e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
September 30, 2007
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number 1-6732
Covanta Holding
Corporation
(Exact name of registrant as
specified in its charter)
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Delaware
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95-6021257
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification Number)
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40 Lane Road, Fairfield, NJ
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07004
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(Address of Principal Executive
Office)
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(Zip code)
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(973) 882-9000
(Registrants telephone
number including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act.
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer 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.
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Class
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Outstanding at October 18, 2007
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Common Stock, $0.10 par value
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153,892,757 shares
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COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTERLY REPORT
For the Quarter Ended September 30, 2007
1
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 its businesses
described in Item 1A. Risk Factors of Covantas Annual
Report on
Form 10-K
for the year ended December 31, 2006 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.
2
PART I.
FINANCIAL INFORMATION
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ITEM 1.
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FINANCIAL
STATEMENTS
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COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2007
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2006
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2007
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2006
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(Unaudited)
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(In thousands, except per share amounts)
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OPERATING REVENUES:
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|
|
|
|
|
|
|
|
|
|
|
|
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Waste and service revenues
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$
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212,088
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$
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203,103
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$
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629,039
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$
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607,973
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Electricity and steam sales
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123,684
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104,019
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364,165
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329,610
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Other operating revenues
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16,578
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3,993
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44,495
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13,024
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|
|
|
|
|
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|
|
|
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|
|
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Total operating revenues
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352,350
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311,115
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1,037,699
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950,607
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|
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|
|
|
|
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|
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|
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|
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OPERATING EXPENSES:
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|
|
|
|
|
|
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|
|
|
|
|
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Plant operating expenses
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187,874
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|
|
|
162,211
|
|
|
|
589,442
|
|
|
|
524,456
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|
Depreciation and amortization expense
|
|
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50,540
|
|
|
|
47,752
|
|
|
|
147,019
|
|
|
|
142,987
|
|
Net interest expense on project debt
|
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|
12,501
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|
|
|
14,722
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|
40,992
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|
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46,013
|
|
General and administrative expenses
|
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|
18,483
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|
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17,746
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|
|
60,704
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|
|
52,051
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|
Write-down of assets, net of insurance recoveries
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|
|
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|
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4,925
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Other operating expenses (income)
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|
11,325
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|
(2,959
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)
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|
37,498
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1,251
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|
|
|
|
|
|
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Total operating expenses
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280,723
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239,472
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880,580
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766,758
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Operating income
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|
71,627
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|
|
71,643
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|
157,119
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183,849
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|
|
|
|
|
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|
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|
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Other income (expense):
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|
|
|
|
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|
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|
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Investment income
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1,963
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2,483
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8,966
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|
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7,801
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|
Interest expense
|
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(16,018
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)
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|
|
(26,968
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)
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|
|
(51,996
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)
|
|
|
(82,812
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)
|
Loss on extinguishment of debt
|
|
|
(65
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)
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|
|
|
|
|
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(32,071
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)
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|
|
(6,795
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)
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|
|
|
|
|
|
|
|
|
|
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|
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Total other expenses
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(14,120
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)
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(24,485
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)
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(75,101
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)
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|
(81,806
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)
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|
|
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Income before income tax expense, minority interests and equity
in net income from unconsolidated investments
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57,507
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47,158
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82,018
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102,043
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Income tax expense
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|
(23,768
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)
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|
|
(18,870
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)
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|
(34,414
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)
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|
(29,795
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)
|
Minority interests
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|
(2,055
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)
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|
|
(1,982
|
)
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|
|
(5,544
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)
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|
|
(4,861
|
)
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Equity in net income from unconsolidated investments
|
|
|
6,731
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|
|
|
4,945
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|
|
16,153
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|
|
26,460
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|
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|
|
|
|
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|
|
|
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|
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NET INCOME
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|
$
|
38,415
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|
|
$
|
31,251
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|
|
$
|
58,213
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|
$
|
93,847
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|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
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Weighted Average Common Shares Outstanding:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
153,035
|
|
|
|
146,418
|
|
|
|
152,504
|
|
|
|
145,393
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Diluted
|
|
|
154,319
|
|
|
|
147,266
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|
|
|
153,844
|
|
|
|
146,710
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.25
|
|
|
$
|
0.21
|
|
|
$
|
0.38
|
|
|
$
|
0.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.25
|
|
|
$
|
0.21
|
|
|
$
|
0.38
|
|
|
$
|
0.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed
consolidated financial statements.
3
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(In thousands, except per share amounts)
|
|
|
ASSETS
|
Current:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
139,678
|
|
|
$
|
233,442
|
|
Marketable securities available for sale
|
|
|
2,795
|
|
|
|
7,080
|
|
Restricted funds held in trust
|
|
|
243,296
|
|
|
|
178,054
|
|
Receivables (less allowances of $4,158 and $4,469, respectively)
|
|
|
228,256
|
|
|
|
209,306
|
|
Unbilled service receivables
|
|
|
59,654
|
|
|
|
56,868
|
|
Deferred income taxes
|
|
|
52,516
|
|
|
|
24,146
|
|
Prepaid expenses and other current assets
|
|
|
107,306
|
|
|
|
94,690
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
833,501
|
|
|
|
803,586
|
|
Property, plant and equipment, net
|
|
|
2,566,971
|
|
|
|
2,637,923
|
|
Investments in fixed maturities at market (cost: $28,085 and
$35,833, respectively)
|
|
|
27,766
|
|
|
|
35,007
|
|
Restricted funds held in trust
|
|
|
208,206
|
|
|
|
229,867
|
|
Unbilled service receivables
|
|
|
60,240
|
|
|
|
73,067
|
|
Waste, service and energy contracts, net
|
|
|
271,871
|
|
|
|
296,528
|
|
Other intangible assets, net
|
|
|
90,456
|
|
|
|
87,046
|
|
Goodwill
|
|
|
114,164
|
|
|
|
91,282
|
|
Investments in investees and joint ventures
|
|
|
91,065
|
|
|
|
73,717
|
|
Other assets
|
|
|
107,012
|
|
|
|
109,797
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
4,371,252
|
|
|
$
|
4,437,820
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
8,276
|
|
|
$
|
36,434
|
|
Current portion of project debt
|
|
|
192,333
|
|
|
|
190,242
|
|
Accounts payable
|
|
|
25,696
|
|
|
|
20,151
|
|
Deferred revenue
|
|
|
25,278
|
|
|
|
16,457
|
|
Accrued expenses and other current liabilities
|
|
|
223,624
|
|
|
|
197,468
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
475,207
|
|
|
|
460,752
|
|
Long-term debt
|
|
|
1,014,007
|
|
|
|
1,223,689
|
|
Project debt
|
|
|
1,167,922
|
|
|
|
1,245,705
|
|
Deferred income taxes
|
|
|
446,637
|
|
|
|
420,263
|
|
Waste and service contracts
|
|
|
126,982
|
|
|
|
135,607
|
|
Other liabilities
|
|
|
161,449
|
|
|
|
169,971
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
3,392,204
|
|
|
|
3,655,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 15)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority Interests
|
|
|
38,668
|
|
|
|
42,681
|
|
|
|
|
|
|
|
|
|
|
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 154,249 and 147,657 shares;
outstanding 153,893 and 147,500 shares, respectively)
|
|
|
15,425
|
|
|
|
14,766
|
|
Additional paid-in capital
|
|
|
763,116
|
|
|
|
619,685
|
|
Accumulated other comprehensive income
|
|
|
5,096
|
|
|
|
3,942
|
|
Accumulated earnings
|
|
|
156,779
|
|
|
|
100,775
|
|
Treasury stock, at par
|
|
|
(36
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
940,380
|
|
|
|
739,152
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
4,371,252
|
|
|
$
|
4,437,820
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed
consolidated financial statements.
4
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
58,213
|
|
|
$
|
93,847
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
147,019
|
|
|
|
142,987
|
|
Amortization of long-term debt deferred financing costs
|
|
|
2,698
|
|
|
|
2,794
|
|
Write-down of assets, net of insurance recoveries
|
|
|
4,925
|
|
|
|
|
|
Loss on extinguishment of debt
|
|
|
32,071
|
|
|
|
6,795
|
|
Amortization of debt premium and discount
|
|
|
(10,687
|
)
|
|
|
(16,856
|
)
|
Stock-based compensation expense
|
|
|
10,052
|
|
|
|
4,866
|
|
Equity in net income from unconsolidated investments
|
|
|
(16,153
|
)
|
|
|
(26,460
|
)
|
Dividends from unconsolidated investments
|
|
|
7,269
|
|
|
|
6,509
|
|
Minority interests
|
|
|
5,544
|
|
|
|
4,861
|
|
Deferred income taxes
|
|
|
14,941
|
|
|
|
10,874
|
|
Other, net
|
|
|
1,868
|
|
|
|
7,749
|
|
Change in working capital, net of effects of acquisitions
|
|
|
2,137
|
|
|
|
(2,987
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
259,897
|
|
|
|
234,979
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase of equity interest
|
|
|
(10,253
|
)
|
|
|
|
|
Proceeds from the sale of investment securities
|
|
|
13,015
|
|
|
|
6,692
|
|
Purchase of property, plant and equipment
|
|
|
(60,231
|
)
|
|
|
(35,693
|
)
|
Property insurance proceeds
|
|
|
7,341
|
|
|
|
|
|
Acquisition of businesses, net of cash acquired
|
|
|
(63,255
|
)
|
|
|
|
|
Other, net
|
|
|
2,310
|
|
|
|
3,694
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(111,073
|
)
|
|
|
(25,307
|
)
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from the issuance of common stock, net
|
|
|
135,757
|
|
|
|
|
|
Proceeds from rights offering, net
|
|
|
|
|
|
|
20,498
|
|
Proceeds from the exercise of options for common stock, net
|
|
|
606
|
|
|
|
1,126
|
|
Proceeds from borrowings on long-term debt
|
|
|
949,907
|
|
|
|
97,619
|
|
Proceeds from borrowings on project debt
|
|
|
3,426
|
|
|
|
6,233
|
|
Proceeds from borrowing on revolving credit facility
|
|
|
30,000
|
|
|
|
|
|
Principal payments on long-term debt
|
|
|
(1,168,148
|
)
|
|
|
(120,080
|
)
|
Principal payments on project debt
|
|
|
(73,393
|
)
|
|
|
(86,612
|
)
|
Payments of borrowings on revolving credit facility
|
|
|
(30,000
|
)
|
|
|
|
|
Payments of long-term debt deferred financing costs
|
|
|
(18,324
|
)
|
|
|
(2,129
|
)
|
Payments of tender premiums on debt extinguishment
|
|
|
(33,016
|
)
|
|
|
(1,952
|
)
|
Decrease in holding company restricted funds
|
|
|
6,660
|
|
|
|
|
|
Increase in restricted funds held in trust
|
|
|
(40,682
|
)
|
|
|
(17,451
|
)
|
Distributions to minority partners
|
|
|
(5,756
|
)
|
|
|
(7,990
|
)
|
Other, net
|
|
|
|
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(242,963
|
)
|
|
|
(110,775
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
375
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(93,764
|
)
|
|
|
99,006
|
|
Cash and cash equivalents at beginning of period
|
|
|
233,442
|
|
|
|
128,556
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
139,678
|
|
|
$
|
227,562
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed
consolidated financial statements.
5
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
Note 1.
|
Organization
and Basis of Presentation
|
The terms we, our, ours,
us, Covanta and Company
refer to Covanta Holding Corporation and its subsidiaries.
Organization
We are a leading developer, owner and operator of infrastructure
for the conversion of energy-from-waste, waste disposal and
renewable energy production businesses in the United States and
abroad. We also engage in the independent power production
business outside the United States.
We own, have equity investments in,
and/or
operate 56 energy generation facilities, 46 of which are in the
United States and 10 of which are located outside the United
States. Our energy generation facilities use a variety of fuels,
including municipal solid waste, water (hydroelectric), natural
gas, coal, wood waste, landfill gas 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 landfills, and several waste transfer stations. We
have two reportable segments, Domestic and International, which
are comprised of our domestic and international waste and energy
services operations, respectively.
Basis
of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with United States
generally accepted accounting principles (GAAP) and
with the instructions to
Form 10-Q
and Article 10 of
Regulation S-X.
Accordingly, they do not include all information and footnotes
required by GAAP for complete financial statements. In the
opinion of management, all adjustments (including normal
recurring accruals) considered necessary for fair presentation
have been included in our financial statements. Operating
results for the interim period are not necessarily indicative of
the results that may be expected for the fiscal year ended
December 31, 2007. 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, 2006
(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.
Certain prior period amounts have been reclassified in the
unaudited condensed consolidated financial statements to conform
to the current period presentation. All intercompany accounts
and transactions have been eliminated.
|
|
Note 2.
|
Recent
Accounting Pronouncements
|
In August 2007, the Financial Accounting Standards Board
(FASB) issued for comment proposed FASB Staff
Position (FSP) No. APB
14-a,
Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement) (FSP APB
14-a).
The proposed FSP would require the issuer of convertible debt
instruments with cash settlement features to separately account
for the liability and equity components of the instrument. The
debt would be recognized at the present value of its cash flows
discounted using the issuers nonconvertible debt borrowing
rate. The equity component would be recognized as the difference
between the proceeds from the issuance of the note and the fair
value of the liability. The proposed FSP would also require an
accretion of the resultant debt discount over the expected life
of the debt. The proposed transition guidance requires
retrospective application to all periods presented, and does not
grandfather existing instruments. The comment deadline for the
proposed FSP was October 15, 2007 and if issued, the
proposed FSP would be effective for us on January 1, 2008.
If the FSP is issued as proposed, we expect the increase in
non-cash interest expense recognized on our consolidated
financial statements to be significant.
6
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In February 2007, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities, including an amendment of FASB Statement
No. 115 (SFAS 159). SFAS 159
allows entities to voluntarily choose to measure certain
financial assets and liabilities at fair value (fair value
option). The fair value option may be elected on an
instrument-by-instrument
basis and is irrevocable, unless a new election date occurs. If
the fair value option is elected for an instrument,
SFAS 159 specifies that the effect of the first
remeasurement to fair value will be reported as a cumulative-
effect adjustment to the opening balance of retained earnings
and unrealized gains and losses for that instrument shall be
reported in earnings at each subsequent reporting date.
SFAS 159 is effective for us on January 1, 2008. We
are currently evaluating whether we will elect to apply the fair
value option to any of our financial assets and liabilities and
the impact of the election on our consolidated financial
statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157),
which defines fair value, establishes a framework for measuring
fair value in accordance with generally accepted accounting
principles, and expands disclosures about fair value
measurements. This statement does not require any new fair value
measurements. SFAS 157 is effective for us on
January 1, 2008. We are currently evaluating the impact of
the adoption of this statement on our consolidated financial
statements.
|
|
Note 3.
|
Acquisitions
and Business Development
|
The acquisitions in the section below are not material to our
unaudited condensed consolidated financial statements
individually or in the aggregate and therefore, disclosures of
pro forma financial information have not been presented.
Dublin
Joint Venture
On September 6, 2007, we announced that we had entered into
definitive agreements for the development of a 1,700 metric ton
per day (tpd) energy-from-waste project serving the
City of Dublin, Ireland and surrounding communities. The Dublin
project is being developed and will be owned by Dublin Waste to
Energy Limited, which is co-owned by us and DONG Energy
Generation A/S. As part of the transaction, we purchased a
controlling stake in Dublin Waste to Energy Limited. Project
construction, which is expected to start in late 2008 and is
estimated to cost approximately 300 million euros, will
require 36 months to complete. Dublin Waste to Energy
Limited has a
25-year tip
fee type contract to provide disposal service for approximately
320,000 metric tons of waste annually. The project is expected
to sell electricity into the local grid under short-term
arrangements. We have committed to provide financing for all
phases of the project, along with DONG Energy Generation A/S and
we expect that numerous project financing structures will be
available once the initial development phase is complete.
Biomass
Energy Facilities
On July 16, 2007, we acquired Central Valley Biomass
Holdings, LLC (Central Valley) from The
AES Corporation. Under the terms of the purchase agreement,
we paid $51 million in cash plus approximately
$5 million in cash related to post-closing adjustments and
transaction costs. Central Valley owns two biomass energy
facilities and a biomass energy fuel management business, which
are all located in California. We borrowed $30 million from
our revolving loan facility to partially fund the acquisition,
which we have since repaid. In addition, we expect to invest
between $15 million and $20 million in capital
improvements to significantly increase the facilities
productivity and improve environmental performance. Our
preliminary purchase price allocation, which includes
$23 million of goodwill, is based on estimates and
assumptions any changes to which could affect the reported
amounts of assets, liabilities and expenses resulting from this
acquisition.
Harrisburg
Energy-from-Waste Facility
On May 29, 2007, we entered into a ten year agreement with
the Harrisburg Authority (the Authority) to maintain
and operate the Authoritys 800 tpd energy-from-waste
facility located in Harrisburg, Pennsylvania. Under the
agreement, we will earn a base annual service fee of
approximately $10.5 million, which is subject to annual
escalation and certain performance-based adjustments. Under the
agreement, we have agreed to provide
7
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
construction management services and to advance up to
$28 million in funding for certain facility improvements
required to enhance facility performance. The agreement will
become effective when certain conditions precedent occur which
is expected in early 2008. In the meantime, we have entered into
an interim agreement to operate and maintain the facility as the
Authoritys contractor.
Holliston
Transfer Station
On April 30, 2007, we acquired a waste transfer station in
Holliston, Massachusetts from Casella Waste Systems Inc. for
cash consideration of $7.4 million.
China
Joint Venture
On April 25, 2007, we purchased a 40% equity interest in
Chongqing Sanfeng Environmental Industry Co., Ltd., a company
located in Chongqing Municipality, Peoples Republic of China.
The company, which was renamed Sanfeng Covanta Environmental
Industry Co., Ltd., owns minority equity interests in two 1,200
metric tpd 24 megawatts (MW) mass-burn
energy-from-waste projects. We made an initial cash payment of
approximately $10 million in connection with our investment
in Sanfeng.
|
|
Note 4.
|
Earnings
Per Share
|
We calculate our basic earnings per share by dividing net income
by the weighted average number of common shares outstanding
during the period. Diluted earnings per share are calculated in
a similar manner, but include the effect of dilutive securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net income
|
|
$
|
38,415
|
|
|
$
|
31,251
|
|
|
$
|
58,213
|
|
|
$
|
93,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares outstanding
|
|
|
153,035
|
|
|
|
146,418
|
|
|
|
152,504
|
|
|
|
145,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.25
|
|
|
$
|
0.21
|
|
|
$
|
0.38
|
|
|
$
|
0.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares outstanding
|
|
|
153,035
|
|
|
|
146,418
|
|
|
|
152,504
|
|
|
|
145,393
|
|
Stock options
|
|
|
592
|
|
|
|
559
|
|
|
|
621
|
|
|
|
546
|
|
Restricted stock
|
|
|
692
|
|
|
|
289
|
|
|
|
719
|
|
|
|
227
|
|
Rights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
544
|
|
Convertible debentures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding
|
|
|
154,319
|
|
|
|
147,266
|
|
|
|
153,844
|
|
|
|
146,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.25
|
|
|
$
|
0.21
|
|
|
$
|
0.38
|
|
|
$
|
0.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options excluded from the weighted average dilutive common
shares outstanding because their inclusion would have been
antidilutive
|
|
|
1,755
|
|
|
|
50
|
|
|
|
1,755
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 31, 2007, we issued 1.00% Senior
Convertible Debentures due 2027 (the 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. See Note 6.
Changes in Capitalization for a description of the Debentures.
8
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 5.
|
Business
Segments
|
Given our increased focus on developing our international waste
and energy business, during the first quarter of 2007, we
segregated what we previously reported as our Waste and Energy
Services segment into two new segments: Domestic and
International. Our remaining operations, which we previously
reported as our Other Services segment and was comprised of the
holding company and insurance subsidiaries operations,
does not meet the quantitative thresholds which require separate
disclosure as a reportable segment. Therefore, we currently have
two reportable segments, Domestic and International, which are
comprised of our domestic and international waste and energy
services operations, respectively.
The results of our reportable segments for the three and nine
months ended September 30, 2007 and 2006 are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable Segments
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
International
|
|
|
All Other(1)
|
|
|
Total
|
|
|
Three Months Ended September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
312,391
|
|
|
$
|
37,400
|
|
|
$
|
2,559
|
|
|
$
|
352,350
|
|
Operating income (loss)
|
|
|
66,182
|
|
|
|
5,840
|
|
|
|
(395
|
)
|
|
|
71,627
|
|
Three Months Ended September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
279,672
|
|
|
$
|
28,255
|
|
|
$
|
3,188
|
|
|
$
|
311,115
|
|
Operating income (loss)
|
|
|
67,134
|
|
|
|
4,610
|
|
|
|
(101
|
)
|
|
|
71,643
|
|
Nine Months Ended September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
900,750
|
|
|
$
|
129,209
|
|
|
$
|
7,740
|
|
|
$
|
1,037,699
|
|
Operating income (loss)
|
|
|
144,497
|
|
|
|
14,163
|
|
|
|
(1,541
|
)
|
|
|
157,119
|
|
Nine Months Ended September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
828,264
|
|
|
$
|
111,700
|
|
|
$
|
10,643
|
|
|
$
|
950,607
|
|
Operating income
|
|
|
165,614
|
|
|
|
18,053
|
|
|
|
182
|
|
|
|
183,849
|
|
|
|
|
(1) |
|
All other is comprised of our insurance subsidiaries
operations. |
|
|
Note 6.
|
Changes
in Capitalization
|
2007
Recapitalization Plan
On January 19, 2007, we announced a comprehensive
recapitalization plan utilizing a series of equity and debt
financings. Subsequent to this announcement, we completed the
following transactions:
|
|
|
|
|
the refinancing of our debt facilities with new debt facilities,
comprised of a $300 million revolving credit facility, a
$320 million funded letter of credit facility, and a
$650 million term loan (collectively referred to as the
New Credit Facilities);
|
|
|
|
an underwritten public offering of 6.118 million shares of
our common stock, from which we received proceeds of
approximately $136.6 million, net of underwriting discounts
and commissions;
|
|
|
|
an underwritten public offering of approximately
$373.8 million aggregate principal amount of Debentures,
from which we received proceeds of approximately
$364.4 million, net of underwriting discounts and
commissions; and
|
|
|
|
the repayment, by means of a tender offer and redemptions, of
approximately $611.9 million in aggregate principal amount
of outstanding notes previously issued by certain of our
intermediate subsidiaries.
|
We completed our public offerings of common stock and
Debentures, including over-allotment options exercised by
underwriters, on January 31, 2007 and February 6,
2007, respectively, and we closed on the New Credit
9
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Facilities on February 9, 2007. We completed our tender
offer for approximately $604.4 million in aggregate
principal amount of outstanding notes on February 22, 2007.
During the third and fourth quarters of 2007, we redeemed all
remaining outstanding intermediate subsidiary notes. See
Intermediate Subsidiary Debt below for specific terms
related to the redemptions.
As a result of the recapitalization plan, we recognized a loss
on extinguishment of debt of approximately $32.1 million,
pre-tax, which is comprised of the write-down of deferred
financing costs, tender premiums paid for the intermediate
subsidiary debt, and a call premium paid in connection with
previously existing financing arrangements. These amounts were
partially offset by the write-down of unamortized premiums
relating to the intermediate subsidiary debt and a gain
associated with the settlement of our interest rate swap
agreements.
New
Credit Facilities
Under the New Credit Facilities, we have substantially greater,
but not unrestricted, ability to make investments in our
business and to take advantage of opportunities to grow our
business through investments and acquisitions, both domestically
and internationally. The New Credit Facilities are comprised of:
|
|
|
|
|
a $300 million revolving loan facility due 2013, which
includes a $200 million sub-facility for the issuance of
letters of credit (the Revolving Loan Facility);
|
|
|
|
a $320 million funded letter of credit facility, due 2014
(the Funded L/C Facility); and
|
|
|
|
a term loan facility, due 2014, in the initial amount of
$650 million and of which $648.4 million was
outstanding as of September 30, 2007 (the Term Loan
Facility).
|
Amortization
Terms
The New Credit Facilities include mandatory annual amortization
of the Term Loan Facility to be paid in quarterly installments
beginning June 30, 2007, through the date of maturity as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
2014
|
|
Total
|
|
Annual Remaining Amortization
|
|
$
|
3,250
|
|
|
$
|
6,500
|
|
|
$
|
6,500
|
|
|
$
|
6,500
|
|
|
$
|
6,500
|
|
|
$
|
6,500
|
|
|
$
|
6,500
|
|
|
$
|
606,125
|
|
|
$
|
648,375
|
|
Under the New Credit Facilities, we are obligated to apply a
portion of excess cash from operations on an annual basis
(calculated pursuant to the credit agreement), as well as
specified other sources, to repay borrowings under the Term Loan
Facility. The portion of excess cash to be used for this purpose
is 50%, 25%, or 0%, based on measurement of the leverage ratio
under the financial covenants.
Interest
and Fee Terms
Loans under the New Credit Facilities are designated, at our
election, as Eurodollar rate loans or base rate loans.
Eurodollar loans bear interest at a reserve adjusted British
Bankers Association Interest Settlement Rate, commonly referred
to as LIBOR, for deposits in dollars plus a
borrowing margin as described below. Interest on Eurodollar rate
loans is payable at the end of the applicable interest period of
one, two, three or six months (and at the end of every three
months in the case of six month Eurodollar loans). Base rate
loans bear interest at (a) a rate per annum equal to the
greater of (1) the prime rate designated in the
relevant facility or (2) the federal funds rate plus 0.5%
per annum, plus (b) a borrowing margin as described below.
Letters of credit that may be issued in the future under the
Revolving Loan Facility will accrue fees at the then effective
borrowing margins on Eurodollar rate loans (described below),
plus a fee on each issued letter of credit payable to the
issuing bank. Letter of credit availability under the Funded L/C
Facility accrues fees (whether or not letters of credit are
issued thereunder) at the then effective borrowing margin for
Eurodollar rate loans times the total availability for issuing
letters of credit (whether or not then utilized), plus a fee on
each issued letter of credit payable to the issuing bank. In
addition, we have agreed to pay to the participants under the
Funded L/C Facility a
10
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
fee equal to 0.10% times the average daily amount of the credit
linked deposit paid by such participants for their participation
under the Funded L/C Facility.
The borrowing margins referred to above for the New Credit
Facilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowing Margin
|
|
|
Borrowing Margin
|
|
|
|
|
|
|
|
|
|
for Term Loans,
|
|
|
for Term Loans,
|
|
|
|
|
|
|
|
|
|
Funded Letters of
|
|
|
Funded Letters of
|
|
|
|
|
|
|
|
|
|
Credit and
|
|
|
Credit and
|
|
|
|
Borrowing Margin
|
|
|
Borrowing Margin
|
|
|
Credit-Linked
|
|
|
Credit-Linked
|
|
|
|
for Revolving Loans
|
|
|
for Revolving Loans
|
|
|
Deposits
|
|
|
Deposits
|
|
Leverage Ratio
|
|
(Eurodollar Loans)
|
|
|
(Base Rate Loans)
|
|
|
(Eurodollar Loans)
|
|
|
(Base Rate Loans)
|
|
|
³ 4.00:1.00
|
|
|
2.00
|
%
|
|
|
1.00
|
%
|
|
|
1.75
|
%
|
|
|
0.75
|
%
|
< 4.00:1.00 and ³ 3.25:1.00
|
|
|
1.75
|
%
|
|
|
0.75
|
%
|
|
|
1.50
|
%
|
|
|
0.50
|
%
|
< 3.25:1.00 and ³ 2.75:1.00
|
|
|
1.50
|
%
|
|
|
0.50
|
%
|
|
|
1.50
|
%
|
|
|
0.50
|
%
|
< 2.75:1.00
|
|
|
1.25
|
%
|
|
|
0.25
|
%
|
|
|
1.50
|
%
|
|
|
0.50
|
%
|
Guarantees
and Securitization
The New Credit Facilities are guaranteed by us and by certain of
our subsidiaries. The subsidiaries that are party to the New
Credit Facilities agreed to secure all of the obligations under
the New Credit Facilities by granting, for the benefit of
secured parties, a first priority lien on substantially all of
their assets, to the extent permitted by existing contractual
obligations, a pledge of substantially all of the capital stock
of each of our domestic subsidiaries and 65% of substantially
all the capital stock of each of our foreign subsidiaries which
are directly owned, in each case to the extent not otherwise
pledged.
Debt
Covenants and Defaults
The loan documentation under the New Credit Facilities contains
customary affirmative and negative covenants and financial
covenants. During the term of the New Credit Facilities, the
negative covenants may place limitations on us, but are
materially less restrictive than the restrictions in effect
prior to February 9, 2007. We were in compliance with all
required covenants as of September 30, 2007.
Debentures
On January 31, 2007, we completed an underwritten public
offering of $373.8 million aggregate principal amount of
Debentures. This offering included Debentures sold pursuant to
an over-allotment option which was exercised by the
underwriters. The Debentures constitute our general unsecured
senior obligations and will rank equally in right of payment
with any future senior unsecured indebtedness. The Debentures
are effectively junior to our existing and future secured
indebtedness, including the New Credit Facilities, to the extent
of the value of the assets securing such indebtedness. The
Debentures are not guaranteed by any of our subsidiaries and are
effectively subordinated to all existing and future indebtedness
and liabilities (including trade payables) of our subsidiaries.
The Debentures bear interest at a rate of 1.00% per year,
payable semi-annually in arrears, on February 1 and August 1 of
each year, commencing on August 1, 2007 and will mature on
February 1, 2027. Beginning with the six-month interest
period commencing February 1, 2012, we will pay contingent
interest on the Debentures during any six-month interest period
in which the trading price of the Debentures measured over a
specified number of trading days is 120% or more of the
principal amount of the Debentures. When applicable, the
contingent interest payable per $1,000 principal amount of
Debentures will equal 0.25% of the average trading price of
$1,000 principal amount of Debentures during the five trading
days ending on the second trading day immediately preceding the
first day of the applicable six-month interest period. The
contingent interest feature in the Debentures is an embedded
derivative instrument. The first contingent cash interest
payment period does not commence until February 1, 2012,
and as such, the fair market value for the embedded derivative
was zero as of September 30, 2007.
11
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Under limited circumstances, the Debentures are convertible by
the holders thereof, at any time, 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). The terms of the
Debentures require that under certain circumstances, such as an
acquisition of us by a third party, the payment by us of a cash
dividend on our common stock, or where a cash tender offer is
made for our common stock, we are obligated to adjust the
conversion rate applicable to the Debentures. This adjustment
requirement constitutes a contingent beneficial conversion
feature that is part of the Debentures. If such an
adjustment were to occur, (i) the amount of the contingent
beneficial feature would be bifurcated from the Debentures,
(ii) the liability recorded in our financial statements
with respect to the Debentures would be reduced by the amount
bifurcated, and (iii) the amount bifurcated would be
recorded as a charge to interest expense and accreted to the
Debenture liability over the remaining term of Debentures, or
the conversion date of the Debentures, if earlier.
At our option, the Debentures are subject to redemption at any
time on or after February 1, 2012, in whole or in part, at
a redemption price equal to 100% of the principal amount of the
Debentures being redeemed, plus accrued and unpaid interest
(including contingent interest, if any). 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 cash at a
repurchase price equal to 100% of the principal amount of the
Debentures being repurchased, plus accrued and unpaid interest
(including contingent interest, if any). The Debentures are also
subject to repurchase by us, at the holders option, if a
fundamental change occurs, for cash at a repurchase price equal
to 100% of the principal amount of the Debentures, plus accrued
and unpaid interest (including contingent interest, if any).
Intermediate
Subsidiary Debt
On January 23, 2007, we commenced cash tender offers for
(a) any and all of the outstanding
81/2% Senior
Secured Notes due 2010 (the MSW I Notes) issued by
MSW Energy Holdings LLC and its wholly owned subsidiary, MSW
Energy Finance Co., Inc. (collectively referred to as MSW
I), (b) any and all of the outstanding
73/8% Senior
Secured Notes due 2010 (the MSW II Notes) issued by
MSW Energy Holdings II LLC and its wholly owned subsidiary,
MSW Energy Finance Co. II, Inc. (collectively referred to as
MSW II) and (c) any and all of the outstanding
6.26% Senior Notes due 2015 (the ARC Notes) of
Covanta ARC LLC.
All outstanding ARC Notes were redeemed on April 16, 2007
at a total redemption price of $743.50 per $1,000 in original
principal amount of the ARC Notes, which includes principal
outstanding, premium and accrued interest up to the redemption
date. On September 6, 2007, all remaining MSW I Notes and
MSW II Notes were redeemed at $1,042.50 and $1,036.88,
respectively, per $1,000 principal amount (plus accrued and
unpaid interest to the date of redemption).
Short-Term
Liquidity
As of September 30, 2007, we had available credit for
liquidity as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Letters
|
|
|
|
|
Total
|
|
|
|
of Credit as of
|
|
Available as of
|
|
|
Available
|
|
|
|
September 30,
|
|
September 30,
|
|
|
Under Facility
|
|
Maturing
|
|
2007
|
|
2007
|
|
Revolving Loan Facility(1)
|
|
$
|
300,000
|
|
|
|
2013
|
|
|
$
|
26,200
|
|
|
$
|
273,800
|
|
Funded L/C Facility
|
|
$
|
320,000
|
|
|
|
2014
|
|
|
$
|
319,868
|
|
|
$
|
132
|
|
|
|
|
(1) |
|
Up to $200 million of which may be utilized for letters of
credit. |
12
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2006
Refinancing
In May 2006, as a result of amendments to our financing
arrangements existing at that time, we recognized a loss on
extinguishment of debt of $6.8 million, pre-tax, in the
three months ended June 30, 2006, which was comprised of
the write-down of deferred financing costs and a call premium
paid on extinguishment.
Stockholders
Equity
During the nine months ended September 30, 2007, we granted
388,717 restricted shares and 1,785,000 share options. See
Note 12. Stock-Based Compensation.
On January 31, 2007, we completed an underwritten public
offering of 5.32 million shares of our common stock. The
shares were sold to the public at a price of $23.50 per share.
We granted the underwriters an option to purchase up to an
additional 798,000 shares of common stock at $22.325 per
share for a period of 30 days beginning on and including
the date of original issuance of the shares in connection with
this offering, solely to cover over-allotments. The option was
exercised and such additional shares were sold on
February 6, 2007. Proceeds received in these offerings were
approximately $136.6 million, net of underwriting discounts
and commissions.
Effective January 1, 2007, we adopted the provisions of
FASB Interpretation No. (FIN) 48, Accounting
for Uncertainty in Income Taxes, an interpretation of FASB
Statement No. 109, (FIN 48). The
impact of applying the provisions of this interpretation
decreased our opening balance retained earnings in 2007. See
Note 9. Income Taxes for additional information.
On February 24, 2006, we completed a rights offering in
which 5,696,911 shares were issued in consideration for
$20.8 million in gross proceeds.
|
|
Note 7.
|
Equity
Method Investments
|
Equity in net income from unconsolidated investments primarily
relates to our 26% investment in Quezon Power, Inc.
(Quezon) in the Philippines. Equity in net income
from unconsolidated investments for the nine months ended
September 30, 2007 included approximately $3.4 million
of increased tax expense for Quezon related to the conclusion of
a six-year income tax holiday in May 2006.
Quezon recorded a $7.0 million cumulative deferred income
tax benefit in the period ended June 30, 2006 on the basis
of rulings which were issued by the Philippine tax authorities
in June 2006 clarifying the tax deductibility of certain losses
upon realization. The realization of this deferred tax benefit
is subject to fluctuations in the value of the Philippine peso
versus the US dollar. During the last six months of 2006 and
during the nine months ended September 30, 2007, we reduced
the cumulative deferred income tax benefit by approximately
$2.1 million and $2.3 million, respectively, as a
result of the strengthening of the Philippine peso versus the US
dollar.
The unaudited results of operations from Quezon were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quezon
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Operating revenues
|
|
$
|
71,325
|
|
|
$
|
70,198
|
|
|
$
|
209,796
|
|
|
$
|
202,771
|
|
Operating income
|
|
|
33,035
|
|
|
|
32,478
|
|
|
|
95,095
|
|
|
|
82,541
|
|
Net income
|
|
|
13,035
|
|
|
|
9,030
|
|
|
|
34,946
|
|
|
|
72,346
|
|
13
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 8. Comprehensive
Income
The components of comprehensive income for the three and nine
months ended September 30, 2007 and 2006 are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Comprehensive income, net of income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
38,415
|
|
|
$
|
31,251
|
|
|
$
|
58,213
|
|
|
$
|
93,847
|
|
Foreign currency translation
|
|
|
(2
|
)
|
|
|
294
|
|
|
|
2,631
|
|
|
|
(113
|
)
|
Amortization of actuarial loss for benefit obligation
|
|
|
26
|
|
|
|
|
|
|
|
79
|
|
|
|
|
|
Net unrealized loss on available-for-sale securities
|
|
|
332
|
|
|
|
532
|
|
|
|
569
|
|
|
|
337
|
|
Net realized (gain) loss on derivative instruments
|
|
|
|
|
|
|
(2,179
|
)
|
|
|
(2,125
|
)
|
|
|
232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net comprehensive income adjustments
|
|
|
356
|
|
|
|
(1,353
|
)
|
|
|
1,154
|
|
|
|
456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
38,771
|
|
|
$
|
29,898
|
|
|
$
|
59,367
|
|
|
$
|
94,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 subsidiary, Covanta Lake II, Inc. files
outside of the consolidated return group. Our federal
consolidated income tax return also includes the taxable results
of certain grantor trusts described below.
We currently estimate our annual effective tax rate, including
discrete items, for the year ended December 31, 2007 to be
approximately 42.5%. We review the annual effective tax rate on
a quarterly basis as projections are revised. The effective
income tax rate was 42.0% and 29.2% for the nine months ended
September 30, 2007 and 2006, respectively. Excluding a
cumulative adjustment of $10 million due to the adoption of
Accounting Principles Board (APB) Opinion
No. 23, Accounting for Income Taxes
Special Areas (APB 23), the effective income
tax rate was 39.0% for the nine months ended September 30,
2006. The increase in the effective tax rate for the nine months
ended September 30, 2007 compared to the nine months ended
September 30, 2006 is primarily the result of the release
of a valuation allowance on federal net operating losses during
the second quarter of 2006.
We adopted the provisions of FIN 48 effective
January 1, 2007. The cumulative effect of applying the
provisions of this interpretation was a $2.8 million
decrease to our opening balance retained earnings in 2007, which
was comprised of an increase of $6.1 million to the
liability for uncertain tax positions, a $16.4 million
increase to deferred tax assets, a $13.1 million decrease
to property, plant and equipment and a reclassification of
$32.7 million between deferred tax liabilities and the
liability for uncertain tax positions. During the quarter ended
September 30, 2007, we reversed the $32.7 million
reclassification between deferred tax liabilities and the
liability for uncertain tax positions based on managements
judgment that such reclassification was not required at the time
of adoption of FIN 48. In connection with this
reclassification, we reversed accrued interest of
$0.6 million through retained earnings. The liability for
uncertain tax positions, exclusive of interest and penalties,
was $25.0 million and $57.2 million as of
September 30, and January 1, 2007, respectively. No
material additional liabilities were recorded for uncertain tax
positions during the nine months ended September 30, 2007.
There are no uncertain tax positions both individually and in
the aggregate, that if recognized, would materially affect our
effective tax rate.
We continue to reflect interest accrued on uncertain tax
positions and penalties as part of the tax provision under
FIN 48. For the three months ended September 30, 2007
and 2006, we recognized $0.2 million and zero,
respectively, and for the nine months ended September 30,
2007 and 2006, we recognized $0.7 million and zero,
respectively of interest and penalties on uncertain tax
positions. As of September 30, and January 1, 2007, we
had accrued interest and penalties associated with uncertain tax
positions of $7.4 million and $7.3 million,
respectively.
14
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As issues are examined by the Internal Revenue Service
(IRS) and state auditors, we may decide to adjust
the existing FIN 48 liability for issues that were not
deemed an exposure at the time we adopted FIN 48.
Accordingly, we will continue to monitor the results of these
audits and adjust the liability as needed. Federal income tax
returns for our subsidiary Covanta Energy Corporation are closed
for the years through 2002. However, to the extent net operating
loss carryforwards (NOLs) are utilized from earlier
years, this will allow the IRS to re-examine closed years. The
tax returns of our subsidiary Covanta ARC Holdings, Inc. and its
subsidiaries (ARC Holdings) are open for federal
audit for the tax return years of 2001 and forward, and are
currently the subject of an IRS examination. This examination is
related to ARC Holdings refund requests related to NOL
carryback claims from tax years prior to our acquisition of ARC
Holdings in 2005 that require Joint Committee approval. State
income tax returns are generally subject to examination for a
period of three to five years after the filing of the respective
return. The state impact of any federal changes remains subject
to examination by various states for a period of up to one year
after formal notification to the states. We have various state
income tax returns in the process of examination, administrative
appeals or litigation.
Our NOLs predominantly arose from our predecessor insurance
entities (which were subsidiaries of our predecessor, 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 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, we believe that neither
existing 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
$410 million for federal income tax purposes as of
December 31, 2006. The NOLs will expire in various amounts
from December 31, 2007 through December 31, 2025, if
not used. In addition to the consolidated federal NOLs, as of
December 31, 2006, we had additional federal credits and
loss carryforwards of $46 million and state credits and
loss carryforwards of $13 million that will expire between
2007 and 2026. These deferred tax assets are offset by a
valuation allowance of $37 million.
Our provision for income taxes in the condensed consolidated
statements of income also includes certain state and other
taxes. Tax filings for these jurisdictions do not consolidate
the activity of the grantor trusts referred to above and in
certain states reflect preparation on a separate-company basis.
For further information, refer to Note 21. Income Taxes of
the Notes to the Consolidated Financial Statements included in
our
Form 10-K.
|
|
Note 10.
|
Supplementary
Information
|
Operating
Revenues
The components of waste and service revenues for the periods
presented below (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Waste and service revenues unrelated to project debt
|
|
$
|
187,115
|
|
|
$
|
176,549
|
|
|
$
|
553,687
|
|
|
$
|
528,094
|
|
Revenue earned explicitly to service project debt-principal
|
|
|
17,290
|
|
|
|
17,274
|
|
|
|
51,871
|
|
|
|
51,822
|
|
Revenue earned explicitly to service project debt-interest
|
|
|
7,683
|
|
|
|
9,280
|
|
|
|
23,481
|
|
|
|
28,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total waste and service revenues
|
|
$
|
212,088
|
|
|
$
|
203,103
|
|
|
$
|
629,039
|
|
|
$
|
607,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
service agreement. In the beginning of the service 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 service
agreement, the amount we bill will exceed the levelized income
and the unbilled service receivable begins to reduce, (and can
become a credit balance) until it becomes nil at the end of the
contract.
In the final year(s) of a contract, cash is utilized from debt
service reserve accounts to pay remaining principal amounts due
to project bondholders and such amounts are no longer billed to
or paid by municipalities. Generally, therefore, in the last
year of the applicable service 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 service 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 for these
facilities of $28.0 million and $18.1 million for the
three months ended September 30, 2007 and 2006,
respectively, and $100.3 million and $79.4 million for
the nine months ended September 30, 2007 and 2006,
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 $13.5 million and $12.0 million for
the three months ended September 30, 2007 and 2006,
respectively, and $43.0 million and $40.4 million for
the nine months ended September 30, 2007 and 2006,
respectively.
Amortization
of Waste, Service and Energy Contracts
The vast majority of our waste, service and energy contracts
were valued in March 2004 and June 2005 related to the
acquisitions of Covanta Energy Corporation and Covanta ARC
Holdings, Inc., respectively. These intangible assets and
liabilities were recorded using then-available information at
their estimated fair market values based upon discounted cash
flows. The following table details the amount of the
actual/estimated amortization expense and contra-expense
associated with these intangible assets and liabilities as of
September 30, 2007 included or expected to be included in
our statement of income for each of the years indicated (in
thousands):
16
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
Waste, Service and
|
|
|
|
|
|
|
Energy Contracts
|
|
|
Waste and Service
|
|
|
|
(Amortization
|
|
|
Contracts
|
|
|
|
Expense)
|
|
|
(Contra-Expense)
|
|
|
Nine Months ended September 30, 2007
|
|
$
|
33,842
|
|
|
$
|
(9,048
|
)
|
|
|
|
|
|
|
|
|
|
Remainder of 2007
|
|
$
|
11,508
|
|
|
$
|
(3,022
|
)
|
2008
|
|
|
44,266
|
|
|
|
(12,053
|
)
|
2009
|
|
|
40,721
|
|
|
|
(12,104
|
)
|
2010
|
|
|
28,403
|
|
|
|
(12,136
|
)
|
2011
|
|
|
25,314
|
|
|
|
(12,195
|
)
|
Thereafter
|
|
|
121,659
|
|
|
|
(75,472
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
271,871
|
|
|
$
|
(126,982
|
)
|
|
|
|
|
|
|
|
|
|
Other
Operating Expenses (Income)
The components of other operating expenses (income) are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Operating Expenses (Income)
|
|
|
|
For the Three
|
|
|
For the Nine
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Construction costs
|
|
$
|
12,534
|
|
|
$
|
692
|
|
|
$
|
34,365
|
|
|
$
|
1,830
|
|
Insurance subsidiary operating expenses
|
|
|
2,119
|
|
|
|
2,499
|
|
|
|
6,759
|
|
|
|
8,097
|
|
Proceeds related to insurance recoveries
|
|
|
(1,359
|
)
|
|
|
(3,416
|
)
|
|
|
(1,437
|
)
|
|
|
(4,197
|
)
|
Unrealized/realized foreign exchange (gain) loss
|
|
|
(232
|
)
|
|
|
44
|
|
|
|
(1,304
|
)
|
|
|
(159
|
)
|
Proceeds received for distributions and settlements related to
the reorganization of Covanta Energy Corporation
|
|
|
|
|
|
|
(2,600
|
)
|
|
|
|
|
|
|
(2,600
|
)
|
Other
|
|
|
(1,737
|
)
|
|
|
(178
|
)
|
|
|
(885
|
)
|
|
|
(1,720
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating expenses (income)
|
|
$
|
11,325
|
|
|
$
|
(2,959
|
)
|
|
$
|
37,498
|
|
|
$
|
1,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 11.
|
Benefit
Obligations
|
The components of net periodic benefit costs are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Post-Retirement Benefits
|
|
|
|
For the Three
|
|
|
For the Nine
|
|
|
For the Three
|
|
|
For the Nine
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Service cost
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Interest cost
|
|
|
1,146
|
|
|
|
1,075
|
|
|
|
3,437
|
|
|
|
3,225
|
|
|
|
192
|
|
|
|
154
|
|
|
|
576
|
|
|
|
463
|
|
Expected return on plan assets
|
|
|
(1,108
|
)
|
|
|
(922
|
)
|
|
|
(3,323
|
)
|
|
|
(2,766
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of actuarial (gain) loss
|
|
|
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
(48
|
)
|
|
|
26
|
|
|
|
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
38
|
|
|
$
|
137
|
|
|
$
|
114
|
|
|
$
|
411
|
|
|
$
|
218
|
|
|
$
|
154
|
|
|
$
|
655
|
|
|
$
|
463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs related to our Savings Plan were $2.9 million and
$2.6 million for the three months ended September 30,
2007 and 2006, respectively and $9.4 million and
$8.4 million for the nine months ended September 30,
2007 and 2006, respectively.
17
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 12.
|
Stock-Based
Compensation
|
Compensation expense related to our stock-based payment awards
totaled $3.7 million and $10.1 million during the
three and nine months ended September 30, 2007,
respectively, and $1.5 million and $4.9 million during
the three and nine months ended September 30, 2006,
respectively.
During the nine months ended September 30, 2007, we granted
388,717 restricted stock awards and 1,785,000 stock options. As
of September 30, 2007, we had approximately
$10.2 million and $12.3 million of unrecognized
compensation expense related to our unvested restricted stock
awards and unvested stock options, respectively. We expect this
compensation expense to be recognized over a weighted average
period of 3 years for our unvested restricted stock awards
and 5 years for our unvested stock options.
Prior to the second quarter of 2007, we recognized compensation
expense based on an overall forfeiture rate of 8%. In order to
better reflect compensation expense by type of award, (i.e.
stock options versus restricted stock awards), we reevaluated
the forfeiture rate during the second quarter of 2007. The new
forfeiture rates range from 8% to 15% depending on the type of
award and the vesting period. The cumulative effect of the
change in the forfeiture rate to compensation expense did not
have a material impact on the financial statements. For
additional information about our stock-based payment awards,
refer to Note 23 of the Notes to Consolidated Financial
Statements in our
Form 10-K.
|
|
Note 13.
|
Financial
Instruments
|
Interest
Rate Swaps
Under financing arrangements in effect from June 24, 2005
to February 9, 2007, we were required to enter into hedging
arrangements with respect to a portion of our exposure to
interest rate changes with respect to our borrowing under the
credit facilities which were in effect. These interest rate
swaps were designated as cash flow hedges in accordance with
SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities. Accordingly,
unrealized gains or losses were deferred in other comprehensive
income until the hedged cash flows affect earnings. The impact
of the interest rate swaps was a decrease to interest expense
for the three months and nine months ended September 30,
2006 by $0.9 million and $1.6 million, respectively.
In connection with the refinancing of our debt facilities in
January 2007, the interest rate swap agreements described above
were settled on February 9, 2007 and we were no longer
required to enter into interest rate swap agreements. We
recognized a gain associated with the settlement of our interest
rate swap agreements of $3.4 million, pre-tax.
Contingent
Interest
The contingent interest feature in the Debentures is an embedded
derivative instrument. The first contingent cash interest
payment period does not commence until February 1, 2012,
and as such, the fair market value for the embedded derivative
was zero as of September 30, 2007. See Note 6. Changes
in Capitalization for specific criteria related to contingent
interest of the Debentures.
|
|
Note 14.
|
Related-Party
Transactions
|
As described in Note 7. Equity Method Investments, we hold
a 26% investment in 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 statement 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
September 30, 2007 and 2006, we collected $9.6 million
and $9.0 million, respectively, and for the nine months
ended September 30, 2007 and 2006, we collected
$27.6 million and $25.9 million, respectively, for the
operation and maintenance of the facility. As of
September 30, 2007 and December 31, 2006, the net
amount due to Quezon was
18
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$4.2 million and $2.2 million, respectively, which
represents advance payments received from Quezon for operation
and maintenance costs.
|
|
Note 15.
|
Commitments
and Contingencies
|
We 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 June 2001, the Environmental Protection Agency
(EPA) named Covanta Haverhill, Inc.
(Haverhill), as a potentially responsible party
(PRP) at the Beede Waste Oil Superfund Site,
Plaistow, New Hampshire (Beede site). On
December 15, 2006, Haverhill together with numerous other
PRPs, signed the Beede Waste Oil Superfund Site RD/RA Consent
Decree with respect to remediation of the Beede site. The
Consent Decree becomes effective upon approval and entry by the
U.S. District Court in New Hampshire. We currently believe
that based on the amount of waste oil Haverhill is alleged to
have sent to the Beede site in comparison to other
similarly-situated settling PRPs, its ultimate liability will
not be material to its financial position and results of
operations although it is not possible at this time to predict
that outcome with certainty.
In August 2004, EPA notified Covanta Essex Company
(Essex) that it was potentially liable 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 will complete a Remedial
Investigation/Feasibility Study of the LPRSA under EPA
oversight. The cost to complete the Study is estimated at
$37 million, in addition to EPA oversight costs.
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
natural resource damages.
19
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other
Matters
Other commitments as of September 30, 2007 were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments Expiring by Period
|
|
|
|
|
|
|
Less Than
|
|
|
More Than
|
|
|
|
Total
|
|
|
One Year
|
|
|
One Year
|
|
|
Letters of credit
|
|
$
|
374,036
|
|
|
$
|
34,400
|
|
|
$
|
339,636
|
|
Surety bonds
|
|
|
59,291
|
|
|
|
|
|
|
|
59,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other commitments net
|
|
$
|
433,327
|
|
|
$
|
34,400
|
|
|
$
|
398,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The letters of credit were issued to secure our performance
under various contractual undertakings related to our domestic
and international projects, or to secure obligations under our
insurance program. Each letter of credit relating to a project
is required to be maintained in effect for the period specified
in related project contracts, and generally may be drawn if it
is not renewed prior to expiration of that period. We believe
that we will be able to fully perform under our contracts to
which these existing letters of credit relate, and that it is
unlikely that letters of credit would be drawn because of a
default of our performance obligations. If any of these letters
of credit were to be drawn under the current debt facilities,
the amount drawn would be immediately repayable 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 New 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 ($50.3 million) and support for
closure obligations of various energy projects when such
projects cease operating ($9.0 million). Were these bonds
to be drawn upon, we would have a contractual obligation to
indemnify the surety company.
We have certain contingent obligations related to the
Debentures. These are:
|
|
|
|
|
holders may require us to repurchase their Debentures on
February 1, 2012, February 1, 2017 and
February 1, 2022;
|
|
|
holders may require us to repurchase their Debentures, if a
fundamental change occurs; and
|
|
|
holders may exercise their conversion rights upon the occurrence
of certain events, which would require us to pay the conversion
settlement amount in cash
and/or our
common stock.
|
See Note 6. Changes in Capitalization for specific criteria
related to contingent interest, conversion or redemption
features of the Debentures.
We have issued or are party to performance guarantees and
related contractual support obligations undertaken mainly
pursuant to agreements to construct and operate certain
energy-from-waste facilities and a water facility. For some
projects, such performance guarantees include obligations to
repay certain financial obligations if the project revenue is
insufficient to do so, or to obtain financing for a project.
With respect to our domestic 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. Such contractual damages or other obligations could
be material, and in circumstances where one or more
subsidiarys contract has been terminated for its default,
such damages could include amounts sufficient to repay project
debt. For facilities owned by municipal clients and operated by
us, our potential maximum liability as of September 30,
2007 associated with the repayment of the municipalities
project debt on such facilities was approximately
$1 billion. This amount was not recorded as a liability in
our consolidated balance sheet as of September 30, 2007 as
we believe that it had not incurred such liability at the date
of the financial statements. Additionally, damages payable under
such guarantees on our owned energy-from-waste facilities could
expose us to recourse liability on project debt. We also believe
that we have not incurred such damages at the date of the
financial statements. If we are asked to perform under one or
more of such guarantees, our liability for damages upon contract
termination would be
20
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
reduced by funds held in trust and proceeds from sales of the
facilities securing the project debt, which is presently not
estimable.
With respect to our international businesses, we have issued
guarantees on behalf of our international operating subsidiaries
with respect to contractual obligations to operate certain
international power projects and one energy-from-waste project.
The potential damages owed under such arrangements for
international projects may be material.
Depending upon the circumstances giving rise to such domestic
and international damages, the contractual terms of the
applicable contracts, and the contract counterpartys
choice of remedy at the time a claim against a guarantee is
made, the amounts owed pursuant to one or more of such
guarantees could be greater than our then-available sources of
funds. To date, we have not incurred material liabilities under
our guarantees, either on domestic or international projects.
On March 31, 2007, our SEMASS energy-from-waste facility
located in Rochester, Massachusetts experienced a fire in the
front-end receiving portion of the facility. Damage was
extensive to this portion of the facility and operations at the
facility were suspended completely for approximately
20 days. As a result of this loss, we recorded an asset
impairment of $18.3 million, pre-tax, in the first quarter
of 2007, which represented a preliminary estimate of the net
book value of the assets destroyed. Based upon additional
analysis as the facility is fully restored, we may increase the
impairment recorded. The cost of repair or replacement, and
business interruption losses, are insured under the terms of
applicable insurance policies, subject to deductibles. We cannot
predict the timing of when we would receive the proceeds under
such policies. During the nine months ended September 30,
2007, we recorded insurance recoveries of $13.3 million
related to repair and reconstruction, $2.7 million related
to clean-up
costs and $2.0 million related to business interruption
losses. Insurance recoveries are recorded as a reduction to the
loss related to the write-down of assets where such recoveries
relate to repair and reconstruction costs, or as a reduction to
operating expenses where such recoveries relate to other costs
or business interruption losses. We expect the cost of repair or
replacement and business interruption losses we do not recover,
representing deductibles under such policies, will not be
material.
|
|
Note 16.
|
Subsequent
Events
|
EnergyAnswers
Corporation
On October 1, 2007, we acquired the operating businesses of
EnergyAnswers Corporation for approximately $40 million in
cash. We also assumed net debt of $21 million
($23 million of consolidated indebtedness net of
$2 million of restricted funds held in trust). These
businesses include a 400 tpd energy-from-waste facility in
Springfield, Massachusetts and a 240 tpd energy-from-waste
facility in Pittsfield, Massachusetts. Approximately
75 percent of waste revenues are contracted for these
facilities.
Westchester
Transfer Stations
On October 1, 2007, we acquired two waste transfer stations
in Westchester County, New York from Regus Industries, LLC for
cash consideration of approximately $7 million.
21
|
|
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
September 30, 2007 and our results of operations for the
three and nine months ended September 30, 2007, compared
with the same periods last year. It should be read in
conjunction with our Audited Consolidated Financial Statements
and Notes thereto for the year ended December 31, 2006 and
Managements Discussion and Analysis of Financial Condition
and Results of Operations included in our Annual Report on
Form 10-K
for the year ended December 31, 2006 and in the interim
unaudited financial statements and notes included in our
Quarterly Reports on
Form 10-Q
for the periods ended March 31, 2007 and June 30,
2007, 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.
We are a leading developer, owner and operator of infrastructure
for the conversion of energy-from-waste, waste disposal and
renewable energy production businesses in the United States and
abroad. We are organized as a holding company and conduct all of
our operations through subsidiaries which are engaged
predominantly in the businesses of waste and energy services. We
also engage in the independent power production business outside
the United States. We own, have equity investments in,
and/or
operate 56 energy generation facilities, 46 of which are in the
United States and 10 of which are located outside the United
States. Our energy generation facilities use a variety of fuels,
including municipal solid waste, wood waste (biomass), landfill
gas, water (hydroelectric), natural gas, coal, and heavy
fuel-oil. We also own or operate several businesses that are
associated with our energy-from-waste business, including a
waste procurement business, three landfills, and several waste
transfer stations. We also operate one domestic water treatment
facility.
We believe our business offers solutions to public sector
leaders around the world in two related elements of critical
infrastructure: post-recycling waste disposal and energy
generation. We believe the environmental benefits of
energy-from-waste, as an alternative to landfilling, are clear
and compelling: utilizing energy-from-waste reduces greenhouse
gas emissions, lowers the risk of groundwater contamination, and
conserves 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 greenhouse gas emissions. As
public planners address their needs for more environmentally
sensitive waste disposal and energy generation in the years
ahead, we believe energy-from-waste will be an increasingly
attractive alternative.
In March 2007, we announced that we had developed and
successfully tested two new and cost-effective technologies that
represented major advances in controlling nitrogen oxide (NOx)
emissions. Both technologies, for which patents are pending,
have been tested at existing facilities and are now ready for
full scale commercial application. We expect to pursue
additional technical improvements to our services and processes
that will add value to our business in the years ahead.
We are focused on:
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providing customers with superior service by operating our
existing businesses to historic high standards;
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|
generating sufficient cash to meet our liquidity needs;
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|
|
paying down project debt;
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|
investing in and growing our business in order to create
additional value for stockholders; and
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|
seeking acquisition opportunities to expand our operations in
the United States and abroad.
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22
On January 19, 2007, we announced a comprehensive
recapitalization plan utilizing a series of equity and debt
financings. With this refinancing, we now have greater
flexibility to pursue strategic opportunities by investing in
the business, and making acquisitions. Additional information
related to our recapitalization plan, are described in
Liquidity and Capital Resources below and Note 6.
Changes in Capitalization of the Notes to the Condensed
Consolidated Financial Statements (Notes).
Business
Development and Acquisitions
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.
Our domestic project development has recently concentrated on
working with our client communities to expand existing
energy-from-waste project capacities and, as a result, we have
two expansion projects under construction. We are also pursuing
additional growth opportunities including more 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 landfill businesses.
We are pursuing international waste
and/or
energy business opportunities, particularly in markets where the
market demand, regulatory environment or other factors encourage
technologies such as energy-from-waste in order to reduce
dependence on landfilling, such as in selected countries in the
European Union (in particular the United Kingdom, Ireland and
Italy), China, or island nations where landfilling is a less
desirable disposal option.
During 2007, our initiatives to grow our business have included
the following:
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|
|
|
|
On October 1, 2007, we acquired the operating businesses of
EnergyAnswers Corporation for approximately $40 million in
cash. We also assumed net debt of $21 million
($23 million of consolidated indebtedness net of
$2 million of restricted funds held in trust). These
businesses include a 400 ton per day (tpd)
energy-from-waste facility in Springfield, Massachusetts and a
240 tpd energy-from-waste facility in Pittsfield, Massachusetts.
Both energy-from-waste projects have tip fee type
contracts. Approximately 75 percent of waste revenues are
contracted for these facilities. In addition, we acquired
businesses that include a landfill operation in Springfield,
Massachusetts, which is used for ash disposal; two transfer
stations, one in Canaan, New York, permitted to transfer 600 tpd
of waste, and the other located at the Springfield
energy-from-waste facility, permitted to transfer 500 tpd.
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|
|
|
On October 1, 2007, we acquired two waste transfer stations
in Westchester County, New York from Regus Industries, LLC for a
cash payment of approximately $7 million. These facilities
will increase our total waste capacity by approximately 1,150
tpd and will enhance our portfolio of transfer stations in the
Northeast United States.
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|
|
|
On September 6, 2007, we announced that we have entered
into definitive agreements for the development of a 1,700 metric
tpd energy-from-waste project serving the City of Dublin,
Ireland and surrounding communities. The Dublin project, which
marks our most significant entry to date into the European waste
and renewable energy markets, is being developed and will be
owned by Dublin Waste to Energy Limited, which is co-owned by us
and DONG Energy Generation A/S. As part of the transaction, we
purchased a controlling stake in Dublin Waste to Energy Limited.
Under the Dublin project agreements, several customary
conditions must be satisfied before construction can begin,
including the issuance of all required licenses and permits. The
permitting process is underway and construction is expected to
start in late 2008.
|
23
Through our subsidiaries, we are responsible for the design and
construction of the project, which is estimated to cost
approximately 300 million euros and requires 36 months
to complete. A separate subsidiary of ours 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. The project is expected to sell electricity into the
local grid under short-term arrangements. We have committed to
provide financing for all phases of the project, along with DONG
Energy Generation A/S and we expect that numerous project
financing structures will be available once the initial
development phase is complete.
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|
|
|
|
On July 16, 2007, we acquired Central Valley Biomass
Holdings, LLC (Central Valley) from The
AES Corporation. Under the terms of the purchase agreement,
we paid $51 million in cash, plus approximately
$5 million in cash related to post-closing adjustments and
transaction costs. Central Valley owns two biomass energy
facilities and a biomass energy fuel management business, all
located in Californias Central Valley. These facilities
add 75 megawatts (MW) to our portfolio of renewable
energy plants. In addition, we expect to invest between
$15 million and $20 million in capital improvements to
increase the facilities productivity and improve
environmental performance.
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|
|
On May 29, 2007, we entered into a ten year agreement with
the Harrisburg Authority to maintain and operate the
Authoritys 800 tpd energy-from-waste facility located in
Harrisburg, Pennsylvania. Under the agreement, we will earn a
base annual service fee of approximately $10.5 million,
which is subject to annual escalation and certain
performance-based adjustments. Under the agreement, we have
agreed to provide construction management services and to
advance up to $28 million in funding for certain facility
improvements required to enhance facility performance. The
agreement will become effective when certain conditions
precedent occur which is expected in early 2008. In the
meantime, we have entered into an interim agreement to operate
and maintain the facility as the Authoritys contractor.
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|
On April 30, 2007, we acquired a waste transfer station in
Holliston, Massachusetts from Casella Waste Systems Inc. for
cash consideration of $7.4 million. This facility will
increase our total waste capacity by approximately 700 tpd.
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|
|
|
On April 25, 2007, we purchased a 40% equity interest in
Chongqing Sanfeng Environmental Industry Co., Ltd., a company
located in Chongqing Municipality, Peoples Republic of China.
The company, which was renamed Sanfeng Covanta Environmental
Industry Co., Ltd. (Sanfeng), is engaged in the
business of owning and operating energy-from-waste projects and
providing design and engineering, procurement and construction
services for energy-from-waste facilities in China. Sanfeng
currently owns minority equity interests in two 1,200 metric tpd
24 MW mass-burn energy-from-waste projects. Chongqing
Iron & Steel Company (Group) Limited holds the
remaining 60% equity interest in Sanfeng. We paid approximately
$10 million in connection with our investment in Sanfeng.
We expect to utilize Sanfeng as a key component of our effort to
grow our energy-from-waste business in China, and that we will
make additional investments as and when Sanfeng is successful in
developing additional projects.
|
Business
Segments
Prior to January 1, 2007, we had two reportable business
segments Waste and Energy Services and Other
Services. Given our increased focus on developing our
international waste and energy business, during the first
quarter of 2007, we segregated what we previously reported as
our Waste and Energy Services segment into two new segments:
Domestic and International. Our remaining operations, which we
previously reported as our Other Services segment and was
comprised of the holding company and insurance
subsidiaries operations, do not meet the quantitative
thresholds which required separate disclosure as a reportable
segment. Therefore, our reportable segments are now Domestic and
International, which are comprised of our domestic and
international waste and energy services operations, respectively.
24
Domestic
For all energy-from-waste projects, we receive revenue from two
primary sources: fees charged for operating projects or
processing waste received and payments for electricity and steam
sales. We also operate, and in some cases have ownership
interests in, transfer stations and landfills which generate
revenue from waste disposal fees or operating fees. In addition,
we own and in some cases operate, other renewable energy
projects in the United States which generate electricity from
wood waste, landfill gas, and hydroelectric resources. The
electricity from these projects is sold to utilities. For these
projects, we receive revenue from electricity sales, and in some
cases cash from equity distributions.
International
We also engage in the independent power production and
energy-from-waste businesses outside the United States. Through
subsidiaries, we have ownership interests in,
and/or
operate facilities in the Philippines, China, Bangladesh, India,
Costa Rica, and Italy. The Costa Rica facilities generate
electricity from hydroelectric resources while the other
independent power production facilities generate electricity and
steam by combusting coal, natural gas, or heavy fuel oil. In
addition, two facilities in China and one facility in Italy
generate electricity by processing waste received. For these
projects, our international subsidiary receives revenue from
operating fees, electricity and steam sales, and in some cases
cash from equity distributions.
Contract
Structures
We have 24 domestic energy-from-waste projects where we charge a
fixed fee (which escalates over time pursuant to contractual
indices we believe are appropriate to reflect price inflation)
for operation and maintenance services. We refer to these
projects as having a Service Fee structure. Our
contracts at Service Fee projects provide revenue that does not
materially vary based on the amount of waste processed or energy
generated and as such is relatively stable for the contract
term. In addition, at most of our Service Fee projects, the
operating subsidiary retains only a fraction of the energy
revenues generated, with the balance used to provide a credit to
the municipal client against its disposal costs. Therefore, in
these projects, the municipal client derives most of the benefit
and risk of energy production and changing energy prices.
We also have 10 domestic energy-from-waste projects where we
receive a per-ton fee under contracts for processing waste. We
refer to these projects as having a Tip Fee
structure. At Tip Fee projects, we generally enter into
long-term waste disposal contracts for a substantial portion of
project disposal capacity and retain all of the energy revenue
generated. These service agreements include stated fixed fees
earned by us for processing waste up to certain base contractual
amounts during specified periods. These service agreements also
set forth the per-ton fees that are payable if we accept waste
in excess of the base contractual amounts. The waste disposal
and energy revenue from these projects is more dependent upon
operating performance and, as such, is subject to greater
revenue fluctuation to the extent performance levels fluctuate.
Under both structures, our returns are expected to be stable if
we do not incur material unexpected operation and maintenance
costs or other expenses. In addition, most of our
energy-from-waste project contracts are structured so that
contract counterparties generally bear, or share in, the costs
associated with events or circumstances not within our control,
such as uninsured force majeure events and changes in legal
requirements. The stability of our domestic 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 domestic 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.
At some of our domestic and international independent power
projects, our operating subsidiaries purchase fuel in the open
markets which exposes us to fuel price risk. At other plants,
fuel costs are contractually included in our electricity
revenues, or fuel is provided by our customers. In some of our
international projects, the project entity (which in some cases
is not our subsidiary) has entered into long-term fuel purchase
contracts that protect the project from changes in fuel prices,
provided counterparties to such contracts perform their
commitments.
25
Seasonal
Effects
Our quarterly operating income from domestic and international
operations within the same fiscal year typically differs
substantially due to seasonal factors, primarily as a result of
the timing of scheduled plant maintenance. We typically conduct
scheduled maintenance periodically each year, which requires
that individual boiler units temporarily cease operations.
During these scheduled maintenance periods, we incur material
repair and maintenance expenses and receive less revenue, until
the boiler units resume operations. This scheduled maintenance
typically occurs during periods of off-peak electric demand in
the spring and fall. The spring scheduled maintenance period is
typically more extensive than scheduled maintenance conducted
during the fall. As a result, we typically incur the highest
maintenance expense in the first half of the year. Given these
factors, we typically experience lower operating income from our
projects during the first six months of each year, and higher
operating income during the second six months of each year.
Contract
Duration
We operate energy-from-waste projects under long-term
agreements. For those projects we own, our contract to sell the
projects energy output (either electricity or steam)
generally expires at or after the date when the initial term of
our contract to operate or receive waste also expires.
Expiration of these contracts will subject us to greater market
risk in maintaining and enhancing revenues as we enter into new
contracts. 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 we will be able to offer disposal
services at rates that will attract sufficient quantities of
waste and provide acceptable revenues. For those projects we
operate but do not own, prior to the expiration of the initial
term of our operating contract, we will seek to enter into
renewal or replacement contracts to continue operating such
projects. We will seek to bid competitively in the market for
additional contracts to operate other facilities as similar
contracts of other vendors expire.
There can be no assurance that we will be able to enter into
such renewals, replacement or additional contracts, or that the
terms available in the market at the time will be favorable or
provide us with levels of profitability similar to those
prevailing prior to contract expiration.
26
The following general discussions should be read in conjunction
with the condensed consolidated financial statements and the
Notes thereto and other financial information appearing and
referred to elsewhere in this report.
Consolidated Results of Operations Comparison of
Results for the Three and Nine Months Ended September 30,
2007 vs. Results for the Three and Nine Months Ended
September 30, 2006
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|
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|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(Unaudited, in thousands)
|
|
|
|
|
|
CONSOLIDATED RESULTS OF OPERATIONS:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
$
|
352,350
|
|
|
$
|
311,115
|
|
|
$
|
1,037,699
|
|
|
$
|
950,607
|
|
Total operating expenses
|
|
|
280,723
|
|
|
|
239,472
|
|
|
|
880,580
|
|
|
|
766,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
71,627
|
|
|
|
71,643
|
|
|
|
157,119
|
|
|
|
183,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
1,963
|
|
|
|
2,483
|
|
|
|
8,966
|
|
|
|
7,801
|
|
Interest expense
|
|
|
(16,018
|
)
|
|
|
(26,968
|
)
|
|
|
(51,996
|
)
|
|
|
(82,812
|
)
|
Loss on extinguishment of debt
|
|
|
(65
|
)
|
|
|
|
|
|
|
(32,071
|
)
|
|
|
(6,795
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(14,120
|
)
|
|
|
(24,485
|
)
|
|
|
(75,101
|
)
|
|
|
(81,806
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense, minority interests and
equity in net income from unconsolidated investments
|
|
|
57,507
|
|
|
|
47,158
|
|
|
|
82,018
|
|
|
|
102,043
|
|
Income tax expense
|
|
|
(23,768
|
)
|
|
|
(18,870
|
)
|
|
|
(34,414
|
)
|
|
|
(29,795
|
)
|
Minority interests
|
|
|
(2,055
|
)
|
|
|
(1,982
|
)
|
|
|
(5,544
|
)
|
|
|
(4,861
|
)
|
Equity in net income from unconsolidated investments
|
|
|
6,731
|
|
|
|
4,945
|
|
|
|
16,153
|
|
|
|
26,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
38,415
|
|
|
$
|
31,251
|
|
|
$
|
58,213
|
|
|
$
|
93,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.25
|
|
|
$
|
0.21
|
|
|
$
|
0.38
|
|
|
$
|
0.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.25
|
|
|
$
|
0.21
|
|
|
$
|
0.38
|
|
|
$
|
0.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income
Operating revenues increased by $41.2 million and
$87.1 million for the three and nine months ended
September 30, 2007, as compared to the same periods in
2006, respectively, primarily due to increased waste and service
revenues at our energy-from-waste facilities, revenues from new
business and increased construction revenues at our Hillsborough
County facility in the Domestic segment. Operating revenues also
increased primarily due to increased demand from the electricity
offtaker and resulting higher electricity generation at our
Indian facilities in the International segment.
Operating expenses increased by $41.3 million and
$113.8 million for the three and nine months ended
September 30, 2007, as compared to the same periods in
2006, respectively, primarily due to increased plant operating
expenses due to normal cost escalations such as wages and
materials, and the scope and timing of plant maintenance,
operating costs of new business and increased construction
expenses at our Hillsborough County facility in our Domestic
segment as discussed below. Operating expenses also increased as
a result of a write-down of assets related to a fire at our
SEMASS energy-from-waste facility on March 31, 2007. In the
International segment, operating expenses increased as a result
of increased plant operating expenses primarily due to increased
demand from the electricity offtaker and resulting higher
generation at our Indian facilities.
27
Additional detail related to operating revenues and operating
expenses is provided in the reported Domestic and International
segment discussions below.
Other
Components of Net Income
Total investment income decreased by $0.5 million for the
three months ended September 30, 2007, as compared to the
same period in 2006, primarily due to lower invested cash
balances. Total investment income increased by $1.2 million
for the nine months ended September 30, 2007, as compared
to the same period in 2006, primarily due to higher invested
cash balances and higher interest rates on invested funds.
Interest expense decreased by $11.0 million and
$30.8 million for the three and nine months ended
September 30, 2007, as compared to the same periods in
2006, respectively, primarily due to lower loan balances and
lower interest rates resulting from the 2007 recapitalization
plan and the May 2006 refinancing. As a result of the
recapitalization plan in the first quarter of 2007, we
recognized a loss on extinguishment of debt charge of
approximately $32.1 million, pre-tax, which is comprised of
the write-down of deferred financing costs, tender premiums paid
for the intermediate subsidiary debt, and a call premium paid in
connection with previously existing financing arrangements.
These amounts were partially offset by the write-down of
unamortized premiums relating to the intermediate subsidiary
debt and a gain associated with the settlement of our interest
rate swap agreements in February 2007. In May 2006, as a result
of amendments to our financing arrangements that existed at that
time, we recognized a loss on extinguishment of debt of
$6.8 million for the nine months ended September 30,
2006. See Note 6. Changes in Capitalization of the Notes
for additional information.
Equity in net income from unconsolidated investments increased
by $1.8 million for the three months ended
September 30, 2007, as compared to the same period in 2006,
primarily due to increased earnings at Quezon. Equity in net
income from unconsolidated investments decreased by
$10.3 million for the nine months ended September 30,
2007, as compared to the same period in 2006. Quezon recorded a
$7.0 million cumulative deferred income tax benefit during
the three months ended June 30, 2006 related to unrealized
foreign exchange losses that are expected to be tax deductible
for Philippine tax purposes in future years. The realization of
this deferred tax benefit is subject to fluctuations in the
value of the Philippine peso versus the US dollar. During the
nine months ended September 30, 2007 and 2006, we reduced
the cumulative deferred income tax benefit by approximately
$2.3 million and $1.4 million, respectively, as a
result of the strengthening of the Philippine peso versus the US
dollar. Equity in net income from unconsolidated investments for
the nine months ended September 30, 2007 also included
approximately $3.4 million of increased tax expense for
Quezon related to the conclusion of a six-year income tax
holiday in May 2006. See Note 7. Equity Method Investments
of the Notes for additional information.
Income tax expense increased by $4.9 million and
$4.6 million for the three and nine months ended
September 30, 2007, as compared to the same periods in
2006, respectively, primarily due to a one-time tax benefit of
$10 million recorded during the three months ended
June 30, 2006, associated with the adoption of the
permanent reinvestment exception under Accounting Principles
Board (APB) Opinion No. 23, Accounting
for Income Taxes Special Areas (APB
23) as discussed in Note 9. Income Taxes of the Notes.
28
Domestic Results of Operations Comparison
of Results for the Three and Nine Months Ended
September 30, 2007 vs. Results for the Three and Nine
Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(Unaudited, in thousands)
|
|
|
|
|
|
Waste and service revenues
|
|
$
|
211,142
|
|
|
$
|
202,154
|
|
|
$
|
626,021
|
|
|
$
|
604,734
|
|
Electricity and steam sales
|
|
|
87,230
|
|
|
|
76,713
|
|
|
|
237,974
|
|
|
|
221,149
|
|
Other operating revenues
|
|
|
14,019
|
|
|
|
805
|
|
|
|
36,755
|
|
|
|
2,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
312,391
|
|
|
|
279,672
|
|
|
|
900,750
|
|
|
|
828,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plant operating expenses
|
|
|
160,174
|
|
|
|
143,317
|
|
|
|
488,202
|
|
|
|
443,852
|
|
Depreciation and amortization expense
|
|
|
48,140
|
|
|
|
45,793
|
|
|
|
140,300
|
|
|
|
136,709
|
|
Net interest expense on project debt
|
|
|
10,893
|
|
|
|
13,125
|
|
|
|
36,270
|
|
|
|
40,655
|
|
General and administrative expenses
|
|
|
15,827
|
|
|
|
15,714
|
|
|
|
52,805
|
|
|
|
46,494
|
|
Write-down of assets, net of insurance recoveries
|
|
|
|
|
|
|
|
|
|
|
4,925
|
|
|
|
|
|
Other operating expense (income)
|
|
|
11,175
|
|
|
|
(5,411
|
)
|
|
|
33,751
|
|
|
|
(5,060
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
246,209
|
|
|
|
212,538
|
|
|
|
756,253
|
|
|
|
662,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
66,182
|
|
|
$
|
67,134
|
|
|
$
|
144,497
|
|
|
$
|
165,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In our discussion of operating revenues and expenses below, new
business includes Central Valley, the Harrisburg facility and
the Holliston transfer station.
Operating
Revenues
Variances in revenues for the domestic segment for the three and
nine months ended September 30, 2007 as compared to the
same periods in 2006 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Segment Operating Revenue Variances
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Existing
|
|
|
New
|
|
|
|
|
|
Existing
|
|
|
New
|
|
|
|
|
|
|
Business
|
|
|
Business
|
|
|
Total
|
|
|
Business
|
|
|
Business
|
|
|
Total
|
|
|
Waste and service revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fee
|
|
$
|
1.7
|
|
|
$
|
4.3
|
|
|
$
|
6.0
|
|
|
$
|
3.0
|
|
|
$
|
11.3
|
|
|
$
|
14.3
|
|
Tip fee
|
|
|
(0.2
|
)
|
|
|
1.5
|
|
|
|
1.3
|
|
|
|
(0.5
|
)
|
|
|
2.8
|
|
|
|
2.3
|
|
Other
|
|
|
1.7
|
|
|
|
|
|
|
|
1.7
|
|
|
|
4.7
|
|
|
|
|
|
|
|
4.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total waste and service revenues
|
|
|
3.2
|
|
|
|
5.8
|
|
|
|
9.0
|
|
|
|
7.2
|
|
|
|
14.1
|
|
|
|
21.3
|
|
Electricity and steam sales
|
|
|
3.5
|
|
|
|
7.0
|
|
|
|
10.5
|
|
|
|
9.8
|
|
|
|
7.0
|
|
|
|
16.8
|
|
Other operating revenues
|
|
|
13.2
|
|
|
|
|
|
|
|
13.2
|
|
|
|
34.4
|
|
|
|
|
|
|
|
34.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
$
|
19.9
|
|
|
$
|
12.8
|
|
|
$
|
32.7
|
|
|
$
|
51.4
|
|
|
$
|
21.1
|
|
|
$
|
72.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from Service Fee arrangements for existing business
increased during the three month and nine month comparative
periods primarily due to contractual escalations, partially
offset by lower revenues earned explicitly to service debt of
$1.3 million and $3.6 million for the three and nine
month comparative periods, respectively.
|
|
|
Revenues from Tip Fee arrangements for existing business changed
during the three month and nine month comparative periods
primarily driven by pricing, offset during the nine month
comparative period by a decrease in revenues of
$3.8 million at our SEMASS facility following its fire on
March 31, 2007.
|
|
|
Other waste and service fee revenues increased primarily due to
higher pricing for scrap metal.
|
|
|
Electricity and steam sales for existing business increased
during the three month and nine month comparative periods
primarily due to higher energy rates. Energy rate settlements of
$1.1 million relating
|
29
|
|
|
|
|
to prior years also contributed to the year to date increase in
electricity and steam sales. These year to date increases were
partially offset by a decrease in revenues of $1.9 million
due to lower volume resulting from the partial suspension of
operations at our SEMASS facility following its fire on
March 31, 2007.
|
|
|
|
|
|
Other operating revenues increased primarily related to
construction revenues for the Hillsborough County facility.
|
Operating
Expenses
Variances in plant operating expenses for the domestic segment
for the three and nine months ended September 30, 2007 as
compared to the same periods in 2006 are as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Segment Plant Operating Expense Variances
|
|
|
Three Months
|
|
Nine Months
|
|
|
Existing
|
|
New
|
|
|
|
Existing
|
|
New
|
|
|
|
|
Business
|
|
Business
|
|
Total
|
|
Business
|
|
Business
|
|
Total
|
|
Total plant operating expenses
|
|
$
|
5.5
|
|
|
$
|
11.4
|
|
|
$
|
16.9
|
|
|
$
|
25.4
|
|
|
$
|
19.0
|
|
|
$
|
44.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Existing business plant operating expenses increased by
$5.5 million and $25.4 million for the three and nine
month comparative periods, primarily due to normal cost
escalations such as wages and materials, and the scope and
timing of plant maintenance. In addition, during the three
months ended September 30, 2007, we recorded
$2.0 million of business interruption insurance recoveries
related to the fire at the SEMASS energy-from-waste facility.
For the nine month period, costs related to the fire at the
SEMASS energy-from-waste facility were $2.6 million, which
is net of $2.0 million and $2.7 million of insurance
recoveries for business interruption and for
clean-up
costs, respectively.
Depreciation and amortization expense increased by
$2.3 million and $3.6 million for the three and nine
months ended September 30, 2007, as compared to the same
periods in 2006, respectively, primarily due to additions of
property, plant and equipment.
Net interest expense on project debt decreased by
$2.2 million and $4.4 million for the three and nine
months ended September 30, 2007, as compared to the same
periods in 2006, respectively, primarily due to lower project
debt balances. Principal payments on project debt were
approximately $60.8 million during the nine months ended
September 30, 2007.
General and administrative expenses increased by
$6.3 million for the nine months ended September 30,
2007, as compared to the same period in 2006, due to stock-based
compensation expense of $3.4 million with the remainder
primarily comprised of increased business development spending.
On March 31, 2007, our SEMASS energy-from-waste facility
experienced a fire in the front-end receiving portion of the
facility. Damage was extensive to this portion of the facility
and operations at the facility were suspended completely for
approximately 20 days. As a result of this loss, we
recorded an asset impairment of $18.3 million, pre-tax, in
the first quarter of 2007, which represented a preliminary
estimate of the net book value of the assets destroyed. Based
upon additional analysis as the facility is fully restored, we
may increase the impairment recorded. The cost of repair or
replacement, and business interruption losses, are insured under
the terms of applicable insurance policies, subject to
deductibles. We cannot predict the timing of when we would
receive the proceeds under such policies. During the nine months
ended September 30, 2007, we recorded insurance recoveries
of $13.3 million related to repair and reconstruction,
$2.7 million related to
clean-up
costs and $2.0 million related to business interruption
losses. Insurance recoveries are recorded as a reduction to the
loss related to the write-down of assets where such recoveries
relate to repair and reconstruction costs, or as a reduction to
operating expenses where such recoveries relate to other costs
or business interruption losses.
Other operating expense increased by $16.6 million and
$38.8 million for the three and nine months ended
September 30, 2007, as compared to the same periods in
2006, respectively, primarily due to costs related to
construction at the Hillsborough County facility. See
Note 10. Supplementary Information of the Notes for
additional information.
30
International Results of Operations
Comparison of Results for the Three and Nine Months Ended
September 30, 2007 vs. Results for the Three and Nine
Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited, in thousands)
|
|
|
Waste and service revenues
|
|
$
|
946
|
|
|
$
|
949
|
|
|
$
|
3,018
|
|
|
$
|
3,239
|
|
Electricity and steam sales
|
|
|
36,454
|
|
|
|
27,306
|
|
|
|
126,191
|
|
|
|
108,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
37,400
|
|
|
|
28,255
|
|
|
|
129,209
|
|
|
|
111,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plant operating expenses
|
|
|
27,700
|
|
|
|
18,894
|
|
|
|
101,240
|
|
|
|
80,604
|
|
Depreciation and amortization expense
|
|
|
2,359
|
|
|
|
1,933
|
|
|
|
6,641
|
|
|
|
6,217
|
|
Net interest expense on project debt
|
|
|
1,608
|
|
|
|
1,597
|
|
|
|
4,722
|
|
|
|
5,358
|
|
General and administrative expenses
|
|
|
1,863
|
|
|
|
1,269
|
|
|
|
5,453
|
|
|
|
3,253
|
|
Other operating income
|
|
|
(1,970
|
)
|
|
|
(48
|
)
|
|
|
(3,010
|
)
|
|
|
(1,785
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
31,560
|
|
|
|
23,645
|
|
|
|
115,046
|
|
|
|
93,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
5,840
|
|
|
$
|
4,610
|
|
|
$
|
14,163
|
|
|
$
|
18,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variances in revenues and plant operating expenses for the
international segment for the three and nine months ended
September 30, 2007 as compared to the same periods in 2006
are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International Segment
|
|
|
|
Operating Revenue
|
|
|
|
|
|
|
Variances
|
|
|
Plant Operating Expense Variances
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
Indian facilities energy sales
|
|
$
|
10.4
|
|
|
$
|
24.8
|
|
|
$
|
9.6
|
|
|
$
|
26.0
|
|
Yanjiang steam sales
|
|
|
|
|
|
|
(2.9
|
)
|
|
|
|
|
|
|
(2.1
|
)
|
Sale of Huantai facility
|
|
|
|
|
|
|
(2.9
|
)
|
|
|
|
|
|
|
(2.6
|
)
|
Sale of Linan facility
|
|
|
(1.2
|
)
|
|
|
(1.3
|
)
|
|
|
(1.0
|
)
|
|
|
(1.0
|
)
|
Other
|
|
|
(0.1
|
)
|
|
|
(0.2
|
)
|
|
|
0.2
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9.1
|
|
|
$
|
17.5
|
|
|
$
|
8.8
|
|
|
$
|
20.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increases in revenues and plant operating expenses under
energy contracts at both Indian facilities resulted primarily
from increased demand from the electricity offtaker and
resulting higher electricity generation. The decreases in
revenues and plant operating expenses from the Yanjiang facility
in China resulted from lower steam sales. Additional decreases
in revenues and plant operating expenses resulted from the sale
of the Huantai facility in China during the second quarter of
2006 and the sale of the Linan facility in China during the
third quarter of 2007.
Net interest expense on project debt decreased by
$0.6 million for the nine months ended September 30,
2007, as compared to the same period in 2006, primarily due to
the scheduled quarterly pay down of project debt at both Indian
facilities. Principal payments on project debt were
approximately $12.6 million during the nine months ended
September 30, 2007.
General and administrative expenses increased by
$0.6 million and $2.2 million for the three and nine
months ended September 30, 2007, as compared to the same
periods in 2006, respectively, primarily due to normal wage and
benefit escalations and additional business development spending.
Other operating income increased by $1.9 million for the
three months ended September 30, 2007, as compared to the
same period in 2006, primarily due to a $1.7 million gain
related to the sale of the Linan facility in China during the
third quarter of 2007. Other operating income increased by
$1.2 million for the nine months ended September 30,
2007, as compared to the same period in 2006, primarily due to
the $1.7 million gain related to the sale of the Linan
facility in China during the third quarter of 2007 combined with
a $0.9 million re-measurement
31
gain on the foreign currency denominated debt at one of the
Indian facilities, compared to a $1.2 million gain related
to the sale of the Huantai facility in China during the second
quarter of 2006.
LIQUIDITY
AND CAPITAL RESOURCES
Generating sufficient cash to meet our liquidity needs, paying
down project debt, pursuing strategic opportunities and
investing in our business remain important objectives of
management. We derive our cash flows principally from our
operations at our domestic and international projects, where our
historical levels of production allow us to satisfy project debt
covenants and payments, and distribute cash. We typically
receive cash distributions from our domestic projects on either
a monthly or quarterly basis, whereas a material portion of cash
from our international projects is received semi-annually,
during the second and fourth quarters.
On January 19, 2007, we announced a comprehensive
recapitalization plan utilizing a series of equity and debt
financings. Under the new credit facilities, we will have
substantially greater, but not unrestricted, ability to make
investments in our business and to take advantage of
opportunities to grow our business through investments and
acquisitions, both domestically and internationally. Additional
information, including material terms related to our
recapitalization plan, is contained below under 2007
Recapitalization Plan and in Note 6. Changes in
Capitalization of the Notes.
Our primary future cash requirements will be to fund capital
expenditures to maintain our existing businesses, make debt
service payments due prior to maturity 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.
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 receipt of cash from our
international projects is also subject to satisfaction of
financial tests and other covenants contained in applicable
project debt arrangements. A material portion of cash from our
international projects are received semi-annually, during the
second and fourth quarters.
Additionally, as of September 30, 2007, we had available
credit for liquidity of $273.8 million under the Revolving
Loan Facility (as defined below) and unrestricted cash of
$139.7 million.
As of September 30, 2007, we were in compliance with the
covenants under the New Credit Facilities (as defined below).
Our projected contractual obligations are consistent with
amounts disclosed in our Annual Report on
Form 10-K
for the year ended December 31, 2006. 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 prior to maturity.
2007
Recapitalization Plan
On January 19, 2007, we announced a comprehensive
recapitalization plan utilizing a series of equity and debt
financings. Subsequent to this announcement, we completed the
following transactions:
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the refinancing of our debt facilities with the new credit
facilities, comprised of a $300 million revolving credit
facility (the Revolving Loan Facility), a
$320 million funded letter of credit facility and a
$650 million term loan (collectively referred to as the
New Credit Facilities);
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an underwritten public offering of 6.118 million shares of
our common stock, from which we received proceeds of
approximately $136.6 million, net of underwriting discounts
and commissions;
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an underwritten public offering of approximately
$373.8 million aggregate principal amount of
1.00% Senior Convertible Debentures due 2027 (the
Debentures), from which we received proceeds of
approximately $364.4 million, net of underwriting discounts
and commissions; and
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32
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the repayment, by means of a tender offer and redemptions, of
approximately $611.9 million in aggregate principal amount
of outstanding notes previously issued by our intermediate
subsidiaries.
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We completed our public offerings of common stock and
Debentures, including over-allotment options exercised by
underwriters, on January 31, 2007 and February 6,
2007, respectively, and we closed on the New Credit Facilities
on February 9, 2007. We completed our tender offer for
approximately $604.4 million in aggregate principal amount
of outstanding notes on February 22, 2007. On
April 16, 2007 and September 6, 2007, all remaining
outstanding ARC Notes and the remaining outstanding MSW I Notes
and MSW II Notes were redeemed, respectively. Additional
information, including material terms related to our
recapitalization plan, are described in Note 6. Changes in
Capitalization of the Notes.
As a result of the recapitalization plan, we recognized a loss
on extinguishment of debt of approximately $32.1 million,
pre-tax, which is comprised of the write-down of deferred
financing costs, tender premiums paid for the intermediate
subsidiary debt, and a call premium paid in connection with
previously existing financing arrangements. These amounts were
partially offset by the write-down of unamortized premiums
relating to the intermediate subsidiary debt and a gain
associated with the settlement of our interest rate swap
agreements.
Sources and Uses of Cash Flow for the Nine Months Ended
September 30, 2007 and 2006:
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For the Nine Months Ended
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September 30,
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2007
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|
2006
|
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|
(In thousands)
|
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|
Net cash provided by operating activities
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$
|
259,897
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|
$
|
234,979
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Net cash used in investing activities
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|
(111,073
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)
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|
(25,307
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)
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Net cash used in financing activities
|
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|
(242,963
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)
|
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|
(110,775
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)
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Effect of exchange rate changes on cash and cash equivalents
|
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|
375
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
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|
$
|
(93,764
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)
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$
|
99,006
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|
|
|
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|
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Net cash provided by operating activities for the nine months
ended September 30, 2007 was $259.9 million, an
increase of $24.9 million from the prior year. The increase
was primarily due to lower interest costs as a result of the
2007 recapitalization plan.
Net cash used in investing activities for the nine months ended
September 30, 2007 was $111.1 million, an increase of
$85.8 million from the prior year period. The increase was
due to higher purchases of property, plant and equipment of
$24.5 million, primarily due to the fire at our SEMASS
energy-from-waste facility, the acquisition of businesses of
$63.3 million, and an equity investment in Sanfeng for
$10.3 million, partially offset by property insurance
proceeds of $7.3 million related to the fire at our SEMASS
energy-from-waste facility.
Net cash used in financing activities for the nine months ended
September 30, 2007 was $243.0 million, an increase of
$132.2 million from the prior year period. This increase
was primarily due to the 2007 recapitalization plan. The net
proceeds from refinancing the previously existing credit
facilities with the New Credit Facilities was $5.6 million,
net of transaction fees. Proceeds of approximately
$364.4 million and $136.6 million, each net of
underwriting discounts and commissions, were received during the
nine months ended September 30, 2007 related to
underwritten public offerings of Debentures and common stock,
respectively. The combination of the proceeds from the public
offerings of Debentures and common stock and approximately
$130.0 million in cash and restricted cash (available for
use as a result of the recapitalization plan) were utilized for
the repayment, by means of a tender offer, of approximately
$604.4 million in principal amount of outstanding notes
previously issued by certain intermediate subsidiaries and the
remaining $7.5 million redeemed during the second and third
quarters of 2007.
Net cash used in financing activities was $110.8 million
for the nine months ended September 30, 2006 and was
primarily driven by amendments in May 2006 to our then-existing
financing arrangements and the repayment of debt partially
offset by a decrease in restricted funds held in trust. On
February 24, 2006, we completed a rights offering in which
5,696,911 shares were issued in consideration for
$20.8 million in gross proceeds.
33
Project
Debt
Domestic
Project Debt
Financing for the energy-from-waste projects is generally
accomplished through tax-exempt and taxable municipal revenue
bonds issued by or on behalf of the municipal client. For such
facilities that are owned by a subsidiary of ours, the 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 and Contingencies. Certain
subsidiaries had recourse liability for project debt which is
recourse to Covanta ARC LLC, but is non-recourse to us, which as
of September 30, 2007 aggregated to $251.2 million.
International
Project Debt
Financing for projects in which we have an ownership or
operating interest is generally accomplished through commercial
loans from local lenders or financing arranged through
international banks, bonds issued to institutional investors and
from multilateral lending institutions based in the United
States. Such debt is generally secured by the revenues generated
by the project and other project assets and is without recourse
to us. Project debt relating to two international projects in
India is included as Project debt (short- and
long-term) in our consolidated financial statements. In
most projects, the instruments defining the rights of debt
holders generally provide that the project subsidiary may not
make distributions to its parent until periodic debt service
obligations are satisfied and other financial covenants are
complied with.
Other
Commitments and Contingencies
Other commitments as of September 30, 2007 were as follows
(in thousands):
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Commitments Expiring by Period
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Less Than
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More Than
|
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Total
|
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One Year
|
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|
One Year
|
|
|
Letters of credit
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$
|
374,036
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|
|
$
|
34,400
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$
|
339,636
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Surety bonds
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59,291
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59,291
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|
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|
|
|
|
|
|
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Total other commitments net
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$
|
433,327
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|
$
|
34,400
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$
|
398,927
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The letters of credit were issued pursuant to the facilities to
secure our performance under various contractual undertakings
related to our domestic and international projects, or to secure
obligations under our insurance program. Each letter of credit
relating to a project is required to be maintained in effect for
the period specified in related project contracts, and generally
may be drawn if it is not renewed prior to expiration of that
period.
We believe that we will be able to fully perform under our
contracts to which these existing letters of credit relate, and
that it is unlikely that letters of credit would be drawn
because of a default of our performance obligations. If any of
these letters of credit were to be drawn under the current debt
facilities, the amount drawn would be immediately repayable 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 New 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 ($50.3 million) and support for
closure obligations of various energy projects when such
projects cease operating ($9.0 million). Were these bonds
to be drawn upon, we would have a contractual obligation to
indemnify the surety company.
We have certain contingent obligations related to the
Debentures. These are:
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holders may require us to repurchase their Debentures on
February 1, 2012, February 1, 2017 and
February 1, 2022;
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34
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holders may require us to repurchase their Debentures, if a
fundamental change occurs; and
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holders may exercise their conversion rights upon the occurrence
of certain events, which would require us to pay the conversion
settlement amount in cash
and/or our
common stock.
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See Note 6. Changes in Capitalization of the Notes for
specific criteria related to contingent interest, conversion or
redemption features of the Debentures.
We and certain of our subsidiaries have issued or are party to
performance guarantees and related contractual support
obligations undertaken mainly pursuant to agreements to
construct and operate certain energy-from-waste facilities and a
water facility. 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
financing for a project. With respect to our domestic and
international businesses, certain of our subsidiaries 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. Such contractual damages or other obligations
could be material, and in circumstances where one or more
subsidiarys contract has been terminated for its default,
such damages could include amounts sufficient to repay project
debt. For facilities owned by municipal clients and operated by
us, our potential maximum liability as of September 30,
2007 associated with the repayment of the municipalities
project debt on such facilities was approximately
$1 billion. This amount was not recorded as a liability in
our condensed consolidated balance sheet as of
September 30, 2007 as we believe that we, or our
subsidiaries, have not incurred such liability as of the date of
the financial statements. Additionally, damages payable under
such guarantees on our owned energy-from-waste facilities could
expose us to recourse liability on project debt. We also believe
that we, or our subsidiaries, have not incurred such damages as
of the date of the financial statements. If we are asked to
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, which is presently not estimable.
Depending upon the circumstances giving rise to such domestic
and international damages, the contractual terms of the
applicable contracts, and the contract counterpartys
choice of remedy at the time a claim against a guarantee is
made, the amounts owed pursuant to one or more of such
guarantees could be greater than our then-available sources of
funds. To date, we have not incurred material liabilities under
such guarantees, either on domestic or international projects.
Discussion
of Critical Accounting Policies and Estimates
In preparing our condensed consolidated financial statements in
accordance with United States generally accepted accounting
principles, we are required to use judgment in making estimates
and assumptions that affect the amounts reported in our
financial statements and related notes. We base our estimates on
historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. These
estimates form the basis for making judgments about the carrying
value of assets and liabilities that are not readily apparent
from other sources. Many of our critical accounting policies are
subject to significant judgments and uncertainties which could
potentially result in materially different results under
different conditions and assumptions. Future events rarely
develop exactly as forecast, and the best estimates routinely
require adjustment. Except as described below, management
believes there have been no material changes during the nine
months ended September 30, 2007 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, 2006.
Stock-Based
Compensation
We recognized compensation expense based on the number of stock
options and restricted stock awards expected to vest by using an
estimate of expected forfeitures. The estimate of the expected
forfeitures was initially determined based on historical
turnover experience from our pension plan. This initial estimate
was subsequently adjusted during the year ended
December 31, 2006, and again in the second quarter of 2007
to reflect a revised forfeiture rate. Prior to the second
quarter of 2007, we recognized compensation expense based on an
overall forfeiture rate of 8%. In order to better reflect
compensation expense by type of award, i.e. options versus
restricted
35
stock, we reevaluated the forfeiture rate during the second
quarter of 2007. The new forfeiture rates range from 8% to 15%
depending on the type of award and the vesting period. The
cumulative effect of the change in the forfeiture rate to
compensation expense was immaterial.
Recent
Accounting Pronouncements
See Note 2. Recent Accounting Pronouncements of the Notes
for information related to new accounting pronouncements.
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ITEM 3.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
In the normal course of business, our subsidiaries are party to
financial instruments that are subject to market risks arising
from changes in interest rates, foreign currency exchange rates,
and commodity prices. Our use of derivative instruments is very
limited and we do not enter into derivative instruments for
trading purposes.
Except as described below, management believes there have been
no material changes during the nine months ended
September 30, 2007 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, 2006.
Interest
Rate Swaps
We were required, under financing arrangements in effect from
June 24, 2005 to February 9, 2007, to enter into
hedging arrangements with respect to a portion of our exposure
to interest rate changes with respect to our borrowing under the
Credit Facilities. The impact of the swaps was to decrease
interest expense for the three months and nine months ended
September 30, 2006 by $0.9 million and
$1.6 million, respectively. In connection with the
refinancing of our debt facilities, the interest rate swap
agreements described above were settled on February 9,
2007. We recognized a gain associated with the settlement of our
interest rate swap agreements of $3.4 million, pre-tax. The
New Credit Facilities do not require us to enter into interest
rate swap agreements. For additional information, see
Note 6. Changes in Capitalization and Note 13.
Financial Instruments of the Notes and Liquidity and Capital
Resources 2007 Recapitalization Plan.
Contingent
Interest
On January 31, 2007, we completed an underwritten public
offering of $373.8 million aggregate principal amount of
1.00% Senior Convertible Debentures due 2027 (the
Debentures). The Debentures bear interest at a rate
of 1.00% per year, payable semi-annually in arrears, on February
1 and August 1 of each year, commencing on August 1, 2007
and will mature on February 1, 2027. Beginning with the
six-month interest period commencing February 1, 2012, we
will pay contingent interest on the Debentures during any
six-month interest period in which the trading price of the
Debentures measured over a specified number of trading days is
120% or more of the principal amount of the Debentures. When
applicable, the contingent interest payable per $1,000 principal
amount of Debentures will equal 0.25% of the average trading
price of $1,000 principal amount of Debentures during the five
trading days ending on the second trading day immediately
preceding the first day of the applicable six-month interest
period. The contingent interest feature in the Debentures is an
embedded derivative instrument. The first contingent cash
interest payment period does not commence until February 1,
2012, and as such, the fair market value for the embedded
derivative was zero as of September 30, 2007. For
additional information related to the New Credit Facilities, see
Note 6. Changes in Capitalization of the Notes and
Liquidity and Capital Resources 2007
Recapitalization Plan.
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ITEM 4.
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CONTROLS
AND PROCEDURES
|
Our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, has evaluated the
effectiveness of Covantas disclosure controls and
procedures, as required by
Rule 13a-15(b)
and
15d-15(b)
under the Securities Exchange Act of 1934 (the Exchange
Act) as of September 30, 2007. Our disclosure
controls and procedures are designed to reasonably assure that
information required to be disclosed by us in reports we file or
submit under the Exchange Act is accumulated and communicated to
our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions
regarding disclosure and is recorded, processed, summarized and
reported within the time periods specified in the
36
Securities and Exchange Commissions (SEC)
rules and forms. Our management, with the participation of the
Chief Executive Officer and Chief Financial Officer, believes
that our disclosure controls and procedures are effective to
provide such reasonable assurance.
Our management, including the Chief Executive Officer and Chief
Financial Officer, believes that any disclosure controls and
procedures or internal controls and procedures, no matter how
well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect
the fact that there are resource constraints, and the benefits
of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, we cannot
provide absolute assurance that all control issues and instances
of fraud, if any, within Covanta have been prevented or
detected. These inherent limitations 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. The design of any systems of controls
also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that
any design will succeed in achieving its stated goals under 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
detected.
Changes
in Internal Control over Financial Reporting
During the second quarter of 2006, we began implementation of a
new operating system for the recording of information relating
to our business. We completed this implementation during the
second quarter of 2007. We initiated this effort as part of a
routine system upgrade and as part of our integration efforts
related to the acquisition of Covanta ARC Holdings, Inc. and its
subsidiaries in June 2005. We believe the new operating system
will maintain and enhance our system of internal controls over
financial reporting and our ability to record, process,
summarize and report information required to be disclosed within
the time periods specified in the SECs rules and forms.
PART II
OTHER INFORMATION
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ITEM 1.
|
LEGAL
PROCEEDINGS
|
See Note 15. Commitments and Contingencies of the Notes to
the Condensed Consolidated Financial Statements.
There have been no material changes during the nine months ended
September 30, 2007 to the risk factors discussed in
Item 1A. Risk Factors in our Annual Report on
Form 10-K
for the year ended December 31, 2006.
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|
ITEM 2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
None.
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|
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.
37
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Exhibit
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|
Number
|
|
Description
|
|
|
31
|
.1
|
|
Certification pursuant to Section 302 of Sarbanes-Oxley Act of
2002 by the Chief Executive Officer.
|
|
31
|
.2
|
|
Certification pursuant to Section 302 of Sarbanes-Oxley Act of
2002 by the Chief Financial Officer.
|
|
32
|
|
|
Certification of periodic financial report pursuant to Section
906 of Sarbanes-Oxley Act of 2002 by the Chief Executive Officer
and Chief Financial Officer.
|
38
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Covanta Holding
Corporation
(Registrant)
Mark A. Pytosh
Senior Vice President and Chief Financial Officer
Thomas E. Bucks
Vice President and Chief Accounting Officer
Date: October 24, 2007
39