periods indicated (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months ended
|
|
Remainder of
|
|
For the Years Ended
|
|
|
March 31, 2010
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
2014
|
|
Non-cash convertible debt discount expense for the Notes
|
|
$
|
5.1
|
|
|
$
|
16.2
|
|
|
$
|
23.5
|
|
|
$
|
26.0
|
|
|
$
|
28.8
|
|
|
$
|
12.9
|
|
Non-cash convertible debt discount expense for the Debentures (1)
|
|
$
|
5.1
|
|
|
$
|
15.7
|
|
|
$
|
22.3
|
|
|
$
|
1.9
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
(1)
|
|
The Debentures mature on
February 1, 2027. At our option, the Debentures are subject
to redemption at any time on or after February 1, 2012, in
whole or in part. In addition, holders may require us to
repurchase their Debentures on February 1, 2012,
February 1, 2017, and February 1, 2022, in whole or in
part. For purposes of the accretion of the debt discount related
to the Debentures, we have assumed that the Debentures will be
repurchased pursuant to the holders option on
February 1, 2012. For information detailing the redemption
features of the Debentures, see Note 11 of the Notes to
Consolidated Financial Statements in our
Form 10-K.
|
Equity
During the three months ended March 31, 2010, we granted
725,693 restricted stock awards. For information related to
stock-based award plans, see Note 10. Stock-Based
Compensation. During the three months ended March 31, 2010,
we did not repurchase shares of our common stock.
During the three months ended March 31, 2009, we
repurchased 139,762 shares of our common stock in
connection with tax withholdings for vested stock awards.
NOTE 7. INCOME
TAXES
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 for the year
ended December 31, 2010 to be approximately 42.4%. The
increase in the estimated annual effective tax rate for 2010 was
primarily a result of the sunset of eligibility for production
tax credits at some of our biomass facilities. We review the
annual effective tax rate on a quarterly basis as projections
are revised and laws are enacted. The effective income tax rate
was 48.4% and 39.5% for the three months ended March 31,
2010 and 2009, respectively. The liability for uncertain tax
positions, exclusive of interest and penalties, was
$131.6 million and $131.2 million as of March 31,
2010 and December 31, 2009, respectively. Liabilities for
uncertain tax positions increased by approximately
$0.4 million during the three months ended March 31,
2010. Included in the balance of unrecognized tax benefits as of
March 31, 2010 are potential benefits of
$115.1 million that, if recognized, would impact the
effective tax rate.
For the three months ended March 31, 2010 and 2009, we
recognized a benefit of $1.7 million and an expense of
$0.03 million, respectively, of interest and penalties on
uncertain tax positions. As of March 31, 2010 and
December 31, 2009,
13
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
we had accrued interest and penalties associated with
liabilities for unrecognized tax positions of $6.8 million
and $8.4 million, respectively. We continue to reflect
interest accrued on uncertain tax positions and penalties as
part of the tax provision.
As issues are examined by the Internal Revenue Service
(IRS) and state auditors, we may decide to adjust
the existing liability for uncertain tax positions for issues
that were not deemed an exposure at the time we adopted
accounting standards related to the accounting for uncertainty
in income taxes. 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. 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
$545 million for federal income tax purposes as of
December 31, 2009, based on the tax returns as filed. The
federal NOLs will expire in various amounts from
December 31, 2011 through December 31, 2028, if not
used. Current forecasts indicate we will utilize consolidated
federal NOLs in 2010 which will otherwise expire in 2011. In
addition to the consolidated federal NOLs, as of
December 31, 2009, we had state NOL carryforwards of
approximately $264.7 million, which expire between 2011 and
2027, capital loss carryforwards of $0.2 million expiring
in 2013, and additional federal credit carryforwards of
$47.5 million. These deferred tax assets are offset by a
valuation allowance of $20.5 million.
In March, 2010, U.S. Federal legislation enacted the
Patient Protection and Affordable Care Act (PPACA)
as well as a companion bill, the Health Care and Education
Reconciliation Act of 2010 (the Reconciliation Act).
As a result of enactment of the PPACA and the Reconciliation Act
(collectively, the Acts), employers receiving the
Medicare Part D subsidy will recognize a deferred tax
charge for the reduction in deductibility of postretirement
prescription drug coverage for eligible retirees. The resulting
deferred tax charge from enactment of the Acts was recognized in
the results for March 31, 2010. This charge was not
material to our condensed consolidated financial statements.
For further information, refer to Note 16. Income Taxes of
the Notes to the Consolidated Financial Statements in our
Form 10-K.
NOTE 8. SUPPLEMENTARY
INFORMATION
Operating
Revenues
The components of waste and service revenues are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Waste and service revenues unrelated to project debt
|
|
$
|
220,757
|
|
|
$
|
186,680
|
|
Revenue earned explicitly to service project debt-principal
|
|
|
16,392
|
|
|
|
13,719
|
|
Revenue earned explicitly to service project debt-interest
|
|
|
4,851
|
|
|
|
5,870
|
|
|
|
|
|
|
|
|
|
|
Total waste and service revenues
|
|
$
|
242,000
|
|
|
$
|
206,269
|
|
|
|
|
|
|
|
|
|
|
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.
14
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In the final year(s) of a contract, cash may be utilized from
available 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,
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 $43.5 million and
$32.3 million for the three months ended March 31,
2010 and 2009, 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 $20.5 million and $14.8 million for
the three months ended March 31, 2010 and 2009,
respectively.
Other
operating expenses
The components of other operating expenses are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Construction costs
|
|
$
|
20,485
|
|
|
$
|
5,346
|
|
Insurance subsidiary operating expenses (1)
|
|
|
4,070
|
|
|
|
3,813
|
|
Foreign exchange (gain) loss
|
|
|
(1,008
|
)
|
|
|
505
|
|
Other
|
|
|
(37
|
)
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
Total other operating expenses
|
|
$
|
23,510
|
|
|
$
|
9,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Insurance subsidiary operating expenses are primarily comprised
of increased incurred but not reported loss reserves, loss
adjustment expenses and policy acquisition costs. |
Amortization
of waste, service and energy contracts
Our waste, service and energy contracts are intangible assets
and liabilities relating to long-term operating contracts at
acquired facilities and are recorded upon acquisition at their
estimated fair market values based upon discounted cash flows.
Intangible assets and liabilities are amortized using the
straight line method over their remaining useful lives. The
following table details the amount of the actual/estimated
amortization expense and contra-expense associated with these
intangible assets and liabilities as of March 31, 2010
included or expected to be included in our condensed
consolidated statement of income for each of the years indicated
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
Waste, Service and
|
|
|
Waste and Service
|
|
|
|
Energy Contracts
|
|
|
Contracts
|
|
|
|
(Amortization Expense)
|
|
|
(Contra-Expense)
|
|
|
Three Months ended March 31, 2010
|
|
$
|
10,278
|
|
|
$
|
(3,166
|
)
|
|
|
|
|
|
|
|
|
|
Remainder of 2010
|
|
$
|
30,258
|
|
|
$
|
(9,555
|
)
|
2011
|
|
|
37,730
|
|
|
|
(12,408
|
)
|
2012
|
|
|
35,636
|
|
|
|
(12,412
|
)
|
2013
|
|
|
32,026
|
|
|
|
(12,390
|
)
|
2014
|
|
|
29,135
|
|
|
|
(12,500
|
)
|
2015
|
|
|
25,800
|
|
|
|
(8,188
|
)
|
Thereafter
|
|
|
310,886
|
|
|
|
(30,734
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
501,471
|
|
|
$
|
(98,187
|
)
|
|
|
|
|
|
|
|
|
|
15
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Non-Cash
Convertible Debt Related Expense
The components of non-cash convertible debt related expense are
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Debt discount accretion related to the Debentures
|
|
$
|
5,054
|
|
|
$
|
4,702
|
|
Debt discount accretion related to the Notes
|
|
|
5,116
|
|
|
|
|
|
Fair value changes related to the Note Hedge
|
|
|
36,896
|
|
|
|
|
|
Fair value changes related to the Cash Conversion Option
|
|
|
(38,819
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-cash convertible debt related expense
|
|
$
|
8,247
|
|
|
$
|
4,702
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
(Loss) Income
The components of comprehensive (loss) income are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Comprehensive (loss) income, net of income taxes:
|
|
|
|
|
|
|
|
|
Net loss attributable to Covanta Holding Corporation
|
|
$
|
(7,233
|
)
|
|
$
|
(651
|
)
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
(1,391
|
)
|
|
|
(1,801
|
)
|
Pension and other postretirement plan unrecognized net loss
|
|
|
(74
|
)
|
|
|
(42
|
)
|
Net unrealized gain (loss) on
available-for-sale
securities
|
|
|
176
|
|
|
|
(284
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss attributable to Covanta Holding
Corporation
|
|
|
(1,289
|
)
|
|
|
(2,127
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive loss attributable to Covanta Holding Corporation
|
|
$
|
(8,522
|
)
|
|
$
|
(2,778
|
)
|
|
|
|
|
|
|
|
|
|
Net income attributable to noncontrolling interests in
subsidiaries
|
|
$
|
2,500
|
|
|
$
|
1,380
|
|
Other comprehensive gain (loss) Foreign currency
translation
|
|
|
965
|
|
|
|
(530
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to noncontrolling interests in
subsidiaries
|
|
$
|
3,465
|
|
|
$
|
850
|
|
|
|
|
|
|
|
|
|
|
Goodwill
The following table details the changes in the carrying value of
goodwill (in thousands):
|
|
|
|
|
|
|
Total
|
|
|
Balance as of December 31, 2009
|
|
$
|
202,996
|
|
Veolia EfW Acquisition (See Note 3)
|
|
|
24,738
|
|
|
|
|
|
|
Balance as of March 31, 2010
|
|
$
|
227,734
|
|
|
|
|
|
|
NOTE 9. BENEFIT
OBLIGATIONS
Pension
and Other Benefit Obligations
The components of net periodic benefit costs are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Post-
|
|
|
|
|
|
|
Retirement
|
|
|
|
Pension Benefits
|
|
|
Benefits
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Service cost
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Interest cost
|
|
|
1,056
|
|
|
|
1,197
|
|
|
|
119
|
|
|
|
122
|
|
Expected return on plan assets
|
|
|
(1,237
|
)
|
|
|
(975
|
)
|
|
|
|
|
|
|
|
|
Amortization of net prior service cost
|
|
|
(82
|
)
|
|
|
19
|
|
|
|
|
|
|
|
|
|
Amortization of actuarial gain
|
|
|
(15
|
)
|
|
|
(46
|
)
|
|
|
(25
|
)
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
(278
|
)
|
|
$
|
195
|
|
|
$
|
94
|
|
|
$
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Defined
Contribution Plans
Substantially all of our employees in the United States are
eligible to participate in defined contribution plans we
sponsor. Our costs related to all defined contribution plans
were $4.9 million and $4.4 million for the three
months ended March 31, 2010 and 2009, respectively.
NOTE 10. STOCK-BASED
COMPENSATION
Compensation expense related to our stock-based awards totaled
$3.5 million and $3.9 million during the three months
ended March 31, 2010 and 2009, respectively.
During the three months ended March 31, 2010, we awarded
certain employees 725,693 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 vesting provisions based solely on continued service. If
the service criteria are satisfied, the awards vest during March
of 2011, 2012 and 2013.
During the three months ended March 31, 2010, we adopted a
Growth Equity Plan, which is to be used for awards pursuant to
our Equity Award Plan for Employees and Officers. The Growth
Equity Plan provides for the award of restricted stock units
(RSU) to certain employees in connection with
specified growth-based acquisitions that have been completed or
development projects that have commenced. We awarded certain
employees 1,085,040 shares of restricted stock units under
the Growth Equity Plan.
The Growth Equity Plan provides that as of the award date of the
restricted stock units, the Compensation Committee shall
determine the net present value of cash flows for the applicable
acquisitions or development projects (Projected
NPV). Vesting of such awards will not occur until at least
three years have passed following an acquisition and upon the
later of three years from the grant date or one year following
the commencement of commercial operations for development
projects. Upon the vesting date, the Compensation Committee will
re-calculate the net present values from cash flows (Bring
Down NPV). If the ratio of the Bring Down NPV to the
Projected NPV is greater than 95% all of the RSUs related to the
particular project will vest. If the ratio is less than 95%, the
number of RSUs originally issued will be proportionately reduced.
As of March 31, 2010, we had approximately
$18.6 million, $12.0 million and $2.6 million of
unrecognized compensation expense related to our unvested
restricted stock awards, restricted stock units, and unvested
stock options, respectively. We expect this compensation expense
to be recognized over a weighted average period of approximately
2 years for our unvested restricted stock awards,
approximately 4 years for our unvested restricted stock
units and approximately 2 years for our unvested stock
options.
NOTE 11. FINANCIAL
INSTRUMENTS
Fair
Value Measurements
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments:
|
|
|
|
|
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 long-term debt and project debt are determined
using quoted market prices.
|
|
|
The fair value of the Note Hedge and the Cash Conversion Option
are determined using an option pricing model based on observable
inputs such as implied volatility, risk free rate, and other
factors. The fair value of the Note Hedge is adjusted to reflect
counterparty risk of non-performance, and is based on the
counterpartys credit spread in the credit derivatives
market. 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
March 31, 2010. However, such amounts have not been
comprehensively revalued for purposes of these financial
statements since March 31, 2010, and current estimates of
fair value may differ significantly from the amounts presented
herein.
17
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents information about the fair value
measurement of our assets and liabilities as of March 31,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
Significant
|
|
|
|
As of March 31, 2010
|
|
|
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
|
|
$
|
77,615
|
|
|
$
|
77,615
|
|
|
$
|
77,615
|
|
|
$
|
|
|
|
$
|
|
|
Money market funds
|
|
|
251,748
|
|
|
|
251,748
|
|
|
|
251,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents:
|
|
|
329,363
|
|
|
|
329,363
|
|
|
|
329,363
|
|
|
|
|
|
|
|
|
|
Restricted funds held in trust:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank deposits and certificates of deposit
|
|
|
23,805
|
|
|
|
23,791
|
|
|
|
23,791
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
147,809
|
|
|
|
147,842
|
|
|
|
147,842
|
|
|
|
|
|
|
|
|
|
U.S. Treasury/Agency obligations (a)
|
|
|
41,552
|
|
|
|
41,552
|
|
|
|
41,552
|
|
|
|
|
|
|
|
|
|
State and municipal obligations
|
|
|
10,253
|
|
|
|
10,253
|
|
|
|
10,253
|
|
|
|
|
|
|
|
|
|
Commercial paper/Guaranteed investment contracts/ Repurchase
agreements
|
|
|
52,660
|
|
|
|
52,660
|
|
|
|
52,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restricted funds held in trust:
|
|
|
276,079
|
|
|
|
276,098
|
|
|
|
276,098
|
|
|
|
|
|
|
|
|
|
Restricted funds other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank deposits and certificates of deposit (b)
|
|
|
20,253
|
|
|
|
20,244
|
|
|
|
20,244
|
|
|
|
|
|
|
|
|
|
Money market funds (c)
|
|
|
7,557
|
|
|
|
7,557
|
|
|
|
7,557
|
|
|
|
|
|
|
|
|
|
U.S. Agency obligations (c)
|
|
|
1,629
|
|
|
|
1,629
|
|
|
|
1,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restricted funds other:
|
|
|
29,439
|
|
|
|
29,430
|
|
|
|
29,430
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities available for sale (c)
|
|
|
300
|
|
|
|
300
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
Mutual and bond funds (b)
|
|
|
2,214
|
|
|
|
2,343
|
|
|
|
2,343
|
|
|
|
|
|
|
|
|
|
Investments available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury/Agency obligations (d)
|
|
|
14,810
|
|
|
|
14,810
|
|
|
|
14,810
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities (d)
|
|
|
3,197
|
|
|
|
3,197
|
|
|
|
3,197
|
|
|
|
|
|
|
|
|
|
Corporate investments (d)
|
|
|
12,302
|
|
|
|
12,302
|
|
|
|
12,302
|
|
|
|
|
|
|
|
|
|
Other government obligations (d)
|
|
|
1,326
|
|
|
|
1,326
|
|
|
|
1,326
|
|
|
|
|
|
|
|
|
|
Equity securities (c)
|
|
|
897
|
|
|
|
897
|
|
|
|
897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments:
|
|
|
35,046
|
|
|
|
35,175
|
|
|
|
35,175
|
|
|
|
|
|
|
|
|
|
Derivative Asset Note Hedge
|
|
|
86,647
|
|
|
|
86,647
|
|
|
|
|
|
|
|
86,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets:
|
|
$
|
756,574
|
|
|
$
|
756,713
|
|
|
$
|
670,066
|
|
|
$
|
86,647
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liability Cash Conversion Option
|
|
$
|
89,785
|
|
|
$
|
89,785
|
|
|
$
|
|
|
|
$
|
89,785
|
|
|
$
|
|
|
Derivative Liabilities Contingent interest features
of the Debentures and Notes
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities:
|
|
$
|
89,785
|
|
|
$
|
89,785
|
|
|
$
|
|
|
|
$
|
89,785
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Instruments Recorded at Carrying
Amount:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivables (e)
|
|
$
|
288,984
|
|
|
$
|
288,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt (excluding Cash Conversion Option)
|
|
$
|
1,317,415
|
|
|
$
|
1,301,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Project debt
|
|
$
|
955,908
|
|
|
$
|
972,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
(b)
|
|
Included in other noncurrent assets
in the condensed consolidated balance sheets.
|
(c)
|
|
Included in prepaid expenses and
other current assets in the condensed consolidated balance
sheets.
|
(d)
|
|
Included in investments in fixed
maturities at market in the condensed consolidated balance
sheets.
|
(e)
|
|
Includes $30.6 million of
noncurrent receivables in other noncurrent assets.
|
Investments
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 securities
values are determined by third party matrix pricing based on the
last days trading activity. Changes in fair values 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 the cost basis for equity securities on the date
of trade, subject to any previous adjustments for
other-than-temporary
declines.
18
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other-than-temporary
declines in fair value are recorded as realized losses in the
condensed consolidated statements of income to the extent they
relate to credit losses, and to AOCI to the extent they are
related to other factors. The cost basis of the security is also
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.
The cost or amortized cost, unrealized gains, unrealized losses
and the fair value of our investments categorized by type of
security, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010
|
|
|
|
Cost or
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Amortized Cost
|
|
|
Gain
|
|
|
Loss
|
|
|
Value
|
|
|
Current investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
300
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
300
|
|
Equity securities insurance business
|
|
|
732
|
|
|
|
168
|
|
|
|
3
|
|
|
|
897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current investments
|
|
$
|
1,032
|
|
|
$
|
168
|
|
|
$
|
3
|
|
|
$
|
1,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities insurance business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
|
$
|
315
|
|
|
$
|
2
|
|
|
$
|
|
|
|
$
|
317
|
|
U.S. government agencies
|
|
|
14,274
|
|
|
|
245
|
|
|
|
26
|
|
|
|
14,493
|
|
Residential mortgage-backed
|
|
|
3,109
|
|
|
|
88
|
|
|
|
|
|
|
|
3,197
|
|
Corporate
|
|
|
11,932
|
|
|
|
410
|
|
|
|
40
|
|
|
|
12,302
|
|
Other government obligations
|
|
|
1,342
|
|
|
|
|
|
|
|
16
|
|
|
|
1,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities insurance business
|
|
|
30,972
|
|
|
|
745
|
|
|
|
82
|
|
|
|
31,635
|
|
Mutual and bond funds
|
|
|
2,214
|
|
|
|
129
|
|
|
|
|
|
|
|
2,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent investments
|
|
$
|
33,186
|
|
|
$
|
874
|
|
|
$
|
82
|
|
|
$
|
33,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
Cost or
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Amortized Cost
|
|
|
Gain
|
|
|
Loss
|
|
|
Value
|
|
|
Current investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
300
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
300
|
|
Equity securities insurance business
|
|
|
732
|
|
|
|
150
|
|
|
|
11
|
|
|
|
871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current investments
|
|
$
|
1,032
|
|
|
$
|
150
|
|
|
$
|
11
|
|
|
$
|
1,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities insurance business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
|
$
|
315
|
|
|
$
|
6
|
|
|
$
|
|
|
|
$
|
321
|
|
U.S. government agencies
|
|
|
13,157
|
|
|
|
257
|
|
|
|
9
|
|
|
|
13,405
|
|
Residential mortgage-backed
|
|
|
5,150
|
|
|
|
74
|
|
|
|
21
|
|
|
|
5,203
|
|
Corporate
|
|
|
8,878
|
|
|
|
337
|
|
|
|
2
|
|
|
|
9,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities insurance business
|
|
|
27,500
|
|
|
|
674
|
|
|
|
32
|
|
|
|
28,142
|
|
Mutual and bond funds
|
|
|
1,802
|
|
|
|
303
|
|
|
|
|
|
|
|
2,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent investments
|
|
$
|
29,302
|
|
|
$
|
977
|
|
|
$
|
32
|
|
|
$
|
30,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
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 March 31, 2010
|
|
|
As of December 31, 2009
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
Description of Investments
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
U.S. Treasury and other direct U.S. Government obligations
|
|
$
|
1,974
|
|
|
$
|
26
|
|
|
$
|
341
|
|
|
$
|
9
|
|
Federal agency mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
1,503
|
|
|
|
21
|
|
Other government obligations
|
|
|
1,326
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
3,029
|
|
|
|
40
|
|
|
|
100
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
6,329
|
|
|
|
82
|
|
|
|
1,944
|
|
|
|
32
|
|
Equity securities
|
|
|
121
|
|
|
|
3
|
|
|
|
94
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired investments
|
|
$
|
6,450
|
|
|
$
|
85
|
|
|
$
|
2,038
|
|
|
$
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The number of U.S. Treasury and federal agency obligations,
mortgage-backed securities, other government obligations, and
corporate bonds temporarily impaired are 2, 0, 2, and 6,
respectively. As of March 31, 2010, all of the temporarily
impaired fixed maturity investments 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 10.1%,
and 18.5% of the total fixed maturities as of March 31,
2010 and December 31, 2009, 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 March 31, 2010
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
One year or less
|
|
$
|
11,331
|
|
|
$
|
11,535
|
|
Over one year to five years
|
|
|
15,900
|
|
|
|
16,398
|
|
Over five years to ten years
|
|
|
2,391
|
|
|
|
2,373
|
|
More than ten years
|
|
|
1,350
|
|
|
|
1,329
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
$
|
30,972
|
|
|
$
|
31,635
|
|
|
|
|
|
|
|
|
|
|
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 March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Fixed maturities, net
|
|
$
|
21
|
|
|
$
|
(97
|
)
|
Equity securities, net
|
|
|
26
|
|
|
|
(145
|
)
|
Mutual and bond funds
|
|
|
129
|
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
Change in net unrealized gain (loss) on investments
|
|
$
|
176
|
|
|
$
|
(284
|
)
|
|
|
|
|
|
|
|
|
|
The components of net unrealized gain (loss) on
available-for-sale
securities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Net unrealized holding gain (loss) on
available-for-sale
securities arising during the period
|
|
$
|
176
|
|
|
$
|
(290
|
)
|
Reclassification adjustment for net realized losses on
available-for-sale
securities included in net income
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain (loss) on
available-for-sale
securities
|
|
$
|
176
|
|
|
$
|
(284
|
)
|
|
|
|
|
|
|
|
|
|
20
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NOTE 12. DERIVATIVE
INSTRUMENTS
The following disclosures summarize the fair value of derivative
instruments not designated as hedging instruments in the
condensed consolidated balance sheets and the effect of changes
in fair value related to those derivative instruments not
designated as hedging instruments on the condensed consolidated
statements of income.
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments Not Designated
|
|
|
|
Fair Value as of
|
|
As Hedging Instruments
|
|
Balance Sheet Location
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
(In thousands)
|
|
|
Asset Derivatives:
|
|
|
|
|
|
|
|
|
|
|
Note Hedge
|
|
Other noncurrent assets
|
|
$
|
86,647
|
|
|
$
|
123,543
|
|
Liability Derivatives:
|
|
|
|
|
|
|
|
|
|
|
Cash Conversion Option
|
|
Long-term debt
|
|
$
|
89,785
|
|
|
$
|
128,603
|
|
Contingent interest features of the Debentures and Notes
|
|
Other noncurrent liabilities
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect on Income of
|
|
|
|
Amount of Gain or (Loss)
|
|
Derivative Instruments
|
|
Location of Gain or (Loss)
|
|
Recognized in Income on Derivative
|
|
Not Designated
|
|
Recognized in Income on
|
|
For the Three Months Ended March 31,
|
|
As Hedging Instruments
|
|
Derivatives
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(In thousands)
|
|
|
Note Hedge
|
|
Non-cash convertible debt related expense
|
|
$
|
(36,896
|
)
|
|
$
|
|
|
Cash Conversion Option
|
|
Non-cash convertible debt related expense
|
|
|
38,818
|
|
|
|
|
|
Contingent interest features of the Debentures and Notes
|
|
Non-cash convertible debt related expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect on income of derivative instruments not designated as
hedging instruments
|
|
|
|
$
|
1,922
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Note Hedge is
accounted for as a derivative instrument 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.
We expect the gain or loss associated with changes to the
valuation of the Note Hedge to substantially offset the gain or
loss associated with changes to the valuation of the Cash
Conversion Option. However, they will not be completely
offsetting as a result of changes in the credit valuation
adjustment related to the Note Hedge. Our most significant
credit exposure arises from the Note Hedge. 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. For specific details
related to the Cash Conversion Option, Note Hedge and contingent
interest features of the Notes, refer to Note 11 of the
Notes to Consolidated Financial Statements in our
Form 10-K.
Contingent
Interest feature of the 1.00% Senior Convertible
Debentures
The contingent interest feature in the Debentures is an embedded
derivative instrument. The first contingent cash interest
payment period would not commence until February 1, 2012.
For specific criteria related to the contingent interest
features of the Debentures, refer to Note 11 and
Note 14 of the Notes to Consolidated Financial Statements
in our
Form 10-K.
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
March 31, 2010 and 2009, we collected $7.6 million and
$5.2 million, respectively, for the operation and
maintenance of the facility. As of March 31, 2010 and
December 31, 2009, the net amount due to Quezon was
$4.3 million and $5.0 million, respectively, which
represents advance payments received from Quezon for operation
and maintenance costs.
21
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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 $52.5 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) in Superior Court
of New Jersey, Essex County 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 March 31, 2010 were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments Expiring by Period
|
|
|
|
|
|
|
Less Than
|
|
|
More Than
|
|
|
|
Total
|
|
|
One Year
|
|
|
One Year
|
|
|
Letters of credit
|
|
$
|
302,227
|
|
|
$
|
5,542
|
|
|
$
|
296,685
|
|
Surety bonds
|
|
|
111,471
|
|
|
|
|
|
|
|
111,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other commitments net
|
|
$
|
413,698
|
|
|
$
|
5,542
|
|
|
$
|
408,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
22
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Concluded)
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.
The surety bonds listed on the table above relate primarily to
performance obligations ($100.7 million) and support for
closure obligations of various energy projects when such
projects cease operating ($10.8 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 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 Note 6. Changes in
Capitalization.
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 11
of the Notes to Consolidated Financial Statements in our
Form 10-K.
We have issued or are party to guarantees and related
contractual support obligations undertaken pursuant to
agreements to construct and operate 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
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 for 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 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.
23
|
|
Item 2.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
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
March 31, 2010 and our results of operations for the three
months ended March 31, 2010, compared with the same period
last year. It should be read in conjunction with our Audited
Consolidated Financial Statements and Notes thereto for the year
ended December 31, 2009 and Managements Discussion
and Analysis of Financial Condition and Results of Operations
included in our
Form 10-K
for the year ended December 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 or EfW), as well as
other waste disposal and renewable energy production businesses
in the Americas, Europe and Asia. Our reportable segments are
Americas and International. 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 Americas.
As of March 31, 2010, we owned, had equity investments in,
and/or
operate 65 energy generation facilities, 57 of which were in the
Americas and eight of which were located outside the Americas.
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, two ash fills and two landfills,
which we use primarily for ash disposal, and 13 waste transfer
stations.
We have 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.
The
Energy-From-Waste Solution
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 the Americas and International segments, 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:
|
|
|
|
|
investing in research and development of new technologies to
enhance existing operations and create new business
opportunities in renewable energy and waste management;
|
|
|
exploring and implementing processes and technologies at our
facilities to improve energy efficiency and lessen environmental
impacts; and
|
|
|
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.
|
24
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 ongoing global economic slowdown and
related unemployment, policy makers are also expected to focus
on economic stimulus, job creation, and energy security. We
believe that the construction and permanent jobs created by
additional energy-from-waste development represent the type of
green jobs that are consistent with this 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 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
policy objectives, 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 policy objectives.
Similar legislation has been introduced in the United States
Senate. While legislation is far from final and a vigorous
debate is expected when the House of Representatives and Senate
bills are reconciled, the direction of Congressional efforts to
date lead us to believe legislation might be passed that could
create additional growth opportunities for our business and
increase energy revenue from existing facilities.
Factors
Affecting Business Conditions and Financial
Results
Market Pricing for Waste, Energy and
Metal Global and regional economy activity,
as well as technological advances, regulations and a variety of
other factors, will affect market supply and demand and
therefore prices for waste disposal services, energy (including
electricity and steam) and other commodities such as scrap
metal. As market prices for waste disposal, electricity, steam
and recycled metal rise it benefits our existing business as
well as our prospects for growth through expansions or new
development. Conversely, market price declines for these
services and commodities will adversely affect both our existing
business and growth prospects.
Seasonal Our quarterly operating
income for the Americas and International segments, within the
same fiscal year, typically differ 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 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.
In addition, at certain of our project subsidiaries,
distributions of excess earnings (above and beyond monthly
operation and maintenance service payments) are subject to
periodic tests of project debt service coverage or requirements
to maintain minimum working capital balances. While these
distributions occur throughout the year based upon the specific
terms of the relevant project debt arrangements, they are
typically highest in the fourth quarter. Our net cash provided
by operating activities exhibits seasonal fluctuations as a
result of the timing of these distributions, including a benefit
in the fourth quarter compared to the first nine months of the
year.
Other Factors Affecting Performance We
have historically performed our operating obligations without
experiencing material unexpected service interruptions or
incurring material increases in costs. In addition, with respect
to many of our contracts, we generally have limited our exposure
for risks not within our control. For additional information
about such risks and damages that we may owe for unexcused
operating performance failures, see Item 1A. Risk
Factors. In monitoring and assessing the ongoing operating
and financial performance of our businesses, we focus on certain
key factors: tons of waste processed, electricity and steam
sold, and boiler availability.
Business
Segments
Our reportable segments are Americas and International. The
Americas segment is comprised of waste and energy services
operations primarily in the United States and Canada. The
International segment is comprised of waste and energy services
operations in other countries, currently those of the United
Kingdom, Ireland, Italy, China, The Philippines, India and
Bangladesh.
25
|
|
|
|
Segment
|
|
Business Description
|
|
|
Americas
|
|
Our business in the Americas is comprised primarily of
energy-from-waste projects. For all of these projects, we earn
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 primarily 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. We may
receive additional revenue from construction activity during
periods when we are constructing new facilities or expanding
existing facilities.
|
|
|
International
|
|
We have ownership interests in and/or operate facilities
internationally, including independent power production
facilities in the Philippines, Bangladesh, China 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 are constructing energy-from-waste facilities in
Ireland and China. We earn revenue from operating fees, waste
processing fees, electricity and steam sales, construction
activities, and in some cases, we receive 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 earn revenue
from two primary sources: fees we receive for operating projects
or for processing waste received, and payments we earn for
electricity
and/or steam
we sell. Typical features of these agreements are as follows:
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
number of
|
|
Fees for operating projects or for
|
|
Payments for electricity
|
Contract types
|
|
projects
|
|
processing waste
received
|
|
and/or steam we sell
|
|
Service Fee
|
|
29
|
|
We charge a fixed fee (which adjusts over time pursuant to
contractual indices that we believe are appropriate to reflect
price inflation) for operation and maintenance services provided
to these energy-from-waste projects. At projects that we own and
where project debt is in place, a portion of our fee is
dedicated to project debt service. 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. (29 Americas segment
Service Fee projects).
|
|
At most of our Service Fee projects, the operating subsidiary
retains only a fraction of the energy revenues generated, with
the balance (generally 90%) 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.
|
|
|
Tip Fee
|
|
16
|
|
We receive a per-ton fee under contracts for processing waste at
Tip Fee projects. We generally enter into long-term waste
disposal contracts for a substantial portion of the
projects disposal capacity. 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. (13
Americas segment Tip Fee projects and 3 International segment
Tip Fee projects).
|
|
Where Tip Fee structures exist, we generally retain 100% of the
energy revenues as well as risk associated with energy
production and changing energy pricing. The majority of Tip Fee
structures are under long-term fixed-price energy contracts.
|
|
|
26
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
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 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 our revenue is waste revenue, which has generally
been subject to less price volatility than our revenue derived
from sales of energy and metals. During the second and third
quarters of 2008, pricing for energy reached historically high
levels and has subsequently declined materially.
At some of our 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
projects, 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.
We generally sell the energy output from our projects to local
utilities pursuant to long-term contracts. At several of our
energy-from-waste projects, we sell energy output under
short-term contracts or on a spot-basis to our customers.
Contracted
and Merchant Capacity
We generally have long-term contracts to operate, or obtain
waste supplies for, our energy-from-waste projects. For those
projects we own, our contract to sell the projects energy
output (either electricity or steam) generally expires on or
after the date when the initial term of our contract to operate
or receive waste also expires. Expiration of both our operating
agreements and our agreements to sell energy output will subject
us to greater market risk in maintaining and enhancing revenues.
As contracts expire at projects we own, 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.
Growth
and Development
In our Americas segment, 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 businesses. We also intend to maintain a focus on
research and development of technologies that we believe will
enhance our competitive position, and offer new technical
solutions to waste and energy problems that augment and
complement our business.
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. Outside of the Americas, we are focusing on the
United Kingdom, Ireland, and China.
The following is a discussion of acquisitions and business
development for 2010 and 2009. See Item 1. Financial
Statements Note 3. Acquisitions and Business
Development for additional information.
ACQUISITIONS
AND BUSINESS DEVELOPMENT
|
|
|
|
|
|
|
|
|
|
|
|
Facility/Operating
|
|
|
|
|
|
|
|
|
|
|
Contract
|
|
Location
|
|
Year
|
|
Transaction
|
|
Type
|
|
Summary
|
|
Huntington
|
|
NY
|
|
2010
|
|
Acquisition
|
|
EfW
|
|
We acquired a nominal limited partnership interest held by a
third party in Covanta Huntington Limited Partnership, our
subsidiary which owns and operates an energy-from-waste facility
in Huntington, New York.
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
Facility/Operating
|
|
|
|
|
|
|
|
|
|
|
Contract
|
|
Location
|
|
Year
|
|
Transaction
|
|
Type
|
|
Summary
|
|
Dade
Long Beach
Hudson Valley
MacArthur
Plymouth
York
Burnaby
Abington
|
|
FL
CA
NY
NY
PA
PA
Canada
PA
|
|
2010
2009
2009
2009
2009
2009
2009
2009
|
|
Acquisition
|
|
EfW
EfW
EfW
EfW
EfW
EfW
EfW
Trans.St.
|
|
We acquired seven energy-from-waste businesses and one transfer
station business from Veolia Environmental Services North
America Corp. (the Veolia EfW Acquisition). The
acquired businesses have a combined capacity of 9,600 tpd. Each
of the operations 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. We acquired a majority ownership
stake in one of the energy-from-waste facilities and
subsequently purchased the remaining ownership stake in this
facility.
|
|
|
Detroit
|
|
MI
|
|
2009
|
|
Contract
|
|
EfW
|
|
We entered into an operating and maintenance agreement with
owners of the Detroit energy-from-waste facility (2,832 tpd, 952
pounds of steam generated per day), pursuant to which we will
operate, maintain and provide certain other services for a term
of one year. Under this agreement, we will earn a fixed fee and
pass through to the owners of the Detroit facility (or pay from
the project revenues) all expenses associated with operations
and maintenance of the facility. After paying all expenses,
excess net revenues flow to the owners (see discussion below
regarding our acquisition of an ownership interest in the
facility). We entered into a waste disposal agreement with the
Greater Detroit Resource Recovery Authority (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 and until either party provides advance
written notice of termination in accordance with the provisions
of the agreement. In December 2009, we entered into a short-term
steam agreement for the Detroit Facility which remains in effect
through June 2010. Negotiations with all stakeholders are in
progress for arrangements to continue operating the Detroit
Facility beyond June 30, 2010. Securing a long-term steam
agreement with appropriate pricing remains an important factor
to the overall Detroit Facility long-term economic viability.
|
|
|
Detroit
|
|
MI
|
|
2009
|
|
Acquisition
|
|
EfW
|
|
A newly-formed Covanta subsidiary purchased an undivided 30%
owner-participant interest in the Detroit energy-from-waste
facility. 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
energy-from-waste facility at market-based rates. The call right
continues for the duration of the participation agreement
agreements expiring in 2035, and the City of Detroit stands
behind GDRRAs waste delivery obligation following exercise
of the call until 2021.
|
|
|
Stanislaus
County
|
|
CA
|
|
2009
|
|
Contract
|
|
EfW
|
|
The service fee contract with Stanislaus County was extended
from 2010 to 2016.
|
|
|
Philadelphia
Transfer
Stations
|
|
PA
|
|
2009
|
|
Acquisition
|
|
Transfer
Stations
|
|
We acquired two waste transfer stations with combined capacity
of 4,500 tpd in Philadelphia, Pennsylvania.
|
|
|
28
ENERGY-FROM-WASTE
PROJECTS UNDER ADVANCED DEVELOPMENT OR
CONSTRUCTION
|
|
|
|
|
|
Project/Facility
|
|
Location
|
|
Summary
|
|
Technology
Development
|
|
|
|
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. Licensing fees
and demonstration unit cumulative purchases totaled
approximately $11.2 million in 2008 and 2009. Licensing
fees and demonstration unit purchases aggregated
$1.6 million during the quarter ended March 31, 2010
and, $4.7 million and $6.5 million during the years
ended December 31, 2009 and 2008, respectively.
|
|
|
AMERICAS
|
|
|
|
|
|
|
Honolulu
|
|
HI
|
|
We operate and maintain the energy-from-waste facility located
in and owned by the City and County of Honolulu, Hawaii. In
December 2009, we entered into agreements with the City and
County of Honolulu to expand the facilitys waste
processing capacity from 2,160 tpd to 3,060 tpd and to increase
the gross electricity capacity from 57 MW to 90 MW.
The agreements also extend the service contract term by
20 years. The $302 million expansion project is a
fixed-price construction project which will be funded and owned
by the City and County of Honolulu. Environmental and other
project related permits have been received and expansion
construction has commenced.
|
|
|
Harrisburg
|
|
PA
|
|
We have an agreement to provide construction management services
and advance up to $25.5 million (of which
$21.7 million has been advanced and $19.8 million is
outstanding as of March 31, 2010) in funding for
certain facility improvements required to enhance facility
performance, which are expected to be completed during 2010. The
repayment of this funding is guaranteed by the City of
Harrisburg, but is otherwise unsecured, and is junior to project
bondholders rights. The first three repayment installments
under this funding arrangement have been paid, but the repayment
installment of $0.6 million which was due to us on
April 1, 2010 has not been paid, and the City of Harrisburg
has requested a forbearance period. We are discussing the
proposed terms of the forbearance period with representatives of
the City and certain other stakeholders. The City of Harrisburg
is in a precarious financial condition with substantial
obligations, and it has reported consideration of various future
options (including seeking bankruptcy protection). We intend to
work with the City of Harrisburg and other stakeholders to
maintain our position in the project and to protect the recovery
of our advance.
|
|
|
Hillsborough
|
|
FL
|
|
During the third quarter of 2009, we completed the expansion and
commenced the operations of the expanded energy-from-waste
facility located in Hillsborough County, Florida. We expanded
waste processing capacity from 1,200 tpd to 1,800 tpd and
increased gross electricity capacity from 29.0 MW to
46.5 MW. As part of the agreement to implement this
expansion, we received a long-term operating contract extension
to 2027.
|
|
|
29
|
|
|
|
|
|
Project/Facility
|
|
Location
|
|
Summary
|
|
INTERNATIONAL
|
|
|
|
|
|
|
Dublin
|
|
Ireland
|
|
We are developing a 1,700 metric tpd energy-from-waste project
serving the City of Dublin, Ireland and surrounding communities
at an estimated cost of approximately 350 million.
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. We are responsible for the design
and construction of the project. We will operate 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, representing approximately 50% of the facilitys
processing capacity. 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. A
portion of the electricity is expected to be eligible for a
preferential renewable tariff. We and DONG Energy Generation A/S
have committed to provide financing for all phases of the
project. We expect to fund construction through existing sources
of liquidity and effect project financing as the project
progresses. The primary approvals and licenses for the project
have been obtained and construction commenced in December 2009.
The parties are working to satisfy remaining conditions and
obtain remaining approvals for the balance of construction
activity, pending receipt of which we expect to curtail project
spending.
|
|
|
Taixing
|
|
China
|
|
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. We will continue to operate our
existing coal-fired facility. The project company has obtained
Rmb 165 million in project financing which, together with
available cash from existing operations will fund construction
costs. The Taixing project commenced construction in late 2009.
|
|
|
Chengdu
|
|
China
|
|
We and Chongqing Iron & Steel Company (Group) Limited
have entered into 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. We also
executed a 25 year waste concession agreement for this
project. In connection with this award, we acquired a 49% equity
interest in the project company. Construction of the facility
has commenced and operation is expected to begin in 2011. The
project company has obtained Rmb 480 million in project
financing, of which 49% is guaranteed by us and 51% is
guaranteed by Chongqing Iron & Steel Company (Group)
Limited until the project has been constructed and for one year
after operations commence.
|
|
|
30
RESULTS
OF OPERATIONS
The comparability of the information provided below with respect
to our revenues, expenses and certain other items for periods
during each of the quarters presented was affected by several
factors. As outlined above under Overview
Growth and Development, our
acquisition and business development initiatives resulted in
various additional projects which increased comparative revenues
and expenses. These factors must be taken into account in
developing meaningful comparisons between the periods compared
below.
RESULTS
OF OPERATIONS Three Months Ended March 31, 2010
vs. Three Months Ended March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
Increase
|
|
|
|
March 31,
|
|
|
(Decrease)
|
|
|
|
2010
|
|
|
2009
|
|
|
2010 vs 2009
|
|
|
|
(Unaudited, in thousands)
|
|
|
CONSOLIDATED RESULTS OF OPERATIONS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
$
|
416,795
|
|
|
$
|
358,760
|
|
|
$
|
58,035
|
|
Total operating expenses
|
|
|
414,824
|
|
|
|
355,568
|
|
|
|
59,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
1,971
|
|
|
|
3,192
|
|
|
|
(1,221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
586
|
|
|
|
1,028
|
|
|
|
(442
|
)
|
Interest expense
|
|
|
(10,588
|
)
|
|
|
(7,916
|
)
|
|
|
2,672
|
|
Non-cash convertible debt related expense
|
|
|
(8,247
|
)
|
|
|
(4,702
|
)
|
|
|
3,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
(18,249
|
)
|
|
|
(11,590
|
)
|
|
|
6,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax benefit and equity in net income from
unconsolidated investments
|
|
|
(16,278
|
)
|
|
|
(8,398
|
)
|
|
|
7,880
|
|
Income tax benefit
|
|
|
7,875
|
|
|
|
3,318
|
|
|
|
4,557
|
|
Equity in net income from unconsolidated investments
|
|
|
3,670
|
|
|
|
5,809
|
|
|
|
(2,139
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (LOSS) INCOME
|
|
|
(4,733
|
)
|
|
|
729
|
|
|
|
(5,462
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net income attributable to noncontrolling interests in
subsidiaries
|
|
|
(2,500
|
)
|
|
|
(1,380
|
)
|
|
|
1,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS ATTRIBUTABLE TO COVANTA HOLDING CORPORATION
|
|
$
|
(7,233
|
)
|
|
$
|
(651
|
)
|
|
|
(6,582
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
153,894
|
|
|
|
153,467
|
|
|
|
427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
153,894
|
|
|
|
153,467
|
|
|
|
427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.05
|
)
|
|
$
|
|
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.05
|
)
|
|
$
|
|
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following general discussions should be read in conjunction
with the above table, the condensed 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 Americas and
International segment discussions below.
Consolidated
Results of Operations Comparison of Results for the
Three Months Ended March 31, 2010 vs. Results for the Three
Months Ended March 31, 2009
Operating revenues increased by $58.0 million primarily due
to the following:
|
|
|
|
|
increased waste and services revenues at our new businesses in
our Americas segment, primarily due to the Veolia EfW
Acquisition, and
|
|
|
increased electricity and steam sales revenue due to higher fuel
pass through costs at our Indian facilities, and
|
|
|
increased recycled metal revenues at our existing
energy-from-waste facilities in our Americas segment, and
|
|
|
increased construction revenue for expansion projects, offset by
|
|
|
decreased waste and service revenues due to the Detroit contract
transition, and
|
|
|
decreased electricity and steam pricing at our existing
energy-from-waste facilities in our Americas segment, primarily
due to the Hempstead and Union contract transitions.
|
Operating expenses increased by $59.3 million primarily due
to the following:
|
|
|
|
|
increased operating costs at our new businesses in our Americas
segment, primarily due to the Veolia EfW Acquisition, and
|
|
|
increased operating expenses at our Indian facilities resulting
primarily from higher fuel costs, and
|
|
|
increased construction expense for expansion projects, offset by
|
|
|
decreased expenses due to contract transitions.
|
31
Operating income was relatively flat with the prior year
comparative period. Increased revenues were offset by increased
operating expenses as described above.
Interest expense increased by $2.7 million primarily due to
the issuance of the 3.25% Cash Convertible Senior Notes
(Notes) which were issued in 2009, offset by lower
floating interest rates on the Term Loan Facility (as defined in
the Liquidity section below). Non-cash convertible debt
related expense increased by $3.5 million primarily due to
the amortization of the debt discount for the Notes which issued
in 2009, offset by the net changes to the valuation of the
derivatives associated with the Notes.
Income tax benefit increased by $4.6 million primarily due
to higher pre-tax operating losses and lower production tax
credits. See Item 1. Financial Statements
Note 7. Income Taxes for additional information.
Equity in net income from unconsolidated investments decreased
by $2.1 million primarily due to decreased earnings
resulting from timing differences in annual maintenance for
Quezon Power, Inc., foreign exchange losses at our Chengdu joint
venture and lower earnings at a biomass project in the Americas
segment due to a turbine outage.
Net income attributable to noncontrolling interests in
subsidiaries increased by $1.1 million primarily due to
increased earnings attributable to the minority partner for our
Southeast Massachusetts energy-from-waste facility.
Americas Segment Results of Operations
Comparison of Results for the Three Months Ended March 31,
2010 vs. Results for the Three Months Ended March 31,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
Increase
|
|
|
|
March 31,
|
|
|
(Decrease)
|
|
|
|
2010
|
|
|
2009
|
|
|
2010 vs 2009
|
|
|
|
(Unaudited, in thousands)
|
|
|
Waste and service revenues
|
|
$
|
241,063
|
|
|
$
|
205,352
|
|
|
$
|
35,711
|
|
Electricity and steam sales
|
|
|
95,409
|
|
|
|
101,249
|
|
|
|
(5,840
|
)
|
Other operating revenues
|
|
|
20,815
|
|
|
|
6,572
|
|
|
|
14,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
357,287
|
|
|
|
313,173
|
|
|
|
44,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plant operating expenses
|
|
|
257,182
|
|
|
|
222,400
|
|
|
|
34,782
|
|
Depreciation and amortization expense
|
|
|
48,021
|
|
|
|
49,722
|
|
|
|
(1,701
|
)
|
Net interest expense on project debt
|
|
|
10,282
|
|
|
|
11,670
|
|
|
|
(1,388
|
)
|
General and administrative expenses
|
|
|
19,461
|
|
|
|
19,493
|
|
|
|
(32
|
)
|
Other operating expenses
|
|
|
20,614
|
|
|
|
5,453
|
|
|
|
15,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
355,560
|
|
|
|
308,738
|
|
|
|
46,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
1,727
|
|
|
$
|
4,435
|
|
|
|
(2,708
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenues
Operating revenues for the Americas segment increased by
$44.1 million as reflected in the comparison of existing
business and new business in the table below (in millions) and
the discussion of key variance drivers which follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas Segment
|
|
|
|
Operating Revenue Variances
|
|
|
|
Existing
|
|
|
New
|
|
|
|
|
|
|
Business
|
|
|
Business(A)
|
|
|
Total
|
|
|
Waste and service revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fee
|
|
$
|
(7.9
|
)
|
|
$
|
33.9
|
|
|
$
|
26.0
|
|
Tip fee
|
|
|
(1.1
|
)
|
|
|
3.4
|
|
|
|
2.3
|
|
Recycled metal
|
|
|
6.4
|
|
|
|
1.0
|
|
|
|
7.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total waste and service revenues
|
|
|
(2.6
|
)
|
|
|
38.3
|
|
|
|
35.7
|
|
Electricity and steam sales
|
|
|
(9.2
|
)
|
|
|
3.4
|
|
|
|
(5.8
|
)
|
Other operating revenues
|
|
|
14.1
|
|
|
|
0.1
|
|
|
|
14.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
$
|
2.3
|
|
|
$
|
41.8
|
|
|
$
|
44.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
New business is defined as businesses acquired after
March 31, 2009. |
|
|
|
|
|
Revenues from Service Fee arrangements for existing business
decreased primarily due to the transition of the Detroit
facility to accounting under the equity method and lower
revenues earned explicitly to service project debt of
$2.0 million, partially offset by the Hillsborough
expansion.
|
|
|
Revenues from Tip Fee arrangements for existing business
decreased primarily due to increased levels of waste disposal
internalization.
|
32
|
|
|
|
|
Recycled metal revenues for existing business increased
$6.4 million compared to the same prior year period
primarily due to higher pricing. Historically, we have
experienced volatile prices for recycled metal which has
affected our recycled metal revenue as reflected in the table
below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
Quarters Ended
|
|
Total Recycled Metal Revenues
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
March 31,
|
|
$
|
12.6
|
|
|
$
|
5.2
|
|
|
$
|
11.4
|
|
June 30,
|
|
|
|
|
|
|
5.8
|
|
|
|
19.0
|
|
September 30,
|
|
|
|
|
|
|
9.1
|
|
|
|
17.3
|
|
December 31,
|
|
|
|
|
|
|
9.1
|
|
|
|
5.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total for the Year Ended December 31,
|
|
$
|
N/A
|
|
|
$
|
29.2
|
|
|
$
|
53.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electricity and steam sales for existing business decreased by
$9.2 million due to lower energy pricing, lower production
primarily due to economically dispatching one of our biomass
facilities and the transition of the Detroit facility to
accounting under the equity method.
|
|
|
Other operating revenues for existing business increased
primarily due to increased construction revenue for expansion
projects.
|
Operating
Expenses
Variances in plant operating expenses for the Americas segment
are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas Segment
|
|
|
|
Plant Operating Expense Variances
|
|
|
|
Existing
|
|
|
New
|
|
|
|
|
|
|
Business
|
|
|
Business(A)
|
|
|
Total
|
|
|
Total plant operating expenses
|
|
$
|
(0.9
|
)
|
|
$
|
35.7
|
|
|
$
|
34.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
New business is defined as businesses acquired after
March 31, 2009. |
Existing business plant operating expenses decreased by
$0.9 million primarily due to the Detroit contract
transition, and the benefit of lower fuel costs related to
economically dispatching one of our biomass facilities,
partially offset by cost escalations, and higher costs relating
to the Hempstead contract transition.
Other operating expenses increased by $15.2 million
primarily due to increased construction expense for expansion
projects.
Operating
Income
Operating income declined $2.7 million from the prior year
comparative period. New business was break-even due to seasonal
expense related to scheduled maintenance activity. Operating
income attributable to the existing business declined primarily
due to contract transitions at our Hempstead, Union and Detroit
facilities, as well as lower energy prices, partially offset by
higher recycled metal revenues and improved performance at
recently acquired facilities following the completion of work
carried out last year.
International
Business Results of Operations Comparison of Results
for the Three Months Ended March 31, 2010 vs. Results for
the Three Months Ended March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
Increase
|
|
|
|
March 31,
|
|
|
(Decrease)
|
|
|
|
2010
|
|
|
2009
|
|
|
2010 vs 2009
|
|
|
|
(Unaudited, in thousands)
|
|
|
Waste and service revenues
|
|
$
|
937
|
|
|
$
|
917
|
|
|
$
|
20
|
|
Electricity and steam sales
|
|
|
53,837
|
|
|
|
40,620
|
|
|
|
13,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
54,774
|
|
|
|
41,537
|
|
|
|
13,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plant operating expenses
|
|
|
47,044
|
|
|
|
33,642
|
|
|
|
13,402
|
|
Depreciation and amortization expense
|
|
|
1,875
|
|
|
|
1,749
|
|
|
|
126
|
|
Net interest expense on project debt
|
|
|
695
|
|
|
|
1,099
|
|
|
|
(404
|
)
|
General and administrative expenses
|
|
|
6,582
|
|
|
|
5,428
|
|
|
|
1,154
|
|
Other operating (income) expense
|
|
|
(1,175
|
)
|
|
|
478
|
|
|
|
(1,653
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
55,021
|
|
|
|
42,396
|
|
|
|
12,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
$
|
(247
|
)
|
|
$
|
(859
|
)
|
|
|
(612
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increases in revenues and plant operating expenses resulted
primarily from higher fuel costs at our Indian facilities, which
are a pass through at both facilities, partially offset by lower
demand from the electricity offtaker and resulting lower
electricity generation.
33
General and administrative expenses increased by
$1.2 million primarily due to additional business
development spending, and normal wage and benefit escalations.
Other operating expense decreased by $1.7 million primarily
due to higher foreign currency exchange gains.
Quarterly
Supplementary Financial Information Adjusted EBITDA
(Non-GAAP Discussion)
To supplement our results prepared in accordance with United
States generally accepted accounting principles
(GAAP), we use the measure of Adjusted EBITDA, which
is a non-GAAP measure as defined by the Securities and Exchange
Commission. This non-GAAP financial measure is described below,
and used in the tables below, is not intended as a substitute
and should not be considered in isolation from measures of
financial performance prepared in accordance with GAAP. In
addition, our use of non-GAAP financial measures may be
different from non-GAAP measures used by other companies,
limiting their usefulness for comparison purposes. The
presentation of Adjusted EBITDA is intended to enhance the
usefulness of our financial information by providing a measure
which management internally uses to assess and evaluate the
overall performance of its business and those of possible
acquisition candidates, and highlight trends in the overall
business.
We use Adjusted EBITDA to provide further information that is
useful to an understanding of the financial covenants contained
in the credit facilities of our most significant subsidiary,
Covanta Energy, and as an additional way of viewing aspects of
its operations that, when viewed with the GAAP results and the
accompanying reconciliations to corresponding GAAP financial
measures, provide a more complete understanding of our business.
The calculation of Adjusted EBITDA is based on the definition in
Covanta Energys credit facilities as described below under
Liquidity and Capital Resources, which we have
guaranteed. Adjusted EBITDA is defined as earnings before
interest, taxes, depreciation and amortization, as adjusted for
additional items subtracted from or added to net income. Because
our business is substantially comprised of that of Covanta
Energy, our financial performance is substantially similar to
that of Covanta Energy. For this reason, and in order to avoid
use of multiple financial measures which are not all from the
same entity, the calculation of Adjusted EBITDA and other
financial measures presented herein are measured on a
consolidated basis. Under these credit facilities, Covanta
Energy is required to satisfy certain financial covenants,
including certain ratios of which Adjusted EBITDA is an
important component. Compliance with such financial covenants is
expected to be the principal limiting factor which will affect
our ability to engage in a broad range of activities in
furtherance of our business, including making certain
investments, acquiring businesses and incurring additional debt.
Covanta Energy was in compliance with these covenants as of
March 31, 2010. Failure to comply with such financial
covenants could result in a default under these credit
facilities, which default would have a material adverse affect
on our financial condition and liquidity.
Adjusted EBITDA should not be considered as an alternative to
net income or cash flow provided by operating activities as
indicators of our performance or liquidity or any other measures
of performance or liquidity derived in accordance with GAAP.
In order to provide a meaningful basis for comparison, we are
providing information with respect to our Adjusted EBITDA for
the three months ended March 31, 2010 and 2009, reconciled
for each such period to net income and cash flow provided by
operating activities, which are believed to be the most directly
comparable measures under GAAP.
The following is a reconciliation of net income to Adjusted
EBITDA (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Net Loss Attributable to Covanta Holding Corporation
|
|
$
|
(7,233
|
)
|
|
$
|
(651
|
)
|
Depreciation and amortization expense
|
|
|
49,922
|
|
|
|
51,498
|
|
Debt service:
|
|
|
|
|
|
|
|
|
Net interest expense on project debt
|
|
|
10,977
|
|
|
|
12,769
|
|
Interest expense
|
|
|
10,588
|
|
|
|
7,916
|
|
Non-cash convertible debt related expense
|
|
|
8,247
|
|
|
|
4,702
|
|
Investment income
|
|
|
(586
|
)
|
|
|
(1,028
|
)
|
|
|
|
|
|
|
|
|
|
Subtotal debt service
|
|
|
29,226
|
|
|
|
24,359
|
|
Income tax benefit
|
|
|
(7,875
|
)
|
|
|
(3,318
|
)
|
Acquisition-related costs(A)
|
|
|
235
|
|
|
|
|
|
Other adjustments:
|
|
|
|
|
|
|
|
|
Change in unbilled service receivables
|
|
|
10,803
|
|
|
|
4,700
|
|
Non-cash compensation expense
|
|
|
3,500
|
|
|
|
3,907
|
|
Other non-cash items
|
|
|
1,037
|
|
|
|
545
|
|
|
|
|
|
|
|
|
|
|
Subtotal other adjustments
|
|
|
15,340
|
|
|
|
9,152
|
|
Net income attributable to noncontrolling interests in
subsidiaries
|
|
|
2,500
|
|
|
|
1,380
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
89,348
|
|
|
|
83,071
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
82,115
|
|
|
$
|
82,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
This amount relates to acquisition-related costs associated with
the Veolia EfW Acquisition in 2009. |
34
The following is a reconciliation of cash flow provided by
operating activities to Adjusted EBITDA (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Cash flow provided by operating activities
|
|
$
|
119,027
|
|
|
$
|
51,395
|
|
Acquisition-related costs
|
|
|
1,623
|
|
|
|
|
|
Debt service
|
|
|
29,226
|
|
|
|
24,359
|
|
Amortization of debt premium and deferred financing costs
|
|
|
169
|
|
|
|
1,178
|
|
Other(A)
|
|
|
(67,930
|
)
|
|
|
5,488
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
82,115
|
|
|
$
|
82,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
This amount relates primarily to changes in working capital. |
For additional discussion related to managements use of
non-GAAP measures, see Liquidity and Capital
Resources Quarterly Supplementary Financial
Information Free Cash Flow
(Non-GAAP Discussion) below.
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. As of March 31, 2010, in addition to
our ongoing cash flow, we had access to several sources of
liquidity, as discussed in Available Sources of Liquidity
below, including our existing cash on hand of
$329 million and the undrawn and available capacity of
$300 million of our revolving credit facility. In addition,
we had restricted cash of $276 million, of which
$154 million was designated for future payment of project
debt principal.
We derive our cash flows principally from our operations from
the projects in our Americas and International segments, which
allow us to satisfy project debt covenants and payments and
distribute cash. We typically receive cash distributions from
our Americas segment 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. 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. See
Managements Discussion and Analysis of Financial
Condition Overview Growth and
Development above.
Sources
and Uses of Cash Flow for the Three Months Ended March 31,
2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
Increase
|
|
|
|
Ended March 31,
|
|
|
(Decrease)
|
|
|
|
2010
|
|
|
2009
|
|
|
2010 vs 2009
|
|
|
|
(Unaudited, in thousands)
|
|
|
Net cash provided by operating activities
|
|
$
|
119,027
|
|
|
$
|
51,395
|
|
|
$
|
67,632
|
|
Net cash used in investing activities
|
|
|
(184,259
|
)
|
|
|
(34,720
|
)
|
|
|
149,539
|
|
Net cash used in financing activities
|
|
|
(38,780
|
)
|
|
|
(49,303
|
)
|
|
|
(10,523
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(308
|
)
|
|
|
(293
|
)
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
$
|
(104,320
|
)
|
|
$
|
(32,921
|
)
|
|
|
71,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities for the three months
ended March 31, 2010 was $119.0 million, an increase
of $67.6 million from the prior year period. The increase
was primarily due to the timing of working capital and
operations at our new businesses in our Americas segment.
Net cash used in investing activities for the three months ended
March 31, 2010 was $184.3 million, an increase of
$149.5 million from the prior year period. The increase was
primarily comprised of higher cash outflows of
$128.3 million related to the acquisition of the Dade,
Florida energy-from-waste business in February 2010 and
$11.1 million of higher cash outflows for increased capital
expenditures.
Net cash used in financing activities for the three months ended
March 31, 2010 was $38.8 million, a decrease of
$10.5 million from the prior year period. The decrease was
primarily due to a decrease in restricted funds of
$11.2 million for debt principal payments.
35
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
March 31, 2010, we had unrestricted cash and cash
equivalents of $329 million.
Short-Term
Liquidity
We have credit facilities which 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 March 31, 2010, we had available credit for liquidity
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Outstanding Letters
|
|
|
|
|
Available
|
|
|
|
of Credit as of
|
|
Available as of
|
|
|
Under Facility
|
|
Maturing
|
|
March 31, 2010
|
|
March 31, 2010
|
|
Revolving Loan Facility(1)
|
|
$
|
300,000
|
|
|
|
2013
|
|
|
$
|
|
|
|
$
|
300,000
|
|
Funded L/C Facility
|
|
$
|
320,000
|
|
|
|
2014
|
|
|
$
|
295,339
|
|
|
$
|
24,661
|
|
(1) Up to $200 million of which may be utilized
for letters of credit.
Quarterly
Supplementary Financial Information Free Cash Flow
(Non-GAAP Discussion)
To supplement our results prepared in accordance with United
States generally accepted accounting principles
(GAAP), we use the measure of Free Cash Flow, which
is a non-GAAP measure as defined by the Securities and Exchange
Commission. This non-GAAP financial measure is not intended as a
substitute and should not be considered in isolation from
measures of liquidity prepared in accordance with GAAP. In
addition, our use of Free Cash Flow may be different from
similarly identified non-GAAP measures used by other companies,
limiting their usefulness for comparison purposes. The
presentation of Free Cash Flow is intended to enhance the
usefulness of our financial information by providing measures
which management internally uses to assess and evaluate the
overall performance of its business and those of possible
acquisition candidates, and highlight trends in the overall
business.
We use the non-GAAP measure of Free Cash Flow as a criterion of
liquidity and performance-based components of employee
compensation. Free Cash Flow is defined as cash flow provided by
operating activities less maintenance capital expenditures,
which are capital expenditures primarily to maintain our
existing facilities. We use Free Cash Flow as a measure of
liquidity to determine amounts we can reinvest in our
businesses, such as amounts available to make acquisitions,
invest in construction of new projects or make principal
payments on debt. For additional discussion related to
managements use of non-GAAP measures, see Results of
Operations Quarterly Supplementary Financial
Information Adjusted EBITDA
(Non-GAAP Discussion) above.
In order to provide a meaningful basis for comparison, we are
providing information with respect to our Free Cash Flow for the
for the three months ended March 31, 2010 and 2009,
reconciled for each such period to cash flow provided by
operating activities.
The following is a summary of Free Cash Flow and its primary
uses (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Cash flow provided by operating activities
|
|
$
|
119,027
|
|
|
$
|
51,395
|
|
Less: Maintenance capital expenditures(A)
|
|
|
(32,604
|
)
|
|
|
(23,664
|
)
|
|
|
|
|
|
|
|
|
|
Free cash flow
|
|
$
|
86,423
|
|
|
$
|
27,731
|
|
|
|
|
|
|
|
|
|
|
Selected Uses of Free Cash Flow:
|
|
|
|
|
|
|
|
|
Principal payments on long-term debt
|
|
$
|
(1,857
|
)
|
|
$
|
(1,675
|
)
|
Principal payments on project debt, net of restricted funds
used(B)
|
|
$
|
(31,195
|
)
|
|
$
|
(38,493
|
)
|
Distributions to partners of noncontrolling interests in
subsidiaries
|
|
$
|
(3,054
|
)
|
|
$
|
(3,716
|
)
|
Acquisition of businesses, net of cash acquired
|
|
$
|
(128,254
|
)
|
|
$
|
|
|
Acquisition of noncontrolling interests in subsidiary
|
|
$
|
(2,000
|
)
|
|
$
|
|
|
Purchase of equity interests
|
|
$
|
|
|
|
$
|
(1,083
|
)
|
Other investment activities, net
|
|
$
|
(16,023
|
)
|
|
$
|
(6,804
|
)
|
Purchases of Property, Plant and Equipment:
|
|
|
|
|
|
|
|
|
Maintenance capital expenditures(A)
|
|
$
|
(32,604
|
)
|
|
$
|
(23,664
|
)
|
Capital expenditures associated with development projects
|
|
|
(2,862
|
)
|
|
|
(2,114
|
)
|
Capital expenditures associated with technology development
|
|
|
(1,720
|
)
|
|
|
(446
|
)
|
Capital expenditures other
|
|
|
(796
|
)
|
|
|
(609
|
)
|
|
|
|
|
|
|
|
|
|
Total purchases of property, plant and equipment
|
|
$
|
(37,982
|
)
|
|
$
|
(26,833
|
)
|
|
|
|
|
|
|
|
|
|
36
|
|
(A) |
Capital Expenditures primarily to maintain existing facilities.
Purchase of property, plant and equipment is also referred to as
Capital Expenditures.
|
|
|
(B) |
Principal payments on project debt are net of restricted funds
held in trust used to pay debt principal of $15.5 million
and $4.3 million for the three months ended March 31,
2010 and 2009, respectively. Principal payments on project debt
excludes principal repayments on working capital borrowings
relating to the operations of our Indian facilities of
$0.7 million and $2.5 million for the quarters ended
March 31, 2010 and 2009, respectively.
|
Credit
Agreement Financial Covenants
The loan documentation under the Credit Facilities contains
customary affirmative and negative covenants and financial
covenants as discussed in Note 11. Long-Term Debt of the
Notes to the Consolidated Financial Statements included in our
Form 10-K
for the year ended December 31, 2009
(Form 10-K).
As of March 31, 2010, we were in compliance with the
covenants under the Credit Facilities. The maximum Covanta
Energy capital expenditures that can be incurred to maintain
existing operating businesses is approximately $220 million
as of March 31, 2010.
Long-Term
Debt
Long-term debt is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
3.25% Cash Convertible Senior Notes due 2014
|
|
$
|
460,000
|
|
|
$
|
460,000
|
|
Debt discount related to Cash Convertible Senior Notes
|
|
|
(107,359
|
)
|
|
|
(112,475
|
)
|
Cash conversion option derivative at fair value
|
|
|
89,785
|
|
|
|
128,603
|
|
|
|
|
|
|
|
|
|
|
3.25% Cash Convertible Senior Notes, net
|
|
|
442,426
|
|
|
|
476,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.00% Senior Convertible Debentures due 2027
|
|
|
373,750
|
|
|
|
373,750
|
|
Debt discount related to Convertible Debentures
|
|
|
(39,988
|
)
|
|
|
(45,042
|
)
|
|
|
|
|
|
|
|
|
|
1.00% Senior Convertible Debentures, net
|
|
|
333,762
|
|
|
|
328,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loan Facility due 2014
|
|
|
630,500
|
|
|
|
632,125
|
|
Other long-term debt
|
|
|
512
|
|
|
|
745
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,407,200
|
|
|
|
1,437,706
|
|
Less: current portion
|
|
|
(6,801
|
)
|
|
|
(7,027
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
1,400,399
|
|
|
$
|
1,430,679
|
|
|
|
|
|
|
|
|
|
|
3.25%
Cash Convertible Senior Notes due 2014
(Notes)
Under limited circumstances, 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) upon conversion under any circumstances.
For specific criteria related to contingent interest, conversion
or redemption features of the Notes and details related to the
cash conversion option, cash convertible note hedge and warrants
related to the Notes, refer to Note 11 of the Notes to
Consolidated Financial Statements in our
Form 10-K.
For details related to the fair value for the contingent
interest feature, cash conversion option, and cash convertible
note hedge related to the Notes, see Note 12. Derivative
Instruments.
1.00% Senior
Convertible Debentures due 2027
(Debentures)
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 March 31, 2010, 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 11
of the Notes to Consolidated Financial Statements in our
Form 10-K.
For details related to the fair value for the contingent
interest feature related to the Debentures, see Note 12.
Derivative Instruments.
37
Project
Debt
Americas
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 our subsidiary Covanta ARC
LLC, but is non-recourse to us, which as of March 31, 2010
aggregated to $251.2 million.
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.
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 money
market funds, bank deposits and certificates of deposit, United
States treasury bills and notes, and United States government
agency securities. Restricted fund balances are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010
|
|
|
As of December 31, 2009
|
|
|
|
Current
|
|
|
Noncurrent
|
|
|
Current
|
|
|
Noncurrent
|
|
|
Debt service funds
|
|
$
|
90,990
|
|
|
$
|
76,739
|
|
|
$
|
73,406
|
|
|
$
|
101,376
|
|
Revenue funds
|
|
|
18,682
|
|
|
|
|
|
|
|
13,061
|
|
|
|
|
|
Other funds
|
|
|
45,284
|
|
|
|
44,384
|
|
|
|
44,756
|
|
|
|
45,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
154,956
|
|
|
$
|
121,123
|
|
|
$
|
131,223
|
|
|
$
|
146,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the $276.1 million in total restricted funds as of
March 31, 2010, approximately $153.7 million was
designated for future payment of project debt principal.
Capital
Requirements
Our projected contractual obligations are consistent with
amounts disclosed in our Annual Report on
Form 10-K
for the year ended December 31, 2009. We believe that when
combined with our other sources of liquidity, including our
existing cash on hand and the Revolving Loan Facility, we will
generate sufficient cash over at least the next twelve months to
meet operational needs, make capital expenditures, invest in the
business and service debt due.
Other
Commitments
Other commitments as of March 31, 2010 were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments Expiring by Period
|
|
|
|
|
|
|
Less Than
|
|
|
More Than
|
|
|
|
Total
|
|
|
One Year
|
|
|
One Year
|
|
|
Letters of credit
|
|
$
|
302,227
|
|
|
$
|
5,542
|
|
|
$
|
296,685
|
|
Surety bonds
|
|
|
111,471
|
|
|
|
|
|
|
|
111,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other commitments net
|
|
$
|
413,698
|
|
|
$
|
5,542
|
|
|
$
|
408,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
38
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.
The surety bonds listed on the table above relate primarily to
performance obligations ($100.7 million) and support for
closure obligations of various energy projects when such
projects cease operating ($10.8 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 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 Note 6. Changes in
Capitalization.
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 11
of the Notes to Consolidated Financial Statements in our
Form 10-K
for the year ended December 31, 2009.
We have issued or are party to guarantees and related
contractual support obligations undertaken pursuant to
agreements to construct and operate 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
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 for 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 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.
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.
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. Management believes there have been no
material changes during the three months ended March 31,
2010 to the items discussed in Discussion of Critical Accounting
Policies in Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations of our
Annual Report on
Form 10-K
for the year ended December 31, 2009.
|
|
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 commodity prices, interest rates, foreign
currency exchange rates, and derivative instruments. Our use of
derivative instruments is very limited and we do not enter into
derivative instruments for trading purposes. We use a
sensitivity model to evaluate the fair value or cash flows of
financial instruments with exposure to market risk that assumes
instantaneous, parallel shifts in exchange rates and interest
rate yield curves. There are certain limitations inherent in use
of a
39
sensitivity analysis, primarily due to the assumption that
exchange rates change in a parallel manner and that interest
rates change instantaneously.
There have been no material changes during the three months
ended March 31, 2010 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, 2009. For details related
to fair value estimates for the Cash Conversion Option, Note
Hedge and contingent interest as of March 31, 2010, refer
to Item 1. Financial Statements
Note 11. Financial Instruments and Note 12.
Derivative Instruments.
|
|
Item 4.
|
CONTROLS
AND PROCEDURES
|
Our management, with the participation of our Chief Executive
Officer and Interim 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 March 31, 2010. 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
Interim 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 rules and forms.
Our Chief Executive Officer and Interim 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
Interim 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
In August 2009, we completed the acquisition of six
energy-from-waste businesses and one transfer station business
located in New York, Pennsylvania, California and Canada and in
February 2010, we completed this acquisition transaction with
the purchase of an energy-from-waste business in Florida. We
have excluded these businesses from Managements Report on
Internal Control over Financial Reporting as of
December 31, 2009, and we will include these businesses in
Managements Report on Internal Control over Financial
Reporting as of December 31, 2010.
There has not been any change in our system of internal control
over financial reporting during the fiscal quarter ended
March 31, 2010 that has materially affected, or is
reasonably likely to materially affect, internal control over
financial reporting.
40
PART II
OTHER INFORMATION
|
|
Item 1.
|
LEGAL
PROCEEDINGS
|
See Note 14. Commitments and Contingencies of the Notes to
the Condensed Consolidated Financial Statements.
There have been no material changes during the three months
ended March 31, 2010 to the risk factors discussed in
Item 1A. Risk Factors in our Annual Report on
Form 10-K
for the year ended December 31, 2009.
|
|
Item 2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
None.
|
|
Item 3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
None.
|
|
Item 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
None
|
|
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 Interim 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 Interim Chief Financial Officer.
|
41
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)
Thomas E. Bucks
Vice President, Chief Accounting Officer
and Interim Chief Financial Officer
Date: April 21, 2010
42