e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
June 30, 2008
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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
(State or other jurisdiction
of
incorporation or organization)
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95-6021257
(I.R.S. Employer
Identification Number)
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40 Lane Road, Fairfield, NJ
(Address of Principal
Executive Office)
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07004
(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, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o
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(Do not check if a smaller reporting
company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
APPLICABLE
ONLY TO CORPORATE ISSUERS:
The number of shares of the registrants Common Stock
outstanding as of the last practicable date.
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Class
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Outstanding at July 22, 2008
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Common Stock, $0.10 par value
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154,280,160 shares
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COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTERLY REPORT
For the
Quarter Ended June 30, 2008
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Page
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Part I. Financial Information
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Cautionary Note Regarding Forward-Looking Statements
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2
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Item 1. Financial Statements
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3
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Condensed Consolidated Statements of Income for the Three and
Six Months Ended June 30, 2008 and 2007 (Unaudited)
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3
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Condensed Consolidated Balance Sheets as of June 30, 2008
(Unaudited) and December 31, 2007
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4
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Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2008 and 2007 (Unaudited)
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5
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Notes to Condensed Consolidated Financial Statements (Unaudited)
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6
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Note 1. Organization and Basis of Presentation
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6
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Note 2. Recent Accounting Pronouncements
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7
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Note 3. Acquisitions and Business Development
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8
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Note 4. Earnings Per Share
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11
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Note 5. Financial Information by Business Segments
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12
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Note 6. Changes in Capitalization
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12
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Note 7. Comprehensive Income
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14
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Note 8. Income Taxes
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14
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Note 9. Supplementary Information
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15
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Note 10. Benefit Obligations
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17
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Note 11. Stock-Based Compensation
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18
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Note 12. Financial Instruments
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18
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Note 13. Related-Party Transactions
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19
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Note 14. Commitments and Contingencies
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19
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Note 15. Subsequent Event
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21
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Item 2. Managements Discussion and
Analysis of Financial Condition and Results of Operations
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22
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Overview
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22
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Results of Operations
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27
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Liquidity and Capital Resources
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32
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Item 3. Quantitative and Qualitative Disclosures
About Market Risk
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36
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Item 4. Controls and Procedures
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36
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Part II. Other Information
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Item 1. Legal Proceedings
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37
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Item 1A. Risk Factors
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37
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Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds
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37
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Item 3. Defaults Upon Senior Securities
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37
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Item 4. Submission of Matters to a Vote of
Security Holders
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37
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Item 5. Other Information
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38
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Item 6. Exhibits
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38
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Other
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Signatures
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39
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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 their businesses
described in Item 1A. Risk Factors of Covantas Annual
Report on
Form 10-K
for the year ended December 31, 2007 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
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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2008
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2007
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2008
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2007
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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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Waste and service revenues
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$
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242,689
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$
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218,040
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$
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460,312
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$
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416,951
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Electricity and steam sales
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163,832
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126,815
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316,897
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240,481
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Other operating revenues
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16,475
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10,285
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34,553
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27,917
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Total operating revenues
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422,996
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355,140
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811,762
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685,349
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OPERATING EXPENSES:
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Plant operating expenses
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238,608
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199,561
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497,619
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401,568
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Depreciation and amortization expense
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51,590
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48,436
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100,164
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96,479
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Net interest expense on project debt
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13,776
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13,886
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27,537
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28,491
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General and administrative expenses
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23,135
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20,029
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47,289
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42,221
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Write-down of assets, net of insurance recoveries
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(13,341
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)
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4,925
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Other operating expenses
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19,358
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9,357
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31,859
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26,173
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Total operating expenses
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346,467
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277,928
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704,468
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599,857
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Operating income
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76,529
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77,212
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107,294
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85,492
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Other income (expense):
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Investment income
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1,052
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1,819
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2,692
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7,003
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Interest expense
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(11,563
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)
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(14,718
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)
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(25,283
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)
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(35,978
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)
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Loss on extinguishment of debt
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(32,006
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)
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Total other expenses
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(10,511
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)
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(12,899
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)
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(22,591
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)
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(60,981
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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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|
66,018
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|
|
|
64,313
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|
|
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84,703
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|
|
|
24,511
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Income tax expense
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|
|
(26,260
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)
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|
|
(28,822
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)
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|
|
(33,796
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)
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|
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(10,646
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)
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Minority interests
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(2,225
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)
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|
|
(2,091
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)
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(4,094
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)
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|
|
(3,489
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)
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Equity in net income from unconsolidated investments
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7,320
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|
|
|
4,316
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|
|
|
12,812
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|
|
|
9,422
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|
|
|
|
|
|
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|
|
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|
|
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NET INCOME
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$
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44,853
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$
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37,716
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$
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59,625
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$
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19,798
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Weighted Average Common Shares Outstanding:
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Basic
|
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|
153,387
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|
|
|
152,983
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|
|
|
153,276
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|
|
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152,234
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|
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|
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|
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Diluted
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154,848
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154,307
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154,710
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|
|
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153,603
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Earnings Per Share:
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|
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Basic
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$
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0.29
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|
$
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0.25
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|
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$
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0.39
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|
$
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0.13
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Diluted
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$
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0.29
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$
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0.24
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$
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0.39
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$
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0.13
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The accompanying notes are an integral part of the condensed
consolidated financial statements.
3
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
|
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As of
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|
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June 30,
|
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December 31,
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|
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2008
|
|
|
2007
|
|
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(Unaudited)
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(In thousands, except per share amounts)
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ASSETS
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Current:
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Cash and cash equivalents
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$
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143,706
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$
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149,406
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Marketable securities available for sale
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300
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2,495
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Restricted funds held in trust
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207,320
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187,951
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Receivables (less allowances of $3,926 and $4,353)
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252,857
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252,114
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Unbilled service receivables
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|
55,852
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|
|
|
59,232
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Deferred income taxes
|
|
|
59,904
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|
|
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29,873
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Prepaid expenses and other current assets
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|
112,411
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|
|
|
113,927
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|
|
|
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Total Current Assets
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832,350
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794,998
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Property, plant and equipment, net
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2,595,105
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|
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2,620,507
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Investments in fixed maturities at market (cost: $21,640 and
$26,338)
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|
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21,384
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|
|
|
26,260
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Restricted funds held in trust
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|
|
200,683
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|
|
|
191,913
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Unbilled service receivables
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|
|
51,255
|
|
|
|
56,685
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Waste, service and energy contracts, net
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|
|
246,384
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|
|
|
268,353
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Other intangible assets, net
|
|
|
85,431
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|
|
|
88,954
|
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Goodwill
|
|
|
127,763
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|
|
|
127,027
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Investments in investees and joint ventures
|
|
|
96,281
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|
|
|
81,248
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Other assets
|
|
|
120,500
|
|
|
|
112,554
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|
|
|
|
|
|
|
|
|
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Total Assets
|
|
$
|
4,377,136
|
|
|
$
|
4,368,499
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|
|
|
|
|
|
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current:
|
|
|
|
|
|
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|
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Current portion of long-term debt
|
|
$
|
6,776
|
|
|
$
|
6,898
|
|
Current portion of project debt
|
|
|
191,885
|
|
|
|
195,625
|
|
Accounts payable
|
|
|
35,494
|
|
|
|
29,916
|
|
Deferred revenue
|
|
|
20,947
|
|
|
|
25,114
|
|
Accrued expenses and other current liabilities
|
|
|
208,254
|
|
|
|
234,000
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
463,356
|
|
|
|
491,553
|
|
Long-term debt
|
|
|
1,009,295
|
|
|
|
1,012,534
|
|
Project debt
|
|
|
1,016,801
|
|
|
|
1,084,650
|
|
Deferred income taxes
|
|
|
487,638
|
|
|
|
440,723
|
|
Waste and service contracts
|
|
|
121,118
|
|
|
|
130,464
|
|
Other liabilities
|
|
|
151,374
|
|
|
|
141,740
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
3,249,582
|
|
|
|
3,301,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 14)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority Interests
|
|
|
39,269
|
|
|
|
40,773
|
|
|
|
|
|
|
|
|
|
|
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 154,788 and 154,281 shares;
outstanding 154,280 and 153,922 shares)
|
|
|
15,479
|
|
|
|
15,428
|
|
Additional paid-in capital
|
|
|
769,814
|
|
|
|
765,287
|
|
Accumulated other comprehensive income
|
|
|
14,339
|
|
|
|
16,304
|
|
Accumulated earnings
|
|
|
288,704
|
|
|
|
229,079
|
|
Treasury stock, at par
|
|
|
(51
|
)
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
1,088,285
|
|
|
|
1,026,062
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
4,377,136
|
|
|
$
|
4,368,499
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
59,625
|
|
|
$
|
19,798
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
100,164
|
|
|
|
96,479
|
|
Write-down of assets, net of insurance recoveries
|
|
|
|
|
|
|
4,925
|
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
32,006
|
|
Amortization of long-term debt deferred financing costs
|
|
|
1,856
|
|
|
|
1,704
|
|
Amortization of debt premium and discount
|
|
|
(5,547
|
)
|
|
|
(7,689
|
)
|
Stock-based compensation expense
|
|
|
8,061
|
|
|
|
6,407
|
|
Equity in net income from unconsolidated investments
|
|
|
(12,812
|
)
|
|
|
(9,422
|
)
|
Dividends from unconsolidated investments
|
|
|
15,668
|
|
|
|
7,194
|
|
Minority interests
|
|
|
4,094
|
|
|
|
3,489
|
|
Deferred income taxes
|
|
|
16,363
|
|
|
|
(1,789
|
)
|
Other, net
|
|
|
6,606
|
|
|
|
784
|
|
Change in restricted funds held in trust
|
|
|
(14,992
|
)
|
|
|
3,049
|
|
Change in working capital, net of effects of acquisitions
|
|
|
(18,709
|
)
|
|
|
(11,348
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
160,377
|
|
|
|
145,587
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase of equity interest
|
|
|
(18,503
|
)
|
|
|
(10,253
|
)
|
Acquisition of businesses, net of cash acquired
|
|
|
(20,128
|
)
|
|
|
(7,439
|
)
|
Proceeds from the sale of investment securities
|
|
|
18,177
|
|
|
|
9,575
|
|
Purchase of investment securities
|
|
|
(11,106
|
)
|
|
|
|
|
Purchase of property, plant and equipment
|
|
|
(53,764
|
)
|
|
|
(43,016
|
)
|
Property insurance proceeds
|
|
|
6,315
|
|
|
|
7,341
|
|
Other, net
|
|
|
(1,146
|
)
|
|
|
233
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(80,155
|
)
|
|
|
(43,559
|
)
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from the issuance of common stock, net
|
|
|
|
|
|
|
135,757
|
|
Proceeds from the exercise of options for common stock, net
|
|
|
221
|
|
|
|
111
|
|
Proceeds from borrowings on long-term debt
|
|
|
|
|
|
|
949,907
|
|
Financings of insurance premiums, net
|
|
|
(6,911
|
)
|
|
|
|
|
Proceeds from borrowings on project debt
|
|
|
4,102
|
|
|
|
3,389
|
|
Principal payments on long-term debt
|
|
|
(3,361
|
)
|
|
|
(1,160,385
|
)
|
Principal payments on project debt
|
|
|
(65,164
|
)
|
|
|
(65,489
|
)
|
Payments of long-term debt deferred financing costs
|
|
|
|
|
|
|
(18,324
|
)
|
Payments of tender premiums on debt extinguishment
|
|
|
|
|
|
|
(32,759
|
)
|
Decrease in holding company restricted funds
|
|
|
|
|
|
|
6,660
|
|
(Increase) decrease in restricted funds held in trust
|
|
|
(11,174
|
)
|
|
|
4,766
|
|
Distributions to minority partners
|
|
|
(3,746
|
)
|
|
|
(4,578
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(86,033
|
)
|
|
|
(180,945
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
111
|
|
|
|
337
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(5,700
|
)
|
|
|
(78,580
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
149,406
|
|
|
|
233,442
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
143,706
|
|
|
$
|
154,862
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed
consolidated financial statements.
5
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
|
|
Note 1.
|
Organization
and Basis of Presentation
|
The terms we, our, ours,
us and Company refer to Covanta Holding
Corporation and its subsidiaries; the term Covanta
Energy refers to our subsidiary Covanta Energy Corporation
and its subsidiaries.
Organization
We are a leading developer, owner and operator of infrastructure
for the conversion of waste to energy (known as
energy-from-waste), as well as other waste disposal
and renewable energy production businesses in the Americas,
Europe and Asia. We conduct all of our operations through
subsidiaries which are engaged predominantly in the businesses
of waste and energy services. We also engage in the independent
power production business outside the Americas.
We own, have equity investments in,
and/or
operate 58 energy generation facilities, 48 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, four 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, 2008. 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, 2007
(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.
During the first quarter of 2008, we revised our presentation of
the condensed consolidated statements of cash flows to present
changes in restricted funds held in trust relating to operating
activities as a component of cash flow from operating activities
and changes in restricted funds held in trust relating to
financing activities (debt principal repayments) as a component
of cash flow from financing activities; previously we included
all changes in restricted funds held in trust as a component of
cash flow from financing activities. For the six months ended
June 30, 2007, we have reclassified the presentation of the
changes in restricted funds held related to operating and
financing activities, although not material, to conform to the
presentation on the condensed consolidated statements of cash
flows.
6
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 2.
|
Recent
Accounting Pronouncements
|
In May 2008, the Financial Accounting Standards Board
(FASB) issued FASB Staff Position (FSP)
No. APB
14-1,
Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement) (FSP APB
14-1).
The FSP requires the issuer of convertible debt instruments with
cash settlement features to separately account for the liability
and equity components of the instrument. The debt should be
recognized at the present value of its cash flows discounted
using the issuers nonconvertible debt borrowing rate. The
equity component should be recognized as the difference between
the proceeds from the issuance of the note and the fair value of
the liability, net of deferred taxes. FSP APB
14-1 also
requires an accretion of the resultant debt discount over the
expected life of the debt. FSP APB
14-1,
effective for us on January 1, 2009 for our convertible
debentures, requires retrospective application for all periods
presented, and does not grandfather existing instruments. We
estimate that the pre-tax increase in non-cash interest expense
to be recognized on our condensed consolidated financial
statements using a 7.25% discount rate, our nonconvertible debt
borrowing rate at the date of the bonds issuance, would be
as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012-2027
|
|
|
Total
|
|
|
Pre-tax increase in non-cash interest expense
|
|
$
|
5.2
|
|
|
$
|
6.1
|
|
|
$
|
6.5
|
|
|
$
|
7.0
|
|
|
$
|
7.6
|
|
|
$
|
213.9
|
|
|
$
|
246.3
|
|
In March 2008, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 161, Disclosures
about Derivative Instruments and Hedging Activities
(SFAS 161), which is intended to improve
financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors
to better understand the effects on an entitys financial
position, financial performance, and cash flows. SFAS 161
is effective for us on January 1, 2009. Although we do not
currently expect the adoption of SFAS 161 to result in
additional financial reporting disclosures, we are continuing to
assess the potential disclosure effects of SFAS 161.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements (SFAS 160). SFAS 160
amends Accounting Research Bulletin No. 51,
Consolidated Financial Statements, to establish
accounting and reporting for the noncontrolling (minority)
interests in a subsidiary and the deconsolidation of a
subsidiary. Moreover, SFAS 160 eliminates the diversity
that currently exists in accounting for transactions between an
entity and noncontrolling interests by requiring they be treated
as equity transactions. SFAS 160 is effective for us on
January 1, 2009. Although we do not currently expect the
adoption of SFAS 160 to have a material impact on our
consolidated financial statements, we are continuing to assess
the potential effects of SFAS 160.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations
(SFAS 141(R)). SFAS 141(R)s
objective is to improve reporting by creating greater
consistency in the accounting and financial reporting of
business combinations, resulting in more complete, comparable,
and relevant information for investors and other users of
financial statements. To achieve this goal, the new standard
requires the acquiring entity in a business combination to
recognize and measure all of the assets acquired and liabilities
assumed in the transaction including any noncontrolling interest
of the acquired entity; to recognize and measure any goodwill
acquired or gain resulting from a bargain purchase; establishes
the acquisition-date fair value as the measurement objective;
and requires the acquirer to disclose to investors and other
users of financial statements all of the information they need
to evaluate and understand the nature and financial effect of
the business combination. SFAS 141(R) is effective for us
on January 1, 2009. We are continuing to assess the
potential effects of SFAS 141(R).
In February 2007, the FASB issued 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
7
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
gains and losses for that instrument shall be reported in
earnings at each subsequent reporting date. We adopted
SFAS 159 on January 1, 2008, but did not elect to
apply the fair value option to any of our eligible financial
assets and liabilities.
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 was effective for us on
January 1, 2008. In February 2008, the FASB issued FASB
Staff Position
FAS 157-2,
Effective Date of FASB Statement No. 157, which
deferred the effective date of SFAS 157 for one year for
all non-financial assets and non-financial liabilities, except
for those items that are recognized or disclosed at fair value
in the financial statements on a recurring basis (at least
annually). The partial adoption of SFAS 157 on
January 1, 2008 had no impact on our financial position,
results of operations, cash flows or earnings per share. Our
investment securities that are traded on a national securities
exchange are stated at the last reported sales price on the day
of valuation; other securities in the over-the-counter market
and listed securities for which no sale was reported on the date
are stated at the last quoted bid price.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
June 30,
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
|
|
2008
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Marketable securities available for sale
|
|
$
|
300
|
|
|
$
|
300
|
|
|
$
|
|
|
|
$
|
|
|
Investments in fixed maturities at market
|
|
|
21,384
|
|
|
|
21,384
|
|
|
|
|
|
|
|
|
|
Derivatives Contingent interest feature of the
Convertible Debentures (See Note 12)
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
21,684
|
|
|
$
|
21,684
|
|
|
$
|
0
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 3.
|
Acquisitions
and Business Development
|
Our growth strategy includes the acquisition of waste and energy
related businesses located in markets with significant growth
opportunities, as well as the development of new projects and
expansion of existing projects. Acquisitions are accounted for
under the purchase method of accounting. The results of
operations reflect the period of ownership of the acquired
businesses and business development projects. The acquisitions
in the section below are not material to our unaudited condensed
consolidated financial statements individually or in the
aggregate and therefore, disclosures of pro forma financial
information have not been presented.
Domestic
Tulsa
Energy-from-Waste Facility
On June 2, 2008, we acquired an energy-from-waste facility
in Tulsa, Oklahoma from The CIT
Group/Equipment
Financing, Inc. for cash consideration of approximately
$12.7 million. The design capacity of the facility is 1,125
tons per day (tpd) of waste and gross electric
capacity of 16.5 megawatts (MW). This facility was
shut down by the prior owner in the summer of 2007 and we are
planning to return two of the facilitys three boilers to
service before the end of 2008, and return its third boiler to
service during 2009.
8
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Peabody
Landfill
On May 20, 2008, we acquired a landfill for the disposal of
ash in Peabody, Massachusetts from Peabody Monofill Associates,
Inc. and others for cash consideration of approximately
$7.4 million.
Harrisburg
Energy-from-Waste Facility
In February 2008, we entered into a ten year agreement to
maintain and operate an 800 tpd energy-from-waste facility
located in Harrisburg, Pennsylvania. Under the agreement, we
have a right of first refusal to purchase the facility. We also
have agreed to provide construction management services and to
advance up to $25.5 million in funding for certain facility
improvements required to enhance facility performance, the
repayment of which is guaranteed by the City of Harrisburg. As
of June 30, 2008, we have advanced $1.0 million under
this funding arrangement.
Massachusetts
Energy-From-Waste Facilities and Transfer Stations
On October 1, 2007, we acquired the operating businesses of
EnergyAnswers Corporation for cash consideration of
approximately $41 million. 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% of
waste revenues are contracted for at these facilities. We
subsequently sold certain assets acquired in this transaction
for a total consideration of $5.8 million during the fourth
quarter of 2007 and the first quarter of 2008. The purchase
price allocation included $9.8 million of goodwill.
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 $7.3 million.
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. In addition, we invested
approximately $8 million prior to December 31, 2007
and $9.7 million during the six months ended June 30,
2008 in capital improvements to significantly increase the
facilities productivity and improve environmental
performance. The purchase price allocation included
$23.6 million of goodwill.
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 approximately $7.5 million.
Lee
County Energy-from-Waste Facility
In December 2007, we completed the expansion and commenced the
operation of the expanded energy-from-waste facility located in
and owned by Lee County in Florida. We expanded waste processing
capacity from 1,200 tpd to 1,836 tpd and increased gross
electricity capacity from 36.9 MW to 57.3 MW. As part of
the agreement to implement this expansion, we received a
long-term operating contract extension expiring in 2024.
9
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Hillsborough
County Energy-from-Waste Facility
We designed, constructed, and now operate and maintain the 1,200
tpd mass-burn energy-from-waste facility located in and owned by
Hillsborough County in Florida. Due to the growth in the amount
of municipal solid waste generated in Hillsborough County,
Hillsborough County informed us of its desire to expand the
facilitys waste processing and electricity generation
capacities. In August 2005, we entered into agreements with
Hillsborough County to implement this expansion, and to extend
the agreement under which we operate the facility through 2027.
Environmental and other project related permits have been
secured and the expansion construction commenced on
December 29, 2006. Completion of the expansion, and
commencement of the operation of the expanded project, is
expected in 2009.
International
China
On April 2, 2008, our project joint venture with Chongqing
Iron & Steel Company (Group) Limited received an award
to build, own, operate and transfer an 1,800 tpd
energy-from-waste facility for Chengdu Municipality, in Sichuan
Province, Peoples Republic of China. On June 25, 2008, the
projects 25 year waste concession agreement was
executed. In connection with this project, we invested
$17.1 million for a 49% equity interest in the project
joint venture. The Chengdu project is expected to commence
construction near the end of 2008, and commence operations in
2011.
In December 2007, we entered into a joint venture with Guangzhou
Development Power Investment Co., Ltd. through which we intend
to develop energy-from-waste projects in Guangdong Province,
Peoples Republic of China. We hold a 40% equity interest in the
joint venture entity, Guangzhou Development Covanta
Environmental Energy Co., Ltd (GDC Environmental
Energy), and on June 6, 2008, we invested
$1.5 million in the joint venture.
On April 25, 2007, we purchased a 40% equity interest in
Chongqing Sanfeng Environmental Industry Co., Ltd.
(Sanfeng), 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 MW
mass-burn energy-from-waste projects. We made an initial cash
payment of approximately $10 million in connection with our
investment in Sanfeng.
Ireland
On September 6, 2007, we entered into definitive agreements
to build, own, operate and transfer a 1,700 metric tpd
energy-from-waste project serving the City of Dublin, Ireland
and surrounding communities. The Dublin project is being
developed and will be owned by Dublin Waste to Energy Limited,
which 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, is estimated to cost approximately
300 million euros and is expected to 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 electricity grid under
short-term arrangements. We, along with DONG Energy Generation
A/S, have committed to provide financing for all phases of the
project; however, we expect that numerous project financing
structures will be available once the initial development phase
is complete.
10
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 4.
|
Earnings
Per Share
|
Per share data is based on the weighted average outstanding
number of our, par value $0.10 per share, common stock during
the relevant period. Basic earnings per share are calculated
using the weighted average number of outstanding shares of
common stock. Diluted earnings per share computations, as
calculated under the treasury stock method, include the weighted
average number of shares of additional outstanding common stock
issuable for stock options, restricted stock, and rights whether
or not currently exercisable. Diluted earnings per share for all
the periods presented does not include securities if their
effect was anti-dilutive (in thousands, except per share
amounts).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Net income
|
|
$
|
44,853
|
|
|
$
|
37,716
|
|
|
$
|
59,625
|
|
|
$
|
19,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares outstanding
|
|
|
153,387
|
|
|
|
152,983
|
|
|
|
153,276
|
|
|
|
152,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.29
|
|
|
$
|
0.25
|
|
|
$
|
0.39
|
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares outstanding
|
|
|
153,387
|
|
|
|
152,983
|
|
|
|
153,276
|
|
|
|
152,234
|
|
Stock options
|
|
|
745
|
|
|
|
651
|
|
|
|
682
|
|
|
|
636
|
|
Restricted stock
|
|
|
716
|
|
|
|
673
|
|
|
|
752
|
|
|
|
733
|
|
Convertible debentures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding
|
|
|
154,848
|
|
|
|
154,307
|
|
|
|
154,710
|
|
|
|
153,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.29
|
|
|
$
|
0.24
|
|
|
$
|
0.39
|
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options excluded from the weighted average dilutive common
shares outstanding because their inclusion would have been
antidilutive
|
|
|
300
|
|
|
|
1,785
|
|
|
|
300
|
|
|
|
1,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards excluded from the weighted average
dilutive common shares outstanding because their inclusion would
have been antidilutive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. As of
June 30, 2008, the Debentures did not have a dilutive
effect on earnings per share.
11
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 5.
|
Financial
Information by Business Segments
|
We have two reportable segments, Domestic and International,
which are comprised of our domestic and international waste and
energy services operations, respectively. The results of our
reportable segments are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable Segments
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
International
|
|
|
All Other(1)
|
|
|
Total
|
|
|
Three Months Ended June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
350,729
|
|
|
$
|
69,152
|
|
|
$
|
3,115
|
|
|
$
|
422,996
|
|
Operating income (loss)
|
|
|
73,553
|
|
|
|
3,506
|
|
|
|
(530
|
)
|
|
|
76,529
|
|
Three Months Ended June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
300,604
|
|
|
$
|
52,008
|
|
|
$
|
2,528
|
|
|
$
|
355,140
|
|
Operating income (loss)
|
|
|
73,080
|
|
|
|
4,820
|
|
|
|
(688
|
)
|
|
|
77,212
|
|
Six Months Ended June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
674,013
|
|
|
$
|
131,931
|
|
|
$
|
5,818
|
|
|
$
|
811,762
|
|
Operating income (loss)
|
|
|
98,907
|
|
|
|
9,344
|
|
|
|
(957
|
)
|
|
|
107,294
|
|
Six Months Ended June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
588,359
|
|
|
$
|
91,809
|
|
|
$
|
5,181
|
|
|
$
|
685,349
|
|
Operating income (loss)
|
|
|
78,315
|
|
|
|
8,323
|
|
|
|
(1,146
|
)
|
|
|
85,492
|
|
|
|
|
(1) |
|
All other is comprised of our insurance subsidiaries
operations. |
|
|
Note 6.
|
Changes
in Capitalization
|
Long-Term
Debt
Long-term debt is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
1.00% Senior Convertible Debentures due 2027
|
|
$
|
373,750
|
|
|
$
|
373,750
|
|
Term loan due 2014
|
|
|
641,875
|
|
|
|
645,125
|
|
Other long-term debt
|
|
|
446
|
|
|
|
557
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,016,071
|
|
|
|
1,019,432
|
|
Less: current portion
|
|
|
(6,776
|
)
|
|
|
(6,898
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
1,009,295
|
|
|
$
|
1,012,534
|
|
|
|
|
|
|
|
|
|
|
Short-Term
Liquidity
As of June 30, 2008, we had available credit for liquidity
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Letters
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
of Credit as of
|
|
|
Available as of
|
|
|
|
Available
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
Under Facility
|
|
|
Maturing
|
|
|
2008
|
|
|
2008
|
|
|
Revolving Loan Facility(1)
|
|
$
|
300,000
|
|
|
|
2013
|
|
|
$
|
|
|
|
$
|
300,000
|
|
Funded L/C Facility
|
|
$
|
320,000
|
|
|
|
2014
|
|
|
$
|
312,007
|
|
|
$
|
7,993
|
|
|
|
|
(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)
2007
Recapitalization
During the first quarter of 2007, we completed a comprehensive
recapitalization utilizing a series of equity and debt
financings including the following transactions:
|
|
|
|
|
the refinancing of our previously existing credit facilities
with new credit facilities, comprised of a $300 million
revolving credit facility (the Revolving Loan
Facility), a $320 million funded letter of credit
facility (the Funded L/C Facility), and a
$650 million term loan (the Term Loan Facility)
(collectively referred to as the Credit Facilities);
|
|
|
|
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 tender offer and
redemptions for approximately $604.4 million in aggregate
principal amount of outstanding notes on February 22, 2007.
The remaining $7.5 million of the outstanding notes were
redeemed in April 2007 and September 2007.
|
As a result of the recapitalization, we recognized a loss on
extinguishment of debt of approximately $32.0 million,
pre-tax, which was 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.
Credit
Facilities
The loan documentation under the Credit Facilities contains
customary affirmative and negative covenants and financial
covenants. We were in compliance with all required covenants as
of June 30, 2008.
Stockholders
Equity
During the six months ended June 30, 2008, we granted
491,336 restricted stock awards and 250,000 options to purchase
our common stock. See Note 11. Stock-Based Compensation.
13
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 7.
|
Comprehensive
Income
|
The components of comprehensive income are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Comprehensive income, net of income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
44,853
|
|
|
$
|
37,716
|
|
|
$
|
59,625
|
|
|
$
|
19,798
|
|
Foreign currency translation
|
|
|
(2,281
|
)
|
|
|
2,199
|
|
|
|
(1,254
|
)
|
|
|
2,633
|
|
SFAS 158 unrecognized net loss
|
|
|
(170
|
)
|
|
|
53
|
|
|
|
(339
|
)
|
|
|
53
|
|
Net unrealized (gain) loss on available-for-sale securities
|
|
|
(302
|
)
|
|
|
20
|
|
|
|
(372
|
)
|
|
|
237
|
|
Net realized gain on derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net comprehensive (loss) income adjustments
|
|
|
(2,753
|
)
|
|
|
2,272
|
|
|
|
(1,965
|
)
|
|
|
798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
42,100
|
|
|
$
|
39,988
|
|
|
$
|
57,660
|
|
|
$
|
20,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2008 to be
approximately 39.9%. We review the annual effective tax rate on
a quarterly basis as projections are revised. The effective
income tax rate was 39.9% and 43.4% for the six months ended
June 30, 2008 and 2007, respectively. The liability for
uncertain tax positions, exclusive of interest and penalties,
was $26.7 million and $25.4 million as of
June 30, 2008 and December 31, 2007, respectively. No
material additional liabilities were recorded for uncertain tax
positions during the six months ended June 30, 2008.
Included in the balance of unrecognized tax benefits as of
June 30, 2008 are potential benefits of $3.4 million
that, if recognized, would impact the effective tax rate.
We continue to reflect interest accrued on uncertain tax
positions and penalties as part of the tax provision under FASB
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement
No. 109, (FIN 48). For the three
months ended June 30, 2008 and 2007, we recognized
$0.4 million and $0.3 million, respectively and for
the six months ended June 30, 2008 and 2007, we recognized
$0.7 million and $0.5 million, respectively of
interest and penalties on uncertain tax positions. As of
June 30, 2008 and December 31, 2007, we had accrued
interest and penalties associated with unrecognized tax benefits
of $8.3 million and $7.6 million, respectively.
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 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
14
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
impact of any federal changes remains subject to examination by
various states for a period of up to one year after formal
notification to the states. We have various state income tax
returns in the process of examination, administrative appeals or
litigation.
Our NOLs predominantly arose from our predecessor insurance
entities (which were subsidiaries of our predecessor, which was
formerly named Mission Insurance Group, Inc.,
Mission). These Mission insurance entities have been
in state insolvency proceedings in California and Missouri since
the late 1980s. The amount of NOLs available to us will be
reduced by any taxable income 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 of
Insurance nor the final administration by the Missouri Director
of Insurance will result in a material reduction in available
NOLs. In connection with the continued administration of the
trust estates and implementation of arrangements with us, the
California Commissioner has received court approvals, and may
receive additional approvals during 2008, that may result in
additional tax deduction or NOLs, which may be material,
becoming available to us.
We had consolidated federal NOLs estimated to be approximately
$275 million for federal income tax purposes as of
December 31, 2007. The NOLs will expire in various amounts
from December 31, 2009 through December 31, 2026, if
not used. In addition to the consolidated federal NOLs, as of
December 31, 2007, we had additional federal credit
carryforwards of $23.1 million, federal loss carryforwards
of $85.0 million and state NOL carryforwards of
$232.4 million, all of which will expire between 2008 and
2026. These deferred tax assets are offset by a valuation
allowance of $33.2 million.
For further information, refer to Note 9. Income Taxes of
the Notes to the Consolidated Financial Statements included in
our
Form 10-K.
|
|
Note 9.
|
Supplementary
Information
|
Operating
Revenues
The components of waste and service revenues are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
For the Six Months
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Waste and service revenues unrelated to project debt
|
|
$
|
218,965
|
|
|
$
|
193,186
|
|
|
$
|
412,829
|
|
|
$
|
366,572
|
|
Revenue earned explicitly to service project
debt-principal
|
|
|
17,167
|
|
|
|
17,290
|
|
|
|
34,364
|
|
|
|
34,580
|
|
Revenue earned explicitly to service project
debt-interest
|
|
|
6,557
|
|
|
|
7,564
|
|
|
|
13,119
|
|
|
|
15,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total waste and service revenues
|
|
$
|
242,689
|
|
|
$
|
218,040
|
|
|
$
|
460,312
|
|
|
$
|
416,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under some of our service agreements, we bill municipalities
fees to service project debt (principal and interest). The
amounts billed are based on the actual principal amortization
schedule for the project bonds. Regardless of the amounts billed
to client communities relating to project debt principal, we
recognize revenue earned explicitly to service project debt
principal on a levelized basis over the term of the applicable
agreement. In the beginning of the agreement, principal billed
is less than the amount of levelized revenue recognized related
to principal and we record an unbilled service receivable asset.
At some point during the agreement, the amount we bill will
exceed the levelized revenue and the unbilled service receivable
begins to reduce, and ultimately becomes nil at the end of the
contract.
15
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 agreement, little or no cash is received
from municipalities relating to project debt, while our
levelized service revenue continues to be recognized until the
expiration date of the term of the agreement.
Our independent power production facilities in India generate
electricity and steam explicitly for specific purchasers and as
such, these agreements are considered lease arrangements.
Electricity and steam sales included lease income from our
international business of $59.0 million and
$42.2 million for the three months ended June 30, 2008
and 2007, respectively, and $113.1 million and
$72.4 million for the six months ended June 30, 2008
and 2007, 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 $15.3 million and $13.3 million for
the three months ended June 30, 2008 and 2007,
respectively, and $31.7 million and $29.1 million for
the six months ended June 30, 2008 and 2007, respectively.
Amortization
of waste, service and energy contracts
The vast majority of our waste, service and energy contracts
were valued in March 2004 and June 2005 related to the
acquisitions of Covanta Energy and ARC Holdings, respectively.
These intangible assets and liabilities were recorded using
then-available information at their estimated fair market values
based upon discounted cash flows. The following table details
the amount of the actual/estimated amortization expense and
contra-expense associated with these intangible assets and
liabilities as of June 30, 2008 included or expected to be
included in our statement of income for each of the years
indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Waste, Service and
|
|
|
|
|
|
|
Energy Contracts
|
|
|
Waste and Service
|
|
|
|
(Amortization
|
|
|
Contracts
|
|
|
|
Expense)
|
|
|
(Contra-Expense)
|
|
|
Six Months ended June 30, 2008
|
|
$
|
22,730
|
|
|
$
|
(6,476
|
)
|
|
|
|
|
|
|
|
|
|
Remainder of 2008
|
|
$
|
23,023
|
|
|
$
|
(6,561
|
)
|
2009
|
|
|
42,302
|
|
|
|
(13,178
|
)
|
2010
|
|
|
29,864
|
|
|
|
(12,721
|
)
|
2011
|
|
|
26,740
|
|
|
|
(12,408
|
)
|
2012
|
|
|
24,647
|
|
|
|
(12,413
|
)
|
Thereafter
|
|
|
99,808
|
|
|
|
(63,837
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
246,384
|
|
|
$
|
(121,118
|
)
|
|
|
|
|
|
|
|
|
|
SEMASS
Fire
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 damaged assets. During the year ended
December 31, 2007, we reduced the impairment recorded by
$1.0 million, pre-tax, based upon additional analysis as
the facility was being restored.
16
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The cost of repair or replacement, and business interruption
losses, are insured under the terms of applicable insurance
policies, subject to deductibles. We recorded $5.2 million
in the second quarter of 2008 upon receipt of cash proceeds of
$7.2 million in settlement of our business interruption
claim. 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
plant operating expenses where such recoveries relate to other
costs or business interruption losses. We recorded insurance
recoveries as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
For the Six Months
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Repair and reconstruction (reduction to Write-down of assets)
|
|
$
|
|
|
|
$
|
13.3
|
|
|
$
|
|
|
|
$
|
13.3
|
|
Clean-up
costs (reduction to Plant operating expenses)
|
|
$
|
|
|
|
$
|
2.7
|
|
|
$
|
|
|
|
$
|
2.7
|
|
Business interruption losses (reduction to Plant operating
expenses)
|
|
$
|
5.2
|
|
|
$
|
|
|
|
$
|
5.2
|
|
|
$
|
|
|
During the second half of 2007, we recorded additional insurance
recoveries of $4.0 million related to repair and
reconstruction and $2.0 million related to business
interruption losses.
Other
operating expenses
The components of other operating expenses are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Operating Expenses
|
|
|
|
For the Three Months
|
|
|
For the Six Months
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Construction costs
|
|
$
|
12,110
|
|
|
$
|
7,685
|
|
|
$
|
25,267
|
|
|
$
|
21,831
|
|
Insurance subsidiary operating expenses
|
|
|
3,417
|
|
|
|
2,429
|
|
|
|
5,788
|
|
|
|
4,640
|
|
Insurance recoveries
|
|
|
(21
|
)
|
|
|
(78
|
)
|
|
|
(3,769
|
)
|
|
|
(78
|
)
|
Foreign exchange loss (gain)
|
|
|
493
|
|
|
|
(858
|
)
|
|
|
(4
|
)
|
|
|
(1,073
|
)
|
Other
|
|
|
3,359
|
|
|
|
179
|
|
|
|
4,577
|
|
|
|
853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating expenses
|
|
$
|
19,358
|
|
|
$
|
9,357
|
|
|
$
|
31,859
|
|
|
$
|
26,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 10.
|
Benefit
Obligations
|
Pension
and Other Benefit Obligations
The components of net periodic benefit costs are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Post-Retirement Benefits
|
|
|
|
For the Three
|
|
|
For the Six
|
|
|
For the Three
|
|
|
For the Six
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Service cost
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Interest cost
|
|
|
1,176
|
|
|
|
1,145
|
|
|
|
2,352
|
|
|
|
2,291
|
|
|
|
137
|
|
|
|
192
|
|
|
|
274
|
|
|
|
384
|
|
Expected return on plan assets
|
|
|
(1,182
|
)
|
|
|
(1,107
|
)
|
|
|
(2,364
|
)
|
|
|
(2,215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of actuarial (gain) loss
|
|
|
(131
|
)
|
|
|
|
|
|
|
(262
|
)
|
|
|
|
|
|
|
(39
|
)
|
|
|
27
|
|
|
|
(77
|
)
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
(137
|
)
|
|
$
|
38
|
|
|
$
|
(274
|
)
|
|
$
|
76
|
|
|
$
|
98
|
|
|
$
|
219
|
|
|
$
|
197
|
|
|
$
|
437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Defined
Contribution Plans
Substantially all of our domestic employees are eligible to
participate in defined contribution plans we sponsor. Our costs
related to defined contribution plans were $2.7 million and
$2.5 million for the three months ended June 30, 2008
and 2007, respectively and $6.9 million and
$6.5 million for the six months ended June 30, 2008
and 2007, respectively.
|
|
Note 11.
|
Stock-Based
Compensation
|
Compensation expense related to our stock-based payment awards
totaled $4.4 million and $8.1 million during the three
and six months ended June 30, 2008, respectively, and
$4.4 million and $6.4 million during the three and six
months ended June 30, 2007, respectively.
During the six months ended June 30, 2008, we awarded
certain employees 450,836 shares of restricted stock
awards. The restricted stock awards will be expensed over the
requisite service period, subject to an assumed ten percent
forfeiture rate. The terms of the restricted stock awards
include two vesting provisions; one based on a performance
factor and continued service (applicable to 66% of the award)
and one based solely on continued service (applicable to 34% of
the award). If all performance and service criteria are
satisfied, the awards vest during March of 2009, 2010 and 2011.
On May 1, 2008, in accordance with our existing program for
annual director compensation, we awarded 40,500 restricted stock
awards under the Directors Plan. We determined that the service
vesting condition of the restricted stock awards granted to the
directors on May 1, 2008 to be non-substantive and, in
accordance with SFAS No. 123 (revised 2004),
Share-Based Payments, recorded the entire fair value
of the award as compensation expense on the grant date.
On February 21, 2008 and March 31, 2008, we granted
options to purchase an aggregate of 200,000 shares and
50,000 shares, respectively, of common stock. The options
expire 10 years from the date of grant and vest in equal
installments over five years commencing on March 17, 2009.
The stock option fair values were estimated on the date of grant
using the Black-Scholes option pricing model with the following
assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Risk-Free
|
|
|
Dividend
|
|
|
Volatility
|
|
|
Expected
|
|
Grant Date
|
|
Price
|
|
|
Interest Rate
|
|
|
Yield
|
|
|
Expected
|
|
|
Life
|
|
|
February 21, 2008
|
|
$
|
26.26
|
|
|
|
3.387
|
%
|
|
|
0
|
%
|
|
|
28
|
%
|
|
|
6.54 years
|
|
March 31, 2008
|
|
$
|
27.50
|
|
|
|
2.977
|
%
|
|
|
0
|
%
|
|
|
31
|
%
|
|
|
6.48 years
|
|
As of June 30, 2008, we had approximately
$14.9 million and $8.8 million of unrecognized
compensation expense related to our unvested restricted stock
awards and unvested stock options, respectively. We expect this
compensation expense to be recognized over a weighted average
period of 2.0 years for our unvested restricted stock
awards and 3.9 years for our unvested stock options.
|
|
Note 12.
|
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. 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 for a pre-tax gain of
$3.4 million and we were no longer required to enter into
interest rate swap agreements.
18
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Contingent
Interest
On January 31, 2007, we completed an underwritten public
offering of $373.8 million aggregate principal amount of
Senior Convertible Debentures. The Debentures bear interest at a
rate of 1.00% per year, payable
semi-annually
in arrears, on February 1 and August 1 of each year, commencing
on August 1, 2007, and will mature on February 1,
2027. Beginning with the six-month interest period commencing
February 1, 2012, we will pay contingent interest on the
Debentures during any six-month interest period in which the
trading price of the Debentures measured over a specified number
of trading days is 120% or more of the principal amount of the
Debentures. When applicable, the contingent interest payable per
$1,000 principal amount of Debentures will equal 0.25% of the
average trading price of $1,000 principal amount of Debentures
during the five trading days ending on the second trading day
immediately preceding the first day of the applicable six-month
interest period. The contingent interest feature in the
Debentures is an embedded derivative instrument. The first
contingent cash interest payment period does not commence until
February 1, 2012, and the fair market value for the
embedded derivative was zero as of June 30, 2008.
|
|
Note 13.
|
Related-Party
Transactions
|
We are party to an agreement with Quezon Power, Inc.
(Quezon), in which we hold a 26% equity investment,
where 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
June 30, 2008 and 2007, we collected $11.2 million and
$10.7 million, respectively, and for the six months ended
June 30, 2008 and 2007, we collected $20.2 million and
$18.0 million, respectively, for the operation and
maintenance of the facility. As of June 30, 2008 and
December 31, 2007, the net amount due to Quezon was
$5.4 million and $1.1 million, respectively, which
represents advance payments received from Quezon for operation
and maintenance costs.
|
|
Note 14.
|
Commitments
and Contingencies
|
We and/or
our subsidiaries are party to a number of claims, lawsuits and
pending actions, most of which are routine and all of which are
incidental to our business. We assess the likelihood of
potential losses on an ongoing basis and when losses are
considered probable and reasonably estimable, record as a loss
an estimate of the ultimate outcome. If we can only estimate the
range of a possible loss, an amount representing the low end of
the range of possible outcomes is recorded. The final
consequences of these proceedings are not presently determinable
with certainty.
Environmental
Matters
Our operations are subject to environmental regulatory laws and
environmental remediation laws. Although our operations are
occasionally subject to proceedings and orders pertaining to
emissions into the environment and other environmental
violations, which may result in fines, penalties, damages or
other sanctions, we believe that we are in substantial
compliance with existing environmental laws and regulations.
We may be identified, along with other entities, as being among
parties potentially responsible for contribution to costs
associated with the correction and remediation of environmental
conditions at disposal sites subject to 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.
19
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 is undertaking a Remedial
Investigation/Feasibility Study (Study) of the LPRSA
under EPA oversight. The cost to complete the Study is estimated
at $37 million, in addition to EPA oversight costs.
Essexs share of the Study costs to date are not material
to its financial position and results of operations; however,
the Study costs are exclusive of any costs that may be required
of PRPs to remediate the LPRSA or costs associated with natural
resource damages to the LPRSA that may be assessed against PRPs.
Considering the history of industrial and other discharges into
the LPRSA from other sources, including named PRPs, Essex
believes any releases to the LPRSA from its facility to be de
minimis in comparison; however, it is not possible at this time
to predict that outcome with certainty or to estimate
Essexs ultimate liability in the matter, including for
LPRSA remedial costs
and/or
natural resource damages.
20
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Concluded)
Other
Matters
Other commitments as of June 30, 2008 were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments Expiring by Period
|
|
|
|
|
|
|
Less Than
|
|
|
More Than
|
|
|
|
Total
|
|
|
One Year
|
|
|
One Year
|
|
|
Letters of credit
|
|
$
|
320,431
|
|
|
$
|
60,289
|
|
|
$
|
260,142
|
|
Surety bonds
|
|
|
61,981
|
|
|
|
|
|
|
|
61,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other commitments net
|
|
$
|
382,412
|
|
|
$
|
60,289
|
|
|
$
|
322,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The letters of credit were issued under various credit
facilities (primarily the Funded L/C Facility and the Revolving
Credit Facility) to secure our performance under various
contractual undertakings related to our domestic and
international projects or to secure obligations under our
insurance program. Each letter of credit relating to a project
is required to be maintained in effect for the period specified
in related project contracts, and generally may be drawn if it
is not renewed prior to expiration of that period.
We believe that we will be able to fully perform under our
contracts to which these existing letters of credit relate, and
that it is unlikely that letters of credit would be drawn
because of a default of our performance obligations. If any of
these letters of credit were to be drawn by the beneficiary, the
amount drawn would be immediately repayable by us to the issuing
bank. If we do not immediately repay such amounts drawn under
these letters of credit, unreimbursed amounts would be treated
under the Credit Facilities as additional term loans in the case
of letters of credit issued under the Funded L/C Facility, or as
revolving loans in the case of letters of credit issued under
the Revolving Loan Facility.
The surety bonds listed on the table above relate primarily to
performance obligations ($53.0 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;
|
|
|
holders may require us to repurchase their Debentures, if a
fundamental change occurs; and
|
|
|
holders may exercise their conversion rights upon the occurrence
of certain events, which would require us to pay the conversion
settlement amount in cash
and/or our
common stock.
|
For specific criteria related to contingent interest, conversion
or redemption features of the Debentures, refer to Note 6
of the Notes to Consolidated Financial Statements in our
Form 10-K.
We have issued or are party to performance guarantees and
related contractual support obligations undertaken pursuant to
agreements to construct and operate domestic and international
waste and energy facilities. For some projects, such performance
guarantees include obligations to repay certain financial
obligations if the project revenues are insufficient to do so,
or to obtain financing for a project. With respect to our
domestic and international businesses, we have issued guarantees
to municipal clients and other parties that our subsidiaries
will perform in accordance with contractual terms, including,
where required, the payment of damages or other obligations.
Additionally, damages payable under such guarantees on our
energy-from-waste facilities could expose us to recourse
liability on project debt. If we must perform under one or more
of such guarantees, our liability for damages upon contract
termination would be reduced by funds held in trust and proceeds
from sales of the facilities securing the project debt and is
presently not estimable. Depending upon the circumstances giving
rise to such domestic and international damages, the contractual
terms of the applicable contracts, and the contract
counterpartys choice of remedy at the time a claim against
a guarantee is made, the amounts owed pursuant to one or more of
such guarantees could be greater than our then-available sources
of funds. To date, we have not incurred material liabilities
under such guarantees, either on domestic or international
projects.
|
|
Note 15.
|
Subsequent
Event
|
On July 25, 2008, we entered into a new tip fee
type contract with the City of Indianapolis for a term of
10 years commencing upon expiration of the existing
service fee type contract in December 2008.
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
June 30, 2008 and our results of operations for the three
and six months ended June 30, 2008, 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, 2007 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, 2007 and in the interim
unaudited financial statements and notes included in our
Quarterly Reports on
Form 10-Q
for the periods ended March 31, 2008, to which the reader
is directed for additional information.
The preparation of interim financial statements necessarily
relies heavily on estimates. Due to the use of estimates and
certain other factors, such as the seasonal nature of our waste
and energy services business, as well as competitive and other
market conditions, we do not believe that interim results of
operations are indicative of full year results of operations.
The preparation of financial statements requires management to
make estimates and assumptions that affect the reported amounts
and classification of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ
materially from those estimates.
OVERVIEW
We are a leading developer, owner and operator of infrastructure
for the conversion of waste to energy (known as
energy-from-waste), as well as other waste disposal
and renewable energy production businesses in the Americas,
Europe and Asia. We are organized as a holding company and
conduct all of our operations through subsidiaries which are
engaged predominantly in the businesses of waste and energy
services. We also engage in the independent power production
business outside the United States.
We own, have equity investments in,
and/or
operate 58 energy generation facilities, 48 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, four landfills, and several waste
transfer stations.
Our mission is to be the worlds leading energy-from-waste
company, with a complementary network of renewable energy
generation and waste disposal assets. We expect to build value
for our stockholders by satisfying our clients waste
disposal and energy generation needs with safe, reliable and
environmentally superior solutions. In order to accomplish this
mission and create additional value for our stockholders, we are
focused on:
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|
providing customers with superior service and effectively
managing our existing businesses;
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|
generating sufficient cash to meet our liquidity needs and
invest in the business; and
|
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|
developing new projects and making acquisitions to grow our
business in the Americas, Europe and Asia.
|
We believe that our business offers solutions to public sector
leaders around the world in two related elements of critical
infrastructure: waste disposal and renewable energy generation.
We believe that the environmental benefits of energy-from-waste,
as an alternative to landfilling, are clear and compelling:
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 in the Americas, Europe and Asia address their needs
for more environmentally sensitive waste disposal and energy
generation in the years ahead, we believe that energy-from-waste
will be an increasingly attractive alternative.
We are actively engaged in the current discussion among policy
makers in the United States regarding the benefits of
energy-from-waste and the reduction of our dependence on
landfilling for waste disposal and fossil fuels for energy. The
extent to which we are successful in growing our business will
depend in part on our ability to effectively communicate the
benefits of energy-from-waste to public planners seeking waste
disposal solutions, and
22
to policy makers seeking to encourage renewable energy
technologies as viable alternatives to reliance on fossil fuels
as a source of energy.
Acquisitions
and Business Development
In our domestic business, we are pursuing additional growth
opportunities through project expansions, new energy-from-waste
and other renewable energy projects, contract extensions,
acquisitions, and businesses ancillary to our existing business,
such as additional waste transfer, transportation, processing
and landfill businesses.
We are also pursuing international waste
and/or
renewable 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 for waste disposal and fossil
fuels for energy production in order to reduce greenhouse gas
production. In particular, we are focusing on the United
Kingdom, Ireland and China, and are also pursuing opportunities
in certain other markets in Europe, such as Italy, and in Canada
and other markets in the Americas.
2008
acquisitions and business development
Domestic
Business:
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|
|
|
|
We entered into a new tip fee type contract with the
City of Indianapolis for a term of 10 years commencing upon
expiration of the existing service fee type contract
in December 2008.
|
|
|
|
We acquired an energy-from-waste facility in Tulsa, Oklahoma
from The CIT Group/Equipment Financing, Inc. for cash
consideration of approximately $12.7 million. The design
capacity of the facility is 1,125 tons per day (tpd)
of waste and gross electric capacity of 16.5 megawatts
(MW). This facility was shut down by the prior owner
in the summer of 2007 and we are planning to return two of the
facilitys three boilers to service before the end of 2008,
and return its third boiler to service during 2009.
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|
|
|
We acquired a landfill in Peabody, Massachusetts for
approximately $7.4 million in cash. We expect to utilize
this landfill primarily for disposal of ash from
energy-from-waste facilities in the Northeast United States,
including those that we own or operate.
|
International
Business:
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|
|
|
|
We and Chongqing Iron & Steel Company (Group) Limited
have entered into a 25 year contract to build, own, operate
and transfer an 1,800 tpd energy-from-waste facility for Chengdu
Municipality in Sichuan Province, Peoples Republic of China. In
connection with this award, we invested $17.1 million for a
49% equity interest in the project joint venture. The Chengdu
project is expected to commence construction during 2008 and
commence operations in 2011.
|
2007
acquisitions and business development
Domestic
Business:
|
|
|
|
|
We acquired the operating businesses of EnergyAnswers
Corporation (EnergyAnswers) for approximately
$41 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. Both
energy-from-waste
projects have tip fee type contracts. Approximately
75% of waste revenues are contracted for at these facilities. In
addition, we acquired businesses that include a landfill
operation in Springfield, Massachusetts, which is used for ash
disposal; and 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 of waste. We subsequently sold certain assets
acquired in this transaction for a total consideration of
$5.8 million during the fourth quarter of 2007 and the
first quarter of 2008.
|
23
|
|
|
|
|
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 added 75 MW to our portfolio of renewable energy
plants. In addition, we invested approximately $8 million
prior to December 31, 2007, and $9.7 million during
the six months ended June 30, 2008 in capital improvements
to increase the facilities productivity and improve
environmental performance.
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|
|
|
We entered into a new tip fee type contract with the
Town of Hempstead in New York for a term of 25 years
commencing upon expiration of the existing contract in 2009.
|
|
|
|
We acquired two waste transfer stations in Westchester County,
New York from Regus Industries, LLC for cash consideration of
approximately $7.3 million. These facilities increased our
total waste capacity by approximately 1,150 tpd and enhance our
portfolio of transfer stations in the Northeast United States.
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|
|
|
We acquired a waste transfer station in Holliston, Massachusetts
from Casella Waste Systems Inc. for cash consideration of
approximately $7.5 million. This facility increased our
total waste capacity by approximately 700 tpd.
|
|
|
|
We completed the expansion and commenced the operation of the
expanded energy-from-waste facility located in and owned by Lee
County in Florida. We expanded waste processing capacity from
1,200 tpd to 1,836 tpd and increased gross electricity capacity
from 36.9 MW to 57.3 MW. As part of the agreement to
implement this expansion, we received a long-term operating
contract extension expiring in 2024.
|
|
|
|
On May 29, 2007, we entered into a ten year agreement to
maintain and operate an 800 tpd energy-from-waste facility
located in Harrisburg, Pennsylvania and have a right of first
refusal to purchase the facility. Under the agreement, the term
of which commenced February 1, 2008 following satisfaction
of certain conditions precedent, we will earn a base annual
service fee of approximately $10.5 million, which is
subject to annual escalation and certain performance-based
adjustments. We also have agreed to provide construction
management services and to advance up to $25.5 million in
funding for certain facility improvements required to enhance
facility performance, the repayment of which is guaranteed by
the City of Harrisburg. As of June 30, 2008, we advanced
$1.0 million under this funding arrangement.
|
|
|
|
We designed, constructed, operate and maintain the 1,200 tpd
mass-burn energy-from-waste facility located in and owned by
Hillsborough County in Florida. In August 2005, we entered into
agreements with Hillsborough County to implement an expansion,
and to extend the agreement under which we operate the facility
to 2027. During 2006, environmental and other project related
permits were secured and the expansion construction commenced on
December 29, 2006. Completion of the expansion, and
commencement of the operation of the expanded project, is
expected in 2009.
|
International
Business:
|
|
|
|
|
We purchased a 40% equity interest in Sanfeng Covanta
Environmental Industry Co., Ltd. (Sanfeng), a
company located in Chongqing Municipality, Peoples Republic of
China. 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. We expect to make
additional investments as and when Sanfeng is successful in
developing additional projects.
|
|
|
|
In December 2007, we entered into a joint venture with Guangzhou
Development Power Investment Co., Ltd. through which we intend
to develop energy-from-waste projects in Guangdong Province,
Peoples Republic of China. We hold a 40% equity interest in the
joint venture entity, Guangzhou Development Covanta
Environmental Energy Co., Ltd (GDC Environmental
Energy), and on June 6, 2008, we invested
|
24
|
|
|
|
|
$1.5 million in this joint venture following receipt of
final government approvals. We expect to make additional
investments as and when GDC Environmental Energy is successful
in developing projects.
|
|
|
|
|
|
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 commence in late 2008.
|
We are responsible for the design and construction of the
project, which is estimated to cost approximately
300 million euros and will require 36 months to
complete. We will operate and maintain the project for Dublin
Waste to Energy Limited, which has a
25-year
Tip Fee type contract with Dublin to provide
disposal service for approximately 320,000 metric tons of waste
annually. The project is structured on a
build-own-operate-transfer model, where ownership will transfer
to Dublin after the
25-year
term, unless extended. The project is expected to sell
electricity into the local grid under short-term arrangements.
We have committed to provide financing for all phases of the
project, along with DONG Energy Generation A/S; however, we
expect that numerous project financing structures will be
available once the initial development phase is complete.
Business
Segments
Our reportable segments are Domestic and International, which
are comprised of our domestic and international waste and energy
services operations, respectively.
Domestic
For all energy-from-waste projects, we receive revenue from two
primary sources: fees charged for operating projects or
processing waste received and payments for electricity and steam
sales. We also operate, and in some cases have ownership
interests in, transfer stations and landfills which generate
revenue from waste disposal fees or operating fees. In addition,
we own and in some cases operate, other renewable energy
projects in the United States which generate electricity from
wood waste (biomass), landfill gas, and hydroelectric resources.
The electricity from these projects is sold to utilities. For
these projects, we receive revenue from electricity sales, and
in some cases cash from equity distributions.
International
We have ownership interests in
and/or
operate facilities internationally, including independent power
production facilities in the Philippines, Bangladesh and India
where we generate electricity by combusting coal, natural gas
and heavy fuel-oil, and energy-from-waste facilities in China
and Italy. We receive revenue from operating fees, electricity
and steam sales, and in some cases cash from equity
distributions.
Contract
Structures
We have 24 energy-from-waste projects where we charge a fixed
fee (which escalates over time pursuant to contractual indices
that we believe are appropriate to reflect price inflation) for
operation and maintenance services. We refer to these projects
as having a Service Fee structure. Our contracts at
Service Fee projects provide revenue that does not materially
vary based on the amount of waste processed or energy generated
and as such is relatively stable for the contract term. In
addition, at most of our Service Fee projects, the operating
subsidiary retains only a fraction of the energy revenues
generated, with the balance used to provide a credit to the
municipal client against its disposal costs. Therefore, in these
projects, the municipal client derives most of the benefit and
risk of energy production and changing energy prices.
We also have 14 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
25
long-term
waste disposal contracts for a substantial portion of project
disposal capacity and retain all of the energy revenue
generated. These Tip Fee service agreements include stated fixed
fees earned by us for processing waste up to certain base
contractual amounts during specified periods. These Tip Fee
service agreements also set forth the per-ton fees that are
payable if we accept waste in excess of the base contractual
amounts. The waste disposal and energy revenue from these
projects is more dependent upon operating performance and, as
such, is subject to greater revenue fluctuation to the extent
performance levels fluctuate.
Under both structures, our returns are expected to be stable if
we do not incur material unexpected operation and maintenance
costs or other expenses. In addition, most of our
energy-from-waste project contracts are structured so that
contract counterparties generally bear, or share in, the costs
associated with events or circumstances not within our control,
such as uninsured force majeure events and changes in legal
requirements. The stability of our revenues and returns could be
affected by our ability to continue to enforce these
obligations. Also, at some of our energy-from-waste facilities,
commodity price risk is mitigated by passing through commodity
costs to contract counterparties. With respect to our other
domestic renewable energy projects and international independent
power projects, such structural features generally do not exist
because either we operate and maintain such facilities for our
own account or we do so on a cost-plus basis rather than a
fixed-fee basis.
At some of our domestic renewable energy and international
independent power projects, our operating subsidiaries purchase
fuel in the open markets which exposes us to fuel price risk. At
other plants, fuel costs are contractually included in our
electricity revenues, or fuel is provided by our customers. In
some of our international projects, the project entity (which in
some cases is not our subsidiary) has entered into long-term
fuel purchase contracts that protect the project from changes in
fuel prices, provided counterparties to such contracts perform
their commitments.
Seasonal
Effects
Our quarterly operating income from domestic and international
operations within the same fiscal year typically differs
substantially due to seasonal factors, primarily as a result of
the timing of scheduled plant maintenance. We typically conduct
scheduled maintenance periodically each year, which requires
that individual boiler units temporarily cease operations.
During these scheduled maintenance periods, we incur material
repair and maintenance expenses and receive less revenue until
the boiler units resume operations. This scheduled maintenance
typically occurs during periods of off-peak electric demand in
the spring and fall. The spring scheduled maintenance period is
typically more extensive than scheduled maintenance conducted
during the fall. As a result, we typically incur the highest
maintenance expense in the first half of the year. Given these
factors, we typically experience lower operating income from our
projects during the first six months of each year and higher
operating income during the second six months of each year.
Contract
Duration
We operate energy-from-waste projects under long-term
agreements. For those projects we own, our contract to sell the
projects energy output (either electricity or steam)
generally expires at or after the date when the initial term of
our contract to operate or receive waste also expires.
Expiration of these contracts will subject us to greater market
risk in maintaining and enhancing revenues as we enter into new
contracts. Following the expiration of the initial contracts, we
intend to enter into replacement or additional contracts for
waste supplies and will sell our energy output either into the
regional electricity grid or pursuant to new contracts. Because
project debt on these facilities will be paid off at such time,
we believe that we will be able to offer disposal services at
rates that will attract sufficient quantities of waste and
provide acceptable revenues. For those projects we operate but
do not own, prior to the expiration of the initial term of our
operating contract, we will seek to enter into renewal or
replacement contracts to continue operating such projects. We
will seek to bid competitively in the market for additional
contracts to operate other facilities as similar contracts of
other vendors expire.
26
RESULTS
OF OPERATIONS
The comparability of the information provided below with respect
to our revenues, expenses and certain other items was affected
by several factors. As outlined above under Acquisitions and
Business Development, our acquisition and business
development initiatives resulted in various additional projects
which increased comparative 2008 revenues and expenses. These
factors must be taken into account in developing meaningful
comparisons between the periods compared below. The following
general discussions should be read in conjunction with the
condensed consolidated financial statements and the Notes
thereto and other financial information appearing and referred
to elsewhere in this report.
Consolidated
Results of Operations Comparison of Results for the
Three and Six Months Ended June 30, 2008 vs. Results for
the Three and Six Months Ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
Variance
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
Increase/(Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Three Month
|
|
|
Six Month
|
|
|
|
(Unaudited, in thousands)
|
|
|
CONSOLIDATED RESULTS OF OPERATIONS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
$
|
422,996
|
|
|
$
|
355,140
|
|
|
$
|
811,762
|
|
|
$
|
685,349
|
|
|
$
|
67,856
|
|
|
$
|
126,413
|
|
Total operating expenses
|
|
|
346,467
|
|
|
|
277,928
|
|
|
|
704,468
|
|
|
|
599,857
|
|
|
|
68,539
|
|
|
|
104,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
76,529
|
|
|
|
77,212
|
|
|
|
107,294
|
|
|
|
85,492
|
|
|
|
(683
|
)
|
|
|
21,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
1,052
|
|
|
|
1,819
|
|
|
|
2,692
|
|
|
|
7,003
|
|
|
|
(767
|
)
|
|
|
(4,311
|
)
|
Interest expense
|
|
|
(11,563
|
)
|
|
|
(14,718
|
)
|
|
|
(25,283
|
)
|
|
|
(35,978
|
)
|
|
|
(3,155
|
)
|
|
|
(10,695
|
)
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,006
|
)
|
|
|
|
|
|
|
32,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(10,511
|
)
|
|
|
(12,899
|
)
|
|
|
(22,591
|
)
|
|
|
(60,981
|
)
|
|
|
(2,388
|
)
|
|
|
(38,390
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense, minority interests and
equity in net income from unconsolidated investments
|
|
|
66,018
|
|
|
|
64,313
|
|
|
|
84,703
|
|
|
|
24,511
|
|
|
|
1,705
|
|
|
|
60,192
|
|
Income tax expense
|
|
|
(26,260
|
)
|
|
|
(28,822
|
)
|
|
|
(33,796
|
)
|
|
|
(10,646
|
)
|
|
|
(2,562
|
)
|
|
|
23,150
|
|
Minority interests
|
|
|
(2,225
|
)
|
|
|
(2,091
|
)
|
|
|
(4,094
|
)
|
|
|
(3,489
|
)
|
|
|
134
|
|
|
|
605
|
|
Equity in net income from unconsolidated investments
|
|
|
7,320
|
|
|
|
4,316
|
|
|
|
12,812
|
|
|
|
9,422
|
|
|
|
3,004
|
|
|
|
3,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
44,853
|
|
|
$
|
37,716
|
|
|
$
|
59,625
|
|
|
$
|
19,798
|
|
|
|
7,137
|
|
|
|
39,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
153,387
|
|
|
|
152,983
|
|
|
|
153,276
|
|
|
|
152,234
|
|
|
|
404
|
|
|
|
1,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
154,848
|
|
|
|
154,307
|
|
|
|
154,710
|
|
|
|
153,603
|
|
|
|
541
|
|
|
|
1,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.29
|
|
|
$
|
0.25
|
|
|
$
|
0.39
|
|
|
$
|
0.13
|
|
|
$
|
0.04
|
|
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.29
|
|
|
$
|
0.24
|
|
|
$
|
0.39
|
|
|
$
|
0.13
|
|
|
$
|
0.05
|
|
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
Operating
Income
Operating revenues increased by $67.9 million and
$126.4 million for the three and six months ended
June 30, 2008, as compared to the same periods in 2007,
primarily due to increased waste and energy revenues at our
energy-from-waste
facilities and additional revenues from new businesses acquired
during 2008 and 2007 in the Domestic segment as discussed below.
Operating revenues also increased 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 $68.5 million and
$104.6 million for the three and six months ended
June 30, 2008, as compared to the same periods in 2007,
primarily due to increased plant operating expenses resulting
from additional operating and maintenance costs from new
businesses acquired during 2008 and 2007 in the Domestic segment
as discussed below. Higher fuel costs, which are a pass-thru
expense, at our Indian facilities also increased in the
International segment. Operating expenses for the six months
ended June 30, 2007 include a write-down of assets related
to a fire at our SEMASS energy-from-waste facility on
March 31, 2007.
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 $0.8 million and
$4.3 million for the three and six months ended
June 30, 2008, as compared to the same periods in 2007,
primarily due to lower invested cash balances and lower interest
rates.
Interest expense decreased by $3.2 million and
$10.7 million for the three and six months ended
June 30, 2008, as compared to the same periods in 2007,
primarily due to lower floating interest rates on the Term Loan
Facility and lower debt balances and interest rates resulting
from the 2007 recapitalization. As a result of the
recapitalization in the first quarter of 2007, we recognized a
loss on extinguishment of debt charge of approximately
$32.0 million, pre-tax. See Note 6. Changes in
Capitalization of the Notes to the Condensed Consolidated
Financial Statements for additional information.
Income tax expense decreased by $2.6 million for the three
months ended June 30, 2008, as compared to the same period
in 2007, primarily due to the generation of production tax
credits from new businesses acquired, partially offset by
increased pre-tax income resulting from increased waste and
service revenues at our
energy-from-waste
facilities and additional revenues from new businesses acquired.
Income tax expense increased by $23.2 million for the six
months ended June 30, 2008, as compared to the same period
in 2007, due to the absence of both the write-down of assets
related to SEMASS and the loss on extinguishment of debt which
occurred during the six months ended June 30, 2007,
combined with increased
pre-tax
income resulting from increased waste and service revenues at
our energy-from-waste facilities and additional revenues from
new businesses acquired.
Equity in net income from unconsolidated investments increased
by $3.0 million and $3.4 million for the three and six
months ended June 30, 2008, as compared to the same periods
in 2007, primarily due the increased cumulative deferred income
tax benefit at Quezon Power, Inc. resulting from the weakening
of the Philippine peso versus the U.S. dollar.
28
Domestic
Results of
Operations
Comparison of Results for the Three and Six Months Ended
June 30, 2008 vs. Results for the Three and Six Months
Ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
Variance
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
Increase/(Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Three Month
|
|
|
Six Month
|
|
|
|
(Unaudited, in thousands)
|
|
|
Waste and service revenues
|
|
$
|
241,736
|
|
|
$
|
216,997
|
|
|
$
|
458,555
|
|
|
$
|
414,879
|
|
|
$
|
24,739
|
|
|
$
|
43,676
|
|
Electricity and steam sales
|
|
|
95,633
|
|
|
|
75,850
|
|
|
|
186,723
|
|
|
|
150,744
|
|
|
|
19,783
|
|
|
|
35,979
|
|
Other operating revenues
|
|
|
13,360
|
|
|
|
7,757
|
|
|
|
28,735
|
|
|
|
22,736
|
|
|
|
5,603
|
|
|
|
5,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
350,729
|
|
|
|
300,604
|
|
|
|
674,013
|
|
|
|
588,359
|
|
|
|
50,125
|
|
|
|
85,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plant operating expenses
|
|
|
180,504
|
|
|
|
157,567
|
|
|
|
385,798
|
|
|
|
328,028
|
|
|
|
22,937
|
|
|
|
57,770
|
|
Depreciation and amortization expense
|
|
|
49,228
|
|
|
|
46,155
|
|
|
|
95,385
|
|
|
|
92,160
|
|
|
|
3,073
|
|
|
|
3,225
|
|
Net interest expense on project debt
|
|
|
12,256
|
|
|
|
12,292
|
|
|
|
24,366
|
|
|
|
25,377
|
|
|
|
(36
|
)
|
|
|
(1,011
|
)
|
General and administrative expenses
|
|
|
19,664
|
|
|
|
17,047
|
|
|
|
39,282
|
|
|
|
36,978
|
|
|
|
2,617
|
|
|
|
2,304
|
|
Write-down of assets, net of insurance recoveries
|
|
|
|
|
|
|
(13,341
|
)
|
|
|
|
|
|
|
4,925
|
|
|
|
13,341
|
|
|
|
(4,925
|
)
|
Other operating expense
|
|
|
15,524
|
|
|
|
7,804
|
|
|
|
30,275
|
|
|
|
22,576
|
|
|
|
7,720
|
|
|
|
7,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
277,176
|
|
|
|
227,524
|
|
|
|
575,106
|
|
|
|
510,044
|
|
|
|
49,652
|
|
|
|
65,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
73,553
|
|
|
$
|
73,080
|
|
|
$
|
98,907
|
|
|
$
|
78,315
|
|
|
|
473
|
|
|
|
20,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenues
Variances in revenues for the domestic segment are as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Segment Operating Revenue Variances
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Existing
|
|
|
New
|
|
|
|
|
|
Existing
|
|
|
New
|
|
|
|
|
|
|
Business
|
|
|
Business(A)
|
|
|
Total
|
|
|
Business
|
|
|
Business(B)
|
|
|
Total
|
|
|
Waste and service revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fee
|
|
$
|
0.9
|
|
|
$
|
0.3
|
|
|
$
|
1.2
|
|
|
$
|
3.4
|
|
|
$
|
0.6
|
|
|
$
|
4.0
|
|
Tip fee
|
|
|
2.2
|
|
|
|
9.8
|
|
|
|
12.0
|
|
|
|
4.6
|
|
|
|
19.2
|
|
|
|
23.8
|
|
Recycled metal
|
|
|
10.9
|
|
|
|
0.6
|
|
|
|
11.5
|
|
|
|
15.2
|
|
|
|
0.7
|
|
|
|
15.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total waste and service revenues
|
|
|
14.0
|
|
|
|
10.7
|
|
|
|
24.7
|
|
|
|
23.2
|
|
|
|
20.5
|
|
|
|
43.7
|
|
Electricity and steam sales
|
|
|
9.5
|
|
|
|
10.3
|
|
|
|
19.8
|
|
|
|
15.5
|
|
|
|
20.5
|
|
|
|
36.0
|
|
Other operating revenues
|
|
|
5.6
|
|
|
|
|
|
|
|
5.6
|
|
|
|
6.0
|
|
|
|
|
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
$
|
29.1
|
|
|
$
|
21.0
|
|
|
$
|
50.1
|
|
|
$
|
44.7
|
|
|
$
|
41.0
|
|
|
$
|
85.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
This column represents the results of operations for the three
months ended June 30, 2008 for businesses acquired after
June 30, 2007. |
|
(B) |
|
This column represents the results of operations for the three
months ended June 30, 2008 for businesses acquired after
June 30, 2007 plus the results of operations for the three
months ended March 31, 2008 for businesses acquired after
March 31, 2007. |
|
|
|
|
|
Revenues from Service Fee arrangements for existing business
increased during the three and six month comparative periods
primarily due to contractual escalations, partially offset by
lower revenues earned explicitly to service project debt of
$1.4 million and $2.9 million for the three and six
month comparative periods, respectively.
|
29
|
|
|
|
|
Revenues from Tip Fee arrangements for existing business
increased during the three month comparative period by
$4.1 million as a result of increased production in part
due to the impact of a fire in 2007 at our SEMASS
energy-from-waste facility offset by slightly lower pricing. The
increase during the six month comparative period was due to
increased production in part due to the impact of the fire and
an increase in waste volume handled, partially offset by
slightly lower pricing.
|
|
|
Recycled metal revenues increased during the three and six month
comparative periods due to higher pricing for scrap metal and
increased volume of metal recovered for sale.
|
|
|
Electricity and steam sales for existing business increased
during the three and six month comparative periods due to higher
energy rates and by $1.9 million as a result of the impact
of a fire in 2007 at our SEMASS energy-from-waste facility.
|
|
|
Other operating revenues increased during the three and six
month comparative periods primarily due to construction revenue.
|
Operating
Expenses
Variances in plant operating expenses for the domestic segment
are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Segment Plant Operating Expense Variances
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Existing
|
|
|
New
|
|
|
|
|
|
Existing
|
|
|
New
|
|
|
|
|
|
|
Business
|
|
|
Business(A)
|
|
|
Total
|
|
|
Business
|
|
|
Business(B)
|
|
|
Total
|
|
|
Total plant operating expenses
|
|
$
|
2.7
|
|
|
$
|
20.2
|
|
|
$
|
22.9
|
|
|
$
|
20.3
|
|
|
$
|
37.5
|
|
|
$
|
57.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
This column represents the results of operations for the three
months ended June 30, 2008 for businesses acquired after
June 30, 2007. |
|
(B) |
|
This column represents the results of operations for the three
months ended June 30, 2008 for businesses acquired after
June 30, 2007 plus the results of operations for the three
months ended March 31, 2008 for businesses acquired after
March 31, 2007. |
Existing business plant operating expenses increased by
$2.7 million for the three months ended June 30, 2008,
as compared to the same period in 2007, primarily due to cost
escalations, partially offset by $5.2 million of business
interruption insurance recoveries at our SEMASS facility as
discussed below. Existing business plant operating expenses
increased by $20.3 million for the six months ended
June 30, 2008, as compared to the same period in 2007,
primarily due to increased plant maintenance and cost
escalations, partially offset by $5.2 million of business
interruption insurance recoveries at our SEMASS facility as
discussed below.
Depreciation and amortization expense increased by
$3.1 million and $3.2 million for the three and six
months ended June 30, 2008, as compared to the same periods
in 2007, primarily due to new business.
Net interest expense on project debt decreased by
$1.0 million for the six months ended June 30, 2008,
as compared to the same period in 2007, primarily due to lower
project debt balances.
General and administrative expenses increased by
$2.6 million and $2.3 million for the three and six
months ended June 30, 2008, as compared to the same periods
in 2007, primarily due to increased efforts to grow the business.
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 damaged assets. During the year ended
December 31, 2007, we reduced the impairment recorded by
$1.0 million, pre-tax, based upon additional analysis as
the facility was being restored.
The cost of repair or replacement, and business interruption
losses, are insured under the terms of applicable insurance
policies, subject to deductibles. We recorded $5.2 million
in the second quarter of 2008 upon receipt of cash proceeds of
$7.2 million in settlement of our business interruption
claim. Insurance recoveries are recorded as
30
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 plant operating expenses where such
recoveries relate to other costs or business interruption
losses. We recorded insurance recoveries as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Repair and reconstruction (reduction to Write-down of assets)
|
|
$
|
|
|
|
$
|
13.3
|
|
|
$
|
|
|
|
$
|
13.3
|
|
Clean-up
costs (reduction to Plant operating expenses)
|
|
$
|
|
|
|
$
|
2.7
|
|
|
$
|
|
|
|
$
|
2.7
|
|
Business interruption losses (reduction to Plant operating
expenses)
|
|
$
|
5.2
|
|
|
$
|
|
|
|
$
|
5.2
|
|
|
$
|
|
|
During the second half of 2007, we recorded additional insurance
recoveries of $4.0 million related to repair and
reconstruction and $2.0 million related to business
interruption losses.
Other operating expenses increased by $7.7 million for both
the three and six months ended June 30, 2008, as compared
to the same periods in 2007, primarily due to costs related to
construction and losses on the retirement of assets. See
Note 9. Supplementary Information of the Notes for
additional information.
International
Results of
Operations
Comparison of Results for the Three and Six Months Ended
June 30, 2008 vs. Results for the Three and Six Months
Ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
Variance
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
Increase/ (Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Three Month
|
|
|
Six Month
|
|
|
|
(Unaudited, in thousands)
|
|
|
Waste and service revenues
|
|
$
|
953
|
|
|
$
|
1,043
|
|
|
$
|
1,757
|
|
|
$
|
2,072
|
|
|
$
|
(90
|
)
|
|
$
|
(315
|
)
|
Electricity and steam sales
|
|
|
68,199
|
|
|
|
50,965
|
|
|
|
130,174
|
|
|
|
89,737
|
|
|
|
17,234
|
|
|
|
40,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
69,152
|
|
|
|
52,008
|
|
|
|
131,931
|
|
|
|
91,809
|
|
|
|
17,144
|
|
|
|
40,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plant operating expenses
|
|
|
58,104
|
|
|
|
41,994
|
|
|
|
111,821
|
|
|
|
73,540
|
|
|
|
16,110
|
|
|
|
38,281
|
|
Depreciation and amortization expense
|
|
|
2,340
|
|
|
|
2,255
|
|
|
|
4,745
|
|
|
|
4,282
|
|
|
|
85
|
|
|
|
463
|
|
Net interest expense on project debt
|
|
|
1,520
|
|
|
|
1,594
|
|
|
|
3,171
|
|
|
|
3,114
|
|
|
|
(74
|
)
|
|
|
57
|
|
General and administrative expenses
|
|
|
3,264
|
|
|
|
2,219
|
|
|
|
7,054
|
|
|
|
3,590
|
|
|
|
1,045
|
|
|
|
3,464
|
|
Other operating expense
|
|
|
418
|
|
|
|
(874
|
)
|
|
|
(4,204
|
)
|
|
|
(1,040
|
)
|
|
|
1,292
|
|
|
|
(3,164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
65,646
|
|
|
|
47,188
|
|
|
|
122,587
|
|
|
|
83,486
|
|
|
|
18,458
|
|
|
|
39,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
3,506
|
|
|
$
|
4,820
|
|
|
$
|
9,344
|
|
|
$
|
8,323
|
|
|
|
(1,314
|
)
|
|
|
1,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
General and administrative expenses increased by
$1.0 million for the three months ended June 30, 2008,
as compared to the same period in 2007, respectively, primarily
due to normal wage and benefit escalations and additional
efforts to grow the business. General and administrative
expenses increased by $3.5 million for the six months
ended June 30, 2008, as compared to the same period in
2007, respectively, primarily due to increased litigation
expense associated with an insurance claim, normal wage and
benefit escalations and additional business development spending.
Other operating expense increased by $1.3 million for the
three months ended June 30, 2008, as compared to the same
period in 2007, primarily due to a $1.1 million foreign
currency exchange loss related to the Madurai facility
non-recourse debt. Other operating expense decreased by
$3.2 million for the six months ended June 30, 2008,
as compared to the same period in 2007, primarily due to
insurance recoveries associated with a facility in China which
was sold in 2006, partially offset by the foreign currency
exchange loss related to the Madurai facility non-recourse debt.
31
LIQUIDITY
AND CAPITAL RESOURCES
Generating sufficient cash to invest in our business, meet our
liquidity needs, pay down project debt, and pursue strategic
opportunities 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.
During the first quarter of 2007, we completed a comprehensive
recapitalization utilizing a series of equity and debt
financings. 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.
Our primary future cash requirements will be to fund capital
expenditures to maintain our existing businesses, make debt
service payments and grow our business through acquisitions and
business development. We will also seek to enhance our cash flow
from renewals or replacement of existing contracts, from new
contracts to expand existing facilities or operate additional
facilities and by investing in new projects.
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.
Additionally, as of June 30, 2008, we had available credit
for liquidity of $300 million under the Revolving Loan
Facility (as defined below) and unrestricted cash of
$143.7 million.
Our projected contractual obligations are consistent with
amounts disclosed in our Annual Report on
Form 10-K
for the year ended December 31, 2007. 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.
2007
Recapitalization
During the first quarter of 2007, we completed a comprehensive
recapitalization utilizing a series of equity and debt
financings including the following transactions:
|
|
|
|
|
the refinancing of our previously existing credit facilities
with new credit 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 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 tender offer and
redemptions for approximately $604.4 million in aggregate
principal amount of outstanding notes on February 22, 2007.
The remaining $7.5 million of the outstanding notes were
redeemed in April 2007 and September 2007.
|
As a result of the recapitalization, we recognized a loss on
extinguishment of debt of approximately $32.0 million,
pre-tax, which was 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.
32
Credit
Agreement Financial Covenants
The loan documentation under the Credit Facilities contains
customary affirmative and negative covenants and financial
covenants as discussed in Note 6. Long-Term Debt of the
Notes to the Consolidated Financial Statements included in our
Annual Report on
Form 10-K
for the year ended December 31, 2007. As of June 30,
2008, we were in compliance with the covenants under the Credit
Facilities.
The financial covenants of the Credit Facilities, which are
measured on a trailing four quarter period basis, include the
following:
|
|
|
|
|
maximum Covanta Energy leverage ratio of 4.25 to 1.00 for the
four quarter period ended June 30, 2008, which measures
Covanta Energys principal amount of consolidated debt less
certain restricted funds dedicated to repayment of project debt
principal and construction costs (Consolidated Adjusted
Debt) to its adjusted earnings before interest, taxes,
depreciation and amortization, as calculated under the Credit
Facilities (Adjusted EBITDA). The definition of
Adjusted EBITDA in the Credit Facilities excludes certain
non-cash charges. The maximum Covanta Energy leverage ratio
allowed under the Credit Facilities adjusts in future periods as
follows:
|
|
|
|
|
|
4.25 to 1.00 for each of the four quarter periods ended
September 30, 2008;
|
|
|
|
4.00 to 1.00 for each of the four quarter periods ended
December 31, 2008, March 31, June 30 and
September 30, 2009;
|
|
|
|
3.75 to 1.00 for each of the four quarter periods ended
December 31, 2009, March 31, June 30 and
September 30, 2010;
|
|
|
|
3.50 to 1.00 for each four quarter period thereafter;
|
|
|
|
|
|
maximum Covanta Energy capital expenditures incurred to maintain
existing operating businesses of $100 million per fiscal
year, subject to adjustment due to an acquisition by Covanta
Energy; and
|
|
|
|
minimum Covanta Energy interest coverage ratio of 3.00 to 1.00,
which measures Covanta Energys Adjusted EBITDA to its
consolidated interest expense plus certain interest expense of
ours, to the extent paid by Covanta Energy.
|
Sources and Uses of Cash Flow for the Six Months Ended
June 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Increase
|
|
|
|
June 30,
|
|
|
(Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
2008 vs 2007
|
|
|
|
(Unaudited, in thousands)
|
|
|
Net cash provided by operating activities
|
|
$
|
160,377
|
|
|
$
|
145,587
|
|
|
$
|
14,790
|
|
Net cash used in investing activities
|
|
|
(80,155
|
)
|
|
|
(43,559
|
)
|
|
|
36,596
|
|
Net cash used in financing activities
|
|
|
(86,033
|
)
|
|
|
(180,945
|
)
|
|
|
(94,912
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
111
|
|
|
|
337
|
|
|
|
(226
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
$
|
(5,700
|
)
|
|
$
|
(78,580
|
)
|
|
|
72,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the first quarter of 2008, we revised our presentation of
the condensed consolidated statements of cash flows to present
changes in restricted funds held in trust relating to operating
activities as a component of cash flow from operating activities
and changes in restricted funds held in trust relating to
financing activities (debt principal repayments) as a component
of cash flow from financing activities; previously we included
all changes in restricted funds held in trust as a component of
cash flow from financing activities. For the six months ended
June 30, 2007, we have reclassified the presentation of the
changes in restricted funds held related to operating and
financing activities, although not material, to conform to the
presentation on the condensed consolidated statements of cash
flows.
Net cash provided by operating activities for the six months
ended June 30, 2008 was $160.4 million, an increase of
$14.8 million from the prior year period. The increase was
primarily comprised of $29.2 million from a
33
combination of improved operating performance and lower net
interest expense, and insurance receipts of $11.0 million
(including $7.2 million of business interruption recoveries
related to the SEMASS facility), offset by declines in
restricted cash and timing of working capital of
$25.4 million.
Net cash used in investing activities for the six months ended
June 30, 2008 was $80.2 million, an increased use of
cash of $36.6 million compared to the prior year period.
The increase was primarily due to higher cash outflows to
acquire businesses and make equity investments of
$21.5 million, higher outflows for purchases of property,
plant and equipment of $10.7 million (which consisted of
higher capital expenditures of $8.6 million, and
$10.4 million primarily related to refurbishment
expenditures for the two biomass facilities acquired in the
third quarter of 2007), offset by a reduction of
$8.3 million relating to rebuilding the SEMASS facility.
Net cash used in financing activities for the six months ended
June 30, 2008 was $86.0 million, a decrease of
$94.9 million from the prior year period due primarily to
the 2007 recapitalization. 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 three months ended
March 31, 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) 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.
Project
Debt
Domestic
Project Debt
Financing for the energy-from-waste projects is generally
accomplished through tax-exempt and taxable municipal revenue
bonds issued by or on behalf of the municipal client. For such
facilities that are owned by a subsidiary of ours, the municipal
issuers of the bond loans the bond proceeds to our subsidiary to
pay for facility construction. For such facilities,
project-related debt is included as Project debt (short-
and long-term) in our 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 June 30, 2008 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 June 30, 2008 were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments Expiring by Period
|
|
|
|
|
|
|
Less Than
|
|
|
More Than
|
|
|
|
Total
|
|
|
One Year
|
|
|
One Year
|
|
|
Letters of credit
|
|
$
|
320,431
|
|
|
$
|
60,289
|
|
|
$
|
260,142
|
|
Surety bonds
|
|
|
61,981
|
|
|
|
|
|
|
|
61,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other commitments net
|
|
$
|
382,412
|
|
|
$
|
60,289
|
|
|
$
|
322,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
The letters of credit were issued under various credit
facilities (primarily the Funded L/C Facility and the Revolving
Credit Facility) to secure our performance under various
contractual undertakings related to our domestic and
international projects, or to secure obligations under our
insurance program. Each letter of credit relating to a project
is required to be maintained in effect for the period specified
in related project contracts, and generally may be drawn if it
is not renewed prior to expiration of that period.
We believe that we will be able to fully perform under our
contracts to which these existing letters of credit relate and
that it is unlikely that letters of credit would be drawn
because of a default of our performance obligations. If any of
these letters of credit were to be drawn by the beneficiary, the
amount drawn would be immediately repayable by us to the issuing
bank. If we do not immediately repay such amounts drawn under
these letters of credit, unreimbursed amounts would be treated
under the Credit Facilities as additional term loans in the case
of letters of credit issued under the Funded L/C Facility, or as
revolving loans in the case of letters of credit issued under
the Revolving Loan Facility.
The surety bonds listed on the table above relate primarily to
performance obligations ($53.0 million) and support for
closure obligations of various energy projects when such
projects cease operating ($9.0 million). Were these bonds
to be drawn upon, we would have a contractual obligation to
indemnify the surety company.
We have certain contingent obligations related to the
Debentures. These are:
|
|
|
|
|
holders may require us to repurchase their Debentures on
February 1, 2012, February 1, 2017 and
February 1, 2022;
|
|
|
holders may require us to repurchase their Debentures, if a
fundamental change occurs; and
|
|
|
holders may exercise their conversion rights upon the occurrence
of certain events, which would require us to pay the conversion
settlement amount in cash and/or our common stock.
|
For specific criteria related to contingent interest, conversion
or redemption features of the Debentures, see Note 6.
Changes in Capitalization of the Notes to the Consolidated
Financial Statements included in our Audited Consolidated
Financial Statements and accompanying Notes in our Annual Report
on
Form 10-K
for the year ended December 31, 2007.
We have issued or are party to performance guarantees and
related contractual support obligations undertaken pursuant to
agreements to construct and operate certain domestic and
international energy and waste facilities. For some projects,
such performance guarantees include obligations to repay certain
financial obligations if the project revenues are insufficient
to do so, or to obtain financing for a project. With respect to
our domestic and international businesses, we have issued
guarantees to municipal clients and other parties that our
subsidiaries will perform in accordance with contractual terms,
including, where required, the payment of damages or other
obligations. Additionally, damages payable under such guarantees
on our energy-from-waste facilities could expose us to recourse
liability on project debt. If we must perform under one or more
of such guarantees, our liability for damages upon contract
termination would be reduced by funds held in trust and proceeds
from sales of the facilities securing the project debt and is
presently not estimable. Depending upon the circumstances giving
rise to such domestic and international damages, the contractual
terms of the applicable contracts, and the contract
counterpartys choice of remedy at the time a claim against
a guarantee is made, the amounts owed pursuant to one or more of
such guarantees could be material. To date, we have not incurred
material liabilities under such performance guarantees, either
on domestic or international projects.
Discussion
of Critical Accounting Policies and Estimates
In preparing our condensed consolidated financial statements in
accordance with United States generally accepted accounting
principles, we are required to use judgment in making estimates
and assumptions that affect the amounts reported in our
financial statements and related notes. We base our estimates on
historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. These
estimates form the basis for making judgments about the carrying
value of assets and liabilities that are not readily apparent
from other sources. Many of our critical accounting policies are
subject to significant judgments and uncertainties which could
potentially result in materially different results under
different conditions and assumptions. Future events rarely
develop exactly as forecast, and the best estimates routinely
require adjustment. Management believes there
35
have been no material changes during the six months ended
June 30, 2008 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, 2007.
Recent
Accounting Pronouncements
See Note 2. Recent Accounting Pronouncements of the Notes
for information related to new accounting pronouncements.
|
|
ITEM 3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
In the normal course of business, our subsidiaries are party to
financial instruments that are subject to market risks arising
from changes in interest rates, foreign currency exchange rates,
and commodity prices. Our use of derivative instruments is very
limited and we do not enter into derivative instruments for
trading purposes.
Management believes there have been no material changes during
the six months ended June 30, 2008 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, 2007.
|
|
ITEM 4.
|
CONTROLS
AND PROCEDURES
|
Our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, has evaluated the
effectiveness of Covantas disclosure controls and
procedures, as required by
Rule 13a-15(b)
and
15d-15(b)
under the Securities Exchange Act of 1934 (the Exchange
Act) as of June 30, 2008. Our disclosure controls and
procedures are designed to reasonably assure that information
required to be disclosed by us in reports we file or submit
under the Exchange Act is accumulated and communicated to our
management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions
regarding disclosure and is recorded, processed, summarized and
reported within the time periods specified in the Securities and
Exchange Commissions (SEC) rules and forms.
Our 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 consider
the benefits of controls relative to their costs. Inherent
limitations within a control system include the realities that
judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by unauthorized
override of the control. 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
prevented or detected.
Changes
in Internal Control over Financial Reporting
There has not been any change in our system of internal control
over financial reporting during the most recent fiscal quarter
that has materially affected, or is reasonably likely to
materially affect, internal control over financial reporting.
36
PART II
OTHER INFORMATION
|
|
ITEM 1.
|
LEGAL
PROCEEDINGS
|
See Note 14. Commitments and Contingencies of the Notes to
the Condensed Consolidated Financial Statements.
There have been no material changes during the six months ended
June 30, 2008 to the risk factors discussed in
Item 1A. Risk Factors in our Annual Report on
Form 10-K
for the year ended December 31, 2007.
|
|
ITEM 2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
None.
|
|
ITEM 3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
None.
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
We held our Annual Meeting of Stockholders on May 1, 2008.
At that meeting, stockholders voted on the following proposals:
1. To elect eleven directors to serve a one-year term that
will expire at the next Annual Meeting of Stockholders. The
votes cast for each director were as follows:
|
|
|
|
|
|
|
|
|
Directors
|
|
For
|
|
|
Withheld
|
|
|
David M. Barse
|
|
|
130,207,511
|
|
|
|
2,275,536
|
|
Ronald J. Broglio
|
|
|
131,944,388
|
|
|
|
538,659
|
|
Peter C.B. Bynoe
|
|
|
131,608,658
|
|
|
|
874,389
|
|
Linda J. Fisher
|
|
|
131,964,668
|
|
|
|
518,379
|
|
Richard L. Huber
|
|
|
131,906,119
|
|
|
|
576,928
|
|
Anthony J. Orlando
|
|
|
130,551,998
|
|
|
|
1,931,049
|
|
William C. Pate
|
|
|
129,430,198
|
|
|
|
3,052,849
|
|
Robert S. Silberman
|
|
|
131,610,773
|
|
|
|
872,274
|
|
Jean Smith
|
|
|
131,947,695
|
|
|
|
535,352
|
|
Clayton Yeutter
|
|
|
100,723,912
|
|
|
|
31,759,135
|
|
Samuel Zell
|
|
|
129,323,176
|
|
|
|
3,159,871
|
|
2. To amend the Equity Award Plan for Employees and
Officers to increase the number of shares of common stock
authorized for issuance thereunder by an additional
6,000,000 shares from 6,000,000 to 12,000,000 shares
of common stock.
|
|
|
|
|
|
|
Votes For
|
|
Votes Against
|
|
Abstentions
|
|
Broker Non-Vote
|
|
100,284,564
|
|
10,860,844
|
|
574,564
|
|
20,763,075
|
3. To amend the Equity Award Plan for Employees and
Officers to increase the maximum award that a participant may
receive in any calendar year from 300,000 shares of common
stock to 250,000 shares of restricted stock and options to
purchase 650,000 of common stock.
|
|
|
|
|
|
|
Votes For
|
|
Votes Against
|
|
Abstentions
|
|
Broker Non-Vote
|
|
100,938,818
|
|
10,158,104
|
|
623,050
|
|
20,763,075
|
37
4. To amend the Equity Award Plan for Directors to increase
the number of shares of common stock authorized for issuance
thereunder by an additional 300,000 shares from 400,000 to
700,000 shares of common stock.
|
|
|
|
|
|
|
Votes For
|
|
Votes Against
|
|
Abstentions
|
|
Broker Non-Vote
|
|
104,626,632
|
|
6,498,275
|
|
595,065
|
|
20,763,075
|
5. To ratify the appointment of Ernst & Young
LLP, the independent registered public accountants, as our
independent auditors for the 2008 fiscal year.
|
|
|
|
|
Votes For
|
|
Votes Against
|
|
Abstentions
|
|
132,219,738
|
|
103,736
|
|
159,573
|
|
|
ITEM 5.
|
OTHER
INFORMATION
|
(a) None.
(b) Not applicable.
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
31
|
.1
|
|
Certification pursuant to Section 302 of Sarbanes-Oxley Act
of 2002 by the Chief Executive Officer.
|
|
31
|
.2
|
|
Certification pursuant to Section 302 of Sarbanes-Oxley Act
of 2002 by the Chief Financial Officer.
|
|
32
|
|
|
Certification of periodic financial report pursuant to
Section 906 of Sarbanes-Oxley Act of 2002 by the Chief
Executive Officer and Chief Financial Officer.
|
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Covanta Holding
Corporation
(Registrant)
Mark A. Pytosh
Executive Vice President and Chief Financial Officer
Thomas E. Bucks
Vice President and Chief Accounting Officer
Date: July 29, 2008
39