10-Q 1 cov10q_11-14.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 OR | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------ ------------ Commission file number 1-3122 Covanta Energy Corporation ------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 13-5549268 --------------------------- -------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 40 Lane Road, Fairfield, NJ 07004 ---------------------------------------------------------- (Address or principal executive office) (Zip code) (973) 882-9000 ---------------------------------------------------------- (Registrant's telephone number including area code) Not Applicable ---------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by checkmark 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 |X| No | | APPLICABLE ONLY TO CORPORATE ISSUERS: The number of shares outstanding of each of the issuer's classes of common stock, as of September 30, 2001; 49,827,129 shares of Common Stock, $.50 par value per share. PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS COVANTA ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE NINE MONTHS ENDED FOR THE THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- -------------------------- 2001 2000 2001 2000 ------ ------ ------ ------ (In Thousands of Dollars, Except Per Share Data) Service revenues $ 437,910 $ 439,725 $ 146,849 $ 143,277 Electricity and steam sales 266,299 203,836 89,340 76,974 Equity in income of investees and joint ventures 19,528 15,814 7,492 8,357 Construction revenues 36,953 55,569 18,922 13,842 Other sales - net 29,063 32,647 8,060 12,697 Other - net 29,773 12,188 43 Net gain (loss) on sale of businesses 3,872 (1,044) 1,680 (410) -------- -------- -------- -------- Total revenues 823,398 758,735 272,386 254,737 -------- -------- -------- -------- Plant operating expenses 399,784 396,634 131,006 134,283 Construction costs 48,041 62,989 18,565 18,720 Depreciation and amortization 74,985 83,325 25,051 27,572 Debt service charges 65,014 64,499 21,925 21,633 Other operating costs and expenses 48,833 17,270 19,281 2,669 Costs of goods sold 34,081 28,558 12,540 10,483 Selling, administrative and general expenses 54,761 51,998 16,129 18,373 Project development expenses 4,580 16,408 1,668 6,567 Other - net 12,812 22,706 5,649 5,300 Writedown of net assets held for sale 20,408 18,717 -------- -------- -------- -------- Total costs and expenses 763,299 744,387 270,531 245,600 -------- -------- -------- -------- Consolidated operating income 60,099 14,348 1,855 9,137 Interest expense (net of interest income of $7,363, $6,239, $1,207 and $3,563, respectively) (21,867) (26,089) (7,287) (7,873) -------- -------- -------- -------- Income (loss) from continuing operations before income taxes and minority interests 38,232 (11,741) (5,432) 1,264 Income taxes (15,793) 3,003 971 2,422 Minority interests (4,728) (3,149) (1,701) (985) -------- -------- -------- -------- Income (loss) from continuing operations 17,711 (11,887) (6,162) 2,701 Loss on disposal of discontinued operations, including provision for operating losses during phase-out period of $62,375 and $48,656, respectively (net of income tax benefit of YTD 2000, $29,272; Qtr. 2000, $16,518) (128,871) (37,072) -------- -------- -------- -------- Net Income (Loss) 17,711 (140,758) (6,162) (34,371) -------- -------- -------- -------- Other Comprehensive Income (Loss), Net of Tax: Foreign currency translation adjustments (net of income tax benefit of, YTD 2001, $585; Qtr. 2001, $160) (2,230) (6,272) (141) 1,428 Less: Reclassification adjustment for translation adjustments included in loss from discontinued operations 25,332 25,332 Unrealized holding losses arising during period (295) (278) -------- -------- -------- -------- Other comprehensive income (loss) (2,230) 18,765 (141) 26,482 -------- -------- -------- -------- Comprehensive income (loss) $ 15,481 $(121,993) $ (6,303) $ (7,889) ======== ======== ======== ======== Basic Earnings Per Share: Income (loss) from continuing operations $ 0.36 $ (0.24) $ (0.12) $ 0.05 Income (loss) from discontinued operations (2.60) (0.75) -------- -------- -------- -------- Net Income (Loss) $ 0.36 $ (2.84) $ (0.12) $ (0.70) ======== ======== ======== ======== Diluted Earnings Per Share: Income (loss) from continuing operations $ 0.35 $ (0.24) $ (0.12) $ 0.05 Income (loss) from discontinued operations (2.60) (0.75) -------- -------- -------- -------- Net Income (Loss) $ 0.35 $ (2.84) $ (0.12) $ (0.70) ======== ======== ======== ======== See notes to condensed consolidated financial statements.
COVANTA ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 2001 December 31, 2000 ------------------ ----------------- (In Thousands Of Dollars) Assets Current Assets: Cash and cash equivalents $ 61,271 $ 80,643 Restricted cash 194,118 Restricted funds held in trust 132,606 96,280 Receivables (less allowances: 2001, $28,390 and 2000, $19,234) 273,419 247,914 Deferred income taxes 43,509 36,514 Prepaid expenses and other current assets 98,313 77,239 Net assets held for sale 76,989 70,614 ----------- ----------- Total current assets 686,107 803,322 Property, plant and equipment - net 1,925,312 1,789,430 Restricted funds held in trust 155,607 157,061 Unbilled service and other receivables 157,953 155,210 Unamortized contract acquisition costs 84,001 88,702 Goodwill and other intangible assets 17,531 14,944 Investments in and advances to investees and joint ventures 187,562 223,435 Other assets 66,305 63,347 ----------- ----------- Total Assets $ 3,280,378 $ 3,295,451 =========== =========== Liabilities and Shareholders' Equity Liabilities: Current Liabilities: Current portion of long-term debt $ 36,717 $ 145,289 Current portion of project debt 105,766 99,875 Current portion of convertible subordinated debentures 85,000 Accounts payable 40,417 41,106 Federal and foreign income taxes payable 432 Accrued expenses, etc. 342,794 308,681 Deferred income 43,333 38,517 ----------- ----------- Total current liabilities 654,459 633,468 Long-term debt 277,370 310,126 Project debt 1,350,427 1,290,388 Deferred income taxes 334,748 315,931 Deferred income 164,944 172,050 Other liabilities 147,413 158,992 Minority interests 38,451 34,290 Convertible subordinated debentures 63,650 148,650 ----------- ----------- Total Liabilities 3,031,462 3,063,895 =========== =========== Shareholders' Equity: Serial cumulative convertible preferred stock, par value $1.00 per share; authorized, 4,000,000 shares; shares outstanding: 34,810 in 2001 and 35,582 in 2000, net of treasury shares of 29,820 in 2001 and 2000 35 36 Common Stock, par value $.50 per share; authorized, 80,000,000 shares; shares outstanding: 49,827,129 in 2001 and 49,645,459 in 2000, net of treasury shares of 4,111,950 and 4,265,115, respectively 24,914 24,823 Capital surplus 188,374 185,681 Notes receivable from key employees for common stock issuance (1,049) (1,049) Unearned restricted stock compensation (855) Earned surplus 43,491 25,829 Accumulated other comprehensive loss (5,994) (3,764) ----------- ----------- Total Shareholders' Equity 248,916 231,556 ----------- ----------- Total Liabilities and Shareholders' Equity $ 3,280,378 $ 3,295,451 =========== =========== See notes to condensed consolidated financial statements.
COVANTA ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY NINE MONTHS ENDED YEAR ENDED September 30, 2001 December 31, 2000 SHARES AMOUNTS SHARES AMOUNTS -------- --------- -------- --------- (In Thousands Of Dollars, Except Per Share Amounts) Serial Cumulative Convertible Preferred Stock, Par Value $1.00 Per Share; Authorized, 4,000,000 Shares: Balance at beginning of period 65,402 $ 66 69,066 $ 69 Shares converted into common stock (772) (1) (3,664) (3) ---------- --------- ---------- --------- Total 64,630 65 65,402 66 Treasury shares (29,820) (30) (29,820) (30) ---------- --------- ---------- --------- Balance at end of period (aggregate involuntary liquidation value 2001, $701) 34,810 35 35,582 36 ---------- --------- ---------- --------- Common Stock, Par Value $.50 Per Share; Authorized, 80,000,000 Shares: Balance at beginning of period 53,910,574 26,956 53,873,298 26,937 Exercise of stock options 23,898 12 Shares issued for acquisition 15,390 8 Conversion of preferred shares 4,607 2 21,886 11 ---------- --------- ---------- --------- Total 53,939,079 26,970 53,910,574 26,956 ---------- --------- ---------- --------- Treasury shares at beginning of period 4,265,115 2,133 4,405,103 2,203 Issuance of restricted stock (114,199) (57) (139,988) (70) Exercise of stock options (38,966) (20) ---------- --------- ---------- --------- Treasury shares at end of period 4,111,950 2,056 4,265,115 2,133 ---------- --------- ---------- --------- Balance at end of period 49,827,129 24,914 49,645,459 24,823 ---------- --------- ---------- --------- Capital Surplus: Balance at beginning of period 185,681 183,915 Exercise of stock options 776 Issuance of restricted stock 1,918 1,602 Shares issued for acquisition 172 Conversion of preferred shares (1) (8) --------- --------- Balance at end of period 188,374 185,681 --------- --------- Notes receivable from key employees for common stock issuance (1,049) (1,049) --------- --------- Unearned restricted stock compensation: Issuance of restricted common stock (1,567) Amortization of unearned restricted stock compensation 712 --------- --------- Balance at end of period (855) --------- --------- Earned Surplus: Balance at beginning of period 25,829 255,182 Net income (loss) 17,711 (229,285) --------- --------- Total 43,540 25,897 --------- --------- Preferred dividends per share 2001, $1.40625, and 2000, $1.875 49 68 --------- --------- Balance at end of period 43,491 25,829 --------- --------- Cumulative Translation Adjustment Net (5,585) (3,355) --------- --------- Minimum Pension Liability Adjustment (409) (409) --------- --------- TOTAL SHAREHOLDERS' EQUITY $ 248,916 $ 231,556 ========= =========
See notes to condensed consolidated financial statements. COVANTA ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, ----------------------------- 2001 2000 ---------- ---------- (In Thousands Of Dollars) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 17,711 $(140,758) Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by (Used in) Operating Activities of Continuing Operations: Loss on disposal of discontinued operations 128,871 Depreciation and amortization 74,985 83,325 Deferred income taxes 5,266 (561) Provision for doubtful accounts 16,756 1,805 Other 15,041 (6,992) Management of Operating Assets and Liabilities: Decrease (Increase) in Assets: Receivables (38,337) (2,996) Inventories (972) Other assets (34,917) 792 Increase (Decrease) in Liabilities: Accounts payable (9,669) (19,366) Accrued expenses 13,156 (81,508) Deferred income (11,507) (14,814) Other liabilities 5,070 958 --------- --------- Net cash provided by (used in) operating activities of continuing operations 53,555 (52,216) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of businesses 22,045 4,577 Proceeds from sale of property, plant, and equipment 932 6,233 Proceeds from sale of marketable securities available for sale 3,650 Investments in facilities (53,304) (24,169) Other capital expenditures (5,449) (16,685) Decrease in other receivables 3,212 3,625 Distributions from investees and joint ventures 24,257 7,793 Increase in investments in and advances to investees and joint ventures (14,485) (27,979) --------- --------- Net cash used in investing activities of continuing operations (22,792) (42,955) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowing for facilities 94,975 Other new debt 16,306 Increase in funds held in trust (34,912) (3,745) Payment of debt (223,991) (136,215) Dividends paid (49) (50) Decrease (Increase) in restricted cash 194,118 (147,950) Proceeds from exercise of stock options 808 Other (2,415) (3,199) --------- --------- Net cash used in financing activities of continuing operations (50,135) (196,184) --------- --------- Net cash provided by discontinued operations 249,850 --------- --------- Net Decrease in Cash and Cash Equivalents (19,372) (41,505) Cash and Cash Equivalents at Beginning of Period 80,643 101,020 --------- --------- Cash and Cash Equivalents at End of Period $ 61,271 $ 59,515 ========= =========
See notes to condensed consolidated financial statements. ITEM 1 - NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Basis of Presentation: The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America. However, in the opinion of management, all adjustments consisting of normal recurring accruals necessary for a fair presentation of the operating results have been included in the statements. On January 1, 2001, Covanta Energy Corporation, ("the Company") adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" and has identified all derivatives within its scope. SFAS No. 133, as amended and interpreted, establishes accounting and reporting standards for derivative instruments, including certain derivatives embedded in other contracts, and for hedging activities. All derivatives are required to be recorded in the balance sheet as either an asset or liability measured at fair value, with changes in fair value recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows derivative gains and losses to offset related results on the hedged item in the statement of income, and requires that a company must formally document, designate and assess the effectiveness of derivatives that receive hedge accounting. The Company's policy is to enter into derivatives to protect the Company against fluctuations in interest rates and foreign currency exchange rates as they relate to specific assets and liabilities. The Company's policy is to not enter into derivative instruments for speculative purposes. The adoption of SFAS No. 133 as of January 1, 2001 did not have a material impact on the results of operations of the Company and increased both assets and liabilities recorded on the January 1, 2001 balance sheet by approximately $12.3 million. The $12.3 million relates to the Company's interest rate swap agreement that economically fixes the interest rate on certain adjustable-rate revenue bonds reported in Project debt. The asset and liability recorded at January 1, 2001 were increased by $4.1 million during the nine months ended September 30, 2001 to adjust for an increase in the swap's fair value to $16.4 million at September 30, 2001. The swap agreement was entered into in September 1995 and expires in January 2019. Any payments made or received under the swap agreement, including fair value amounts upon termination, are included as an explicit component of the client community's obligation under the related service agreement. Accordingly, all payments under the swap agreement are a pass-through to the client community. Under the swap agreement, the Company will pay an average fixed rate of 9.8% for 2001 through January 2005 and 5.18% thereafter through January 2019, and will receive a floating rate based on current municipal interest rates, similar to the rate on the adjustable-rate revenue bonds, unless certain triggering events occur (primarily credit events), which result in the floating rate converting to either a set percentage of LIBOR or a set percentage of the BMA Municipal Swap Index, at the option of the swap counterparty. In the event the Company terminates the swap prior to its maturity, the floating rate used for determination of settling the fair value of the swap would also be based on a set percentage of one of these two rates at the option of the counterparty. For the three-month periods ended September 30, 2001 and 2000, the floating rates on the swap averaged 2.04% and 3.87%, respectively. The notional amount of the swap at September 30, 2001 and December 31, 2000 was $80.2 million and is reduced in accordance with the scheduled repayments of the applicable revenue bonds. The Company implemented SFAS No. 133 based on the current rules and guidance in place as of January 1, 2001 and has applied the guidance issued since then by the Financial Accounting Standards Board's Derivative Implementation Group. In June 2001, the Financial Accounting Standard Board ("FASB") issued SFAS No. 141, "Business Combinations." SFAS No. 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and prohibits use of the pooling-of-interests method. The adoption of SFAS No. 141 had no impact on the Company's financial position and results of operation. In June 2001, the FASB also issued SFAS No. 142, "Goodwill and Other Intangible Assets", which is effective January 1, 2002. SFAS No. 142 requires upon adoption the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS No. 142 also requires the Company to complete a transitional goodwill impairment test six months from the date of adoption and to evaluate for impairment the carrying value of goodwill on an annual basis thereafter. Identifiable intangible assets will continue to be amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." Also, in June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations", which is effective for the Company on January 1, 2003. SFAS No. 143 requires that a liability for asset retirement obligations be recognized in the period in which it is incurred if it can be reasonably estimated. It also requires such costs to be capitalized as part of the related asset and amortized over such asset's remaining useful life. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which is effective January 1, 2003. SFAS No. 144 replaces SFAS No. 121 and establishes accounting and reporting standards for long-lived assets to be disposed of by sale. This SFAS applies to all long-lived assets, including discontinued operations. SFAS No. 144 requires that those assets be measured at lower of carrying amount or fair value less costs to sell. It also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity that will be eliminated from the ongoing operations of the entity in a disposal transaction. The Company is currently assessing but has not yet determined the effect of adoption of SFAS Nos. 142, 143 and 144 on its financial position and results of operations. The accompanying financial statements for prior periods have been reclassified as to certain amounts, including various revenues and expenses, to conform with the 2001 presentation, which is more tailored for a stand-alone energy company. Discontinued Operations and Assets Held for Sale: On September 17, 1999, the Company announced that it intended to sell its aviation and entertainment businesses and on September 29, 1999, the Board of Directors of the Company formally adopted a plan to sell the operations of its aviation and entertainment units, which were previously reported as separate business segments. As a result of the adoption of this plan, the financial statements present the results of these operations as discontinued until December 31, 2000. At December 31, 2000, the Company had substantially completed its sales of the discontinued operations and, therefore, reclassified the remaining unsold aviation and entertainment businesses in the accompanying December 31, 2000 balance sheet to present those businesses as net assets held for sale. Those businesses include: the venue management businesses at the Arrowhead Pond Arena in Anaheim, California, and the Corel Centre near Ottawa, Canada; the Company's interest in certain entertainment assets in Argentina; the Company's aviation fueling business; and the Company's interests in aviation businesses in Spain and Colombia. The Company's aviation ground handling operations at the Rome airport in Italy were sold in February 2001 for approximately $10.0 million, and the Company's interest in the aviation cargo operations in Spain was sold in May 2001 for approximately $1.8 million. In July 2001, the Company sold its interest in the airport privatization business in Colombia, South America for $9.7 million and reached agreement to sell its aviation cargo operations fueling business. In November 2001, the Company disposed of Datacom Custom Manufacturing, Inc. ("Datacom"), a contract manufacturing company located in Mexico, by transferring the stock of Datacom to the purchaser, in return for a payment to the purchaser of $200,000, plus a contingent note receivable. For the next three years, the Company will receive 50% of Datacom's cash flow. The amount of the contingent payment is capped at $7,500,000. These non-core businesses are reported in the "Other" segment at December 31, 2000 and for the nine months ended September 30, 2001. Another non-core business included in Net Assets Held for Sale is Compania General de Sondeos, S.A. ("CGS"), an environmental and infrastructure company in Spain. CGS is reported in the Energy segment in the nine-month periods ended September 30, 2001 and 2000. The Company expects to dispose of these remaining businesses during the next twelve months. Revenues and loss from discontinued operations (expressed in thousands of dollars) for the three months and nine months ended September 30, 2000, were as follows: Nine Months Three Months Ended September 30 Ended September 30 ------------------ ------------------ Revenues $ 365,546 $ 62,498 =========== =========== Loss Before Income Taxes and Minority Interests $ (158,053) (53,587) Benefit for Income Taxes (29,272) (16,518) Minority Interests 90 3 ----------- ----------- Loss from Discontinued Operations $ (128,871) $ (37,072) =========== =========== Revenues and loss before income taxes from net assets held for sale (expressed in thousands of dollars) for the three months and nine months ended September 30, 2001, which are included in continuing operations in 2001, were as follows: Nine Months Three Months Ended September 30 Ended September 30 ------------------ ------------------ Revenues $ 78,495 $ 26,268 =========== =========== Loss Before Income Taxes $ (27,730) $ (22,602) =========== =========== On January 1, 2001, the Company stopped recording depreciation and amortization expense related to net assets held for sale, which had the effect of decreasing the loss before income taxes by approximately $3.5 million for the nine months ended September 30, 2001. Also, in the second and third quarters of 2001, Covanta management considered current economic conditions, and the status of recent offers and negotiations relating to the Company's investments in Australian venue management businesses, Datacom and CGS. In the third quarter, the Company hired financial advisors to market Datacom for sale. A limited number of offers were received, and the Company concluded that it would not realize the book value of Datacom in a sale. Therefore the Company recorded a write-down of net assets held for sale of $16.8 million related to Datacom. It also recorded write-downs of net assets held for sale of $1.7 million in the second quarter and $1.9 million in the third quarter for the Australian venue management business and CGS, respectively. Net assets held for sale (expressed in thousands of dollars) at September 30, 2001 and December 31, 2000 were as follows: September 30, 2001 December 31, 2000 ------------------ ----------------- Current Assets $ 57,557 $ 73,237 Property, Plant and Equipment - net 21,421 19,939 Other Assets 47,752 73,310 Notes Payable and Current Portion of Long-Term Debt (2,096) (28,651) Other Current Liabilities (44,397) (52,053) Long-Term Debt (63) (670) Other Liabilities (3,185) (14,498) ----------- ----------- Net Assets Held for Sale $ 76,989 $ 70,614 =========== =========== The increase in net assets held for sale during the nine months ended September 30, 2001 is due mainly to the contribution of $25.0 million to an entertainment operation to pay certain of that operation's debt in connection with the closing of the Master Credit Facility, offset partially by the write-downs and sales referred to above (see Liquidity/Cash Flow below). Special Charges: As a result of the Company's Board of Directors' plan to dispose of its aviation and entertainment businesses and close its New York City headquarters, and its plan to exit other noncore businesses, the Company incurred various expenses in 1999 which were recognized in its continuing and discontinued operations. In addition, the Company incurred various expenses in 2000 relating to its decisions to reorganize its development office in Hong Kong and its Energy headquarters in New Jersey. Certain of those charges related to severance costs for its New York City employees and Energy employees, contract termination costs of its former Chairman and Chief Executive Officer, office closure costs, and professional services related to the Energy reorganization, will mostly be paid out over the next two years. The following is a summary of those costs and related payments during the three months ended September 30, 2001 (expressed in thousands of dollars): AMOUNTS PAID ADJUSTMENTS DURING THREE DURING THREE BALANCE AT MONTHS ENDED MONTHS ENDED BALANCE AT JUNE 30, 2001 SEPT. 30, 2001 SEPT. 30, 2001 SEPT. 30, 2001 ------------- -------------- -------------- -------------- Severance for 217 New York employees $ 21,500 $ (2,600) $ 18,900 Severance for 80 Energy employees 4,800 (1,700) 3,100 Contract termination settlement 400 400 Bank fees 2,100 (700) $ (1,400) Office closure costs 3,500 (600) 2,900 ---------- ----------- ---------- ---------- $ 32,300 $ (5,600) $ (1,400) $ 25,300 ========== ========== ========== ==========
Of the New York employees, 24 employees were terminated during 1999; 139 employees were terminated during 2000; 11 employees were terminated in 2001 through September 30, 2001. As of September 30, 2001 the Company expected to terminate the remaining 43 employees after the remaining Aviation businesses are sold. On July 17, 2001 the Company announced that it had reached a definitive agreement to sell its aviation fueling business to Allied Holdings Corporation, an affiliate of Tampa Pipeline Corporation. The agreement is subject to closing conditions including the receipt of third party consents and approvals (including the approval of the Port Authority of New York and New Jersey (the "Port Authority"). The transaction was initially expected to close no later than about October 15. However, given the impact of the events of September 11, 2001 on the aviation industry and the Port Authority, the sale is likely to be separated into two components: one component would involve the Port Authority (the Port Authority component), and the other component would relate to the balance of the sale (the non-Port Authority component). The non-Port Authority component is expected to close on or before December 31, 2001 (subject to the receipt of approvals). No closing date has been set for the Port Authority component pending Port Authority approval of the sale. All 80 of the Energy employees have been terminated during 2001. During the three months ended September 30, 2001, it was determined that the remaining accrual for bank fees of $1.4 million was not necessary and was reversed. Receivables from California Utilities: Recent events in the California energy markets affected the state's two largest utilities and resulted in delayed payments for energy delivered by the Company's facilities in late 2000 and early 2001. Pacific Gas & Electric Company ("PG&E") and Southern California Edison Company ("SCE") both suspended payments under long term power purchase agreements in the beginning of 2001. On March 26, 2001 the California Public Utilities Commission ("CPUC") approved a substantial rate increase and directed the utilities to make payments to suppliers for current energy deliveries. SCE has made payments for energy delivered since March 26, 2001. On April 6, 2001, PG&E filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Since that time PG&E is also in compliance with the CPUC order and is making payments for current energy deliveries. In mid-June the CPUC issued an order declaring as reasonable and prudent any power purchase amendment at a certain fixed-price for a five-year term. On June 18, 2001 and July 31, 2001 the Company entered into several agreements and amendments to power purchase agreements with SCE which contained the CPUC approved pricing for a term of five years, to commence upon the occurrence of events relating to improvements in SCE's financial condition. In addition, in June SCE paid 10% of the outstanding receivables and agreed to a timetable by which the remaining 90% would be paid, which outstanding amount will earn interest. The agreements with SCE contemplated the passage of legislation by the California State Legislature or other actions that would trigger payment to the Company. In late October SCE reached a settlement of a lawsuit brought against the CPUC concerning the CPUC's failure to allow SCE to pass cost increases through to its ratepayers. The settlement achieved the same goals as the proposed legislation which was to provide a path for SCE to achieve creditworthiness. The SCE Agreements are not impacted by the settlement except for the timing of the payment of past due amounts and the start of the fixed price period for energy sales. The Company is in discussions with SCE regarding the timing issues. The settlement was approved by the Federal Court. A consumer group has requested a stay pending an appeal. In July, the Company also entered into agreements with similar terms with PG&E. These agreements also contain the CPUC approved price and term, both of which are effective immediately. Unlike SCE, PG&E made no cash payments but did agree that the amount owed to the Company will earn interest at a rate to be determined by the Bankruptcy Court. PG&E agreed to assume the Company's power purchase agreements and elevate the outstanding payable to priority administrative claim status. The amount of the claim and interest will be settled prior to the finalization of PG&E's plan of reorganization. The Bankruptcy Court approved the agreements, the power purchase agreements and the assumption of the contracts on July 13, 2001. On October 30, 2001, the Company transferred $14.9 million of the outstanding PG&E receivables for $13.4 million to a financial institution. Of this amount, $8.5 million (which related to receivables not subject to pricing disputes with PG&E) was paid in immediate cash. The balance, $4.9 million (which related to receivables to which there are pricing disputes) was placed in escrow until the resolution of those disputes or the conclusion of the PG&E bankruptcy. The remaining $1.5 million represents the 10% discount charged by the financial institution. Disagreements with both SCE and PG&E exist regarding the valuation of the pre-March 26, 2001 receivables. Resolution of these disagreements and payment of the receivables is likely to occur only upon the restoration of SCE to creditworthiness, the resolution of the pricing issues by the CPUC and in the case of PG&E, the resolution of the PG&E bankruptcy. Although this matter is not free of doubt, the Company believes it will ultimately receive payments in full of the net amount of these receivables. Earnings Per Share: FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 2000 ------------------------------------------------------------------------------------ Income Shares Per-Share Income Shares Per-Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------- ------ ----------- ------------- ------ (In thousands, except per share amounts) Income (loss) from continuing operations $ (6,162) $ 2,701 Less: preferred stock dividend 16 16 --------- --------- Basic Earnings (Loss) Per Share (6,178) 49,703 $ (0.12) 2,685 49,544 $ 0.05 ------- ------- Effect of Dilutive Securities: Stock options (A) 68 Restricted stock (A) 81 Convertible preferred stock (A) (A) 6% convertible debentures (A) (A) 5 3/4% convertible debentures (A) (A) ------------------------ ----------------------- Diluted Earnings (Loss) Per Share $ (6,178) 49,703 $ (0.12) $ 2,685 49,693 $ 0.05 -------------------------------------- --------------------------------------- (A) Antidilutive
Note: Basic earnings per common share was computed by dividing net income (loss), reduced by preferred stock dividend requirements, by the weighted average number of shares of common stock outstanding during each period. Diluted earnings per common share was computed on the assumption that all convertible debentures, convertible preferred stock, restricted stock and stock options converted or exercised during each period, or outstanding at the end of each period were converted at the beginning of each period or the date of issuance or grant, if dilutive. This computation provides for the elimination of related convertible debenture interest and preferred dividends. Outstanding stock options to purchase common stock with an exercise price greater than the average market price of common stock were not included in the computation of diluted earnings per share. The balance of such options was 2,614,000 and 5,378,000 for the quarters ended September 30, 2001 and 2000, respectively. Shares of common stock to be issued, assuming conversion of convertible preferred stock, the 6% convertible debentures, the 5 3/4% convertible debentures, stock options and unvested restricted stock issued to employees and directors were not included in computation of diluted earnings per share if to do so would have been antidilutive. The common shares excluded from the calculation were 209,000 and 217,000 for conversion of preferred stock in the quarters ended September 30, 2001 and 2000, respectively;2,175,000 for the quarters ended September 30, 2001 and 2000 for the 6% debentures; 1,524,000 for the quarters ended September 30, 2001 and 2000 for the 5 3/4% debentures: 161,000 for the quarter ended September 30, 2001 for stock options; and 117,000 for unvested restricted stock in the quarter ended September 30, 2001. Earnings Per Share: FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 2000 ------------------------------------------------------------------------------------ Income Shares Per-Share Income Shares Per-Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------- ------ ----------- ------------- ------ (In thousands, except per share amounts) Income (loss) from continuing operations $ 17,711 $ (11,887) Less: preferred stock dividend 49 50 --------- --------- Basic Earnings (Loss) Per Share 17,662 49,659 $ 0.36 (11,937) 49,525 $ (0.24) ------- ------- Effect of Dilutive Securities: Stock options 169 (A) Restricted stock 70 (A) Convertible preferred stock 49 141 (A) 6% convertible debentures (A) (A) 5 3/4% convertible debentures (A) (A) ------------------------ ----------------------- Diluted Earnings (Loss) Per Share $ 17,711 50,039 $ 0.35 $ (11,937) 49,525 $ (0.24) -------------------------------------- --------------------------------------- (B) Antidilutive
Note: Basic earnings per common share was computed by dividing net income (loss), reduced by preferred stock dividend requirements, by the weighted average number of shares of common stock outstanding during each period. Diluted earnings per common share was computed on the assumption that all convertible debentures, convertible preferred stock, restricted stock and stock options converted or exercised during each period, or outstanding at the end of each period were converted at the beginning of each period or the date of issuance or grant, if dilutive. This computation provides for the elimination of related convertible debenture interest and preferred dividends. Outstanding stock options to purchase common stock with an exercise price greater than the average market price of common stock were not included in the computation of diluted earnings per share. The balance of such options was 2,589,000 and 6,060,000 for the nine months ended September 30, 2001 and 2000, respectively. Shares of common stock to be issued, assuming conversion of convertible preferred stock, the 6% convertible debentures, the 5 3/4% convertible debentures, stock options, and unvested restricted stock issued to employees and directors were not included in computations of diluted earnings per share if to do so would have been antidilutive. The common shares excluded from the calculation were 70,000 and 222,000 for conversion of preferred stock for the nine months ended September 30, 2001 and 2000, respectively; 2,175,000 for the nine months ended September 30, 2001 and 2000 for the 6% debentures; 1,524,000 for the nine months ended September 30, 2001 and 2000 for the 5 3/4% debentures; 54,000 and 30,000 for the nine months ended September 30, 2001 and 2000, respectively, for stock options; and 39,000 and 75,000 for unvested restricted stock for the nine months ended September 30, 2001 and 2000, respectively. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Revenues and income (loss) from continuing operations by segment for the three months and the nine months ended September 30, 2001 and 2000 (expressed in thousands of dollars) were as follows: Information Concerning Nine Months Ended September 30, Three Months Ended September 30, Business Segments 2001 2000 2001 2000 ------------------------------------------------------------------------------------------------------ Revenues: Energy $ 742,328 $ 722,084 $ 247,495 $ 242,246 Other 79,500 36,651 24,891 12,491 Corporate 1,570 0 0 0 --------- --------- --------- --------- Total Revenues $ 823,398 $ 758,735 $ 272,386 $ 254,737 ========= ========= ========= ========= Income (loss) from Operations: Energy $ 120,316 $ 74,810 $ 38,563 $ 25,853 Other (36,980) (15,654) (26,481) (4,219) --------- --------- --------- --------- Total Income from Operations 83,336 59,156 12,082 21,634 Corporate unallocated income and expenses-net (23,237) (44,808) (10,227) (12,497) Interest-net (21,867) (26,089) (7,287) (7,873) --------- --------- --------- --------- Income (loss) from continuing operations before income taxes and minority interests $ 38,232 $ (11,741) $ (5,432) $ 1,264 ========= ========= ========= =========
Quarter Ended September 30, 2001 vs. Quarter Ended September 30, 2000 Continuing Operations: Revenues for the quarter ended September 30, 2001 were $17.6 million higher than the comparable period of 2000 primarily reflecting an increase in Other segment revenues of $12.4 million, and an increase in Energy segment revenues of $5.2 million. Service revenues in 2001 increased $3.6 million compared to the quarter ended September 30, 2000. Energy service revenues in 2001 decreased $11.0 million primarily due to a decrease of $19.5 million related to the environmental consulting business which was sold in November 2000, partially offset by an increase of $8.5 million due mainly to contractual annual escalation adjustments at many plants, increased growth in the supplemental waste business, increased Dual Sand System sales and a water service operating agreement with the City of Bessemer, Alabama, which began in October 2000. The Other segment's service revenues increased $14.6 million due primarily to the inclusion in continuing operations of the unsold aviation and entertainment businesses in 2001, which were included in discontinued operations in 2000. Electricity and steam sales revenue increased $12.4 million compared to the third quarter of 2000, attributable mainly to our Samalpatti, India project commencing operation in the second quarter of 2001, partially offset by lower energy pricing experienced primarily at plants in California. Equity in income of investees and joint ventures for the three months ended September 30, 2001 decreased $.9 million compared to the same period in 2000. The decrease is primarily attributable to lower energy pricing at joint ventures in California, partially offset by an increase at our Quezon project in the Philippines due to operating efficiencies, and net equity income related to unsold aviation and entertainment joint ventures. Construction revenues for the three months ended September 30, 2001 increased $5.1 million from the comparable period in 2000. The increase is attributable to the commencement of construction of a water desalination project in Tampa, Florida in the second quarter of 2001, partially offset by the completion of the retrofit construction activity mandated by the Clean Air Act Amendments of 1990, the decision to wind-down activities in the civil construction business, and the completion of construction of a wastewater project in the third quarter of 2000. Other sales - net decreased $4.6 million compared to the third quarter of 2000 due mainly to decreased activity in the operations of Datacom associated with Genicom Corporation (Genicom), its major customer. Datacom was sold in November 2001. There was no significant other revenues - net in the third quarters of 2001 and 2000. Net gain on sale of businesses for the three months ended September 30, 2001 included a gain of $1.4 million on the sale of the Company's interest in the airport privatization business in Colombia, South America. The three months ended September 30, 2000 included an adjustment to the loss on the sale of Applied Data Technology, Inc. ("ADTI") of $.4 million. Total costs and expenses in the third quarter of 2001 increased by $24.9 million compared to the third quarter of 2000. This increase reflects an increase in the Other segment of $35.6 million due mainly to the inclusion of unsold aviation and entertainment businesses in 2001, partially offset by a decrease in the Energy segment of $7.5 million and a decrease in corporate unallocated overhead of $2.7 million. The Energy segment's plant operating expenses decreased by $3.3 million in the three months ended September 30, 2001 compared to the same period of 2000. Operating expenses decreased by $14.2 million in the environmental business, which was sold in November of 2000, partially offset by an increase due to the commencement of operations of the Samalpatti project and the commencement of operations at a wastewater project. Construction costs decreased by $.2 million for the three months ended September 30, 2001 compared to the comparable period of 2000. The decrease is due to the completion of the retrofit construction activity mandated by the Clean Air Act Amendments of 1990, completion of the construction of a wastewater project in the third quarter of 2000, and a decrease in the civil construction business (which management anticipates will cease during 2002), partially offset by an increase due to the commencement of construction of the water desalination project. Depreciation and amortization expense decreased by $2.5 million in the third quarter 2001 compared to the comparable period in 2000. This decrease is primarily related to a $3.4 million decrease in corporate and other depreciation and amortization, which in 2000 included $2.9 million of accelerated amortization of a new data processing system. Also, Energy's depreciation and amortization expense increased by $.8 million in the three months ended September 30, 2001 compared to 2000 primarily due to the commencement of operations of the Samalpatti project in 2001. Debt service charges increased by $.3 million in the third quarter of 2001 versus the comparable period of 2000. The increase is primarily due to project debt outstanding related to the Samalpatti project, offset by lower debt service expense due to lower project debt related to various facilities caused by redemption and maturity of bonds. The Energy segment had one interest rate swap agreement outstanding that resulted in additional debt service expense of $.6 million and $.3 million for the three month periods ended September 30, 2001 and 2000, respectively. Other operating costs and expenses for the third quarter of 2001 increased $16.6 million due to activity in the Other segment. This increase was due mainly to the inclusion of unsold aviation and entertainment businesses in 2001, which were included in discontinued operations in 2000. Costs of goods sold for the third quarter of 2001 increased $2.1 million compared to the third quarter of 2000 due to activity in the Other segment, mainly increased product costs at Datacom. Selling, administrative and general expenses for the third quarter of 2001 decreased $2.2 million compared to the same period of 2000 due mainly to by a decrease in unallocated corporate overhead expenses that was fundamentally the result of a decrease in most overhead costs due to the wind-down of the Company's New York office, partially offset by the inclusion in continuing operations of the unsold aviation and entertainment businesses in 2001. Selling, administrative and general expenses for the Energy segment decreased $2.2 million compared to the third quarter of 2000 principally due to the sale in November 2000 of the environmental consulting business. Project development expenses for the three months ended September 30, 2001 decreased by $4.9 million from the same period in 2000. The decrease is mainly due to a decrease in overhead and other costs related to development in the Asian market. Other expenses-net increased $.3 million compared to the third quarter of 2000. This increase is due mainly to costs incurred in 2001 representing the amortization of the Company's costs in securing its Revolving Credit and Participation Agreement (the "Agreement") in March 2001. Such costs are being amortized over one year. In 2000, Other expenses - net represented fees and expenses incurred in connection with the waiver by certain creditors of certain covenants and the extension of credit through November 2000, and fees and expenses incurred in connection with financing efforts to support the then-proposed recapitalization plan. Write-down of net assets held for sale in the three months ended September 30, 2001 relates to the Company's investments in Datacom and CGS. In the third quarter of 2001, Covanta management considered the status of recent offers and negotiations leading to the sale of Datacom in November 2001 and the anticipated disposal of CGS, and recorded a total pre-tax loss of $18.7 million of which $16.8 million related to Datacom and $1.9 million related to CGS. Interest expense-net in the third quarter of 2001 decreased $.6 million compared to the same period of 2000. Corporate interest expense-net increased $1.6 million primarily due to lower interest income on proceeds from the sale of businesses included in discontinued operations in 2000, partially offset by lower average debt outstanding and lower interest rates on variable-rate debt. The Energy segment's interest expense - net decreased by $1.9 million in 2001 compared to 2000 due to lower debt outstanding caused mainly by payments on debt associated with the Quezon project and an increase in interest income on cash balances. The effective tax rate for the three months ended September 30, 2001 was a 17.9% benefit compared to a (191.6)% provision for the same period of 2000. This increase in the effective rate resulting in tax benefits was primarily due to the greater extent in 2001 to which pretax losses generated tax benefits. Discontinued Operations: In the third quarter of 2000, all aviation and entertainment businesses were accounted for as discontinued operations while such unsold businesses were accounted for in continuing operations in the third quarter of 2001. In the third quarter of 2000 the loss from discontinued operations totaled $37.1 million. The loss before interest and taxes from discontinued operations was $52.4 million, primarily reflecting accrued net losses of $44.5 million on the disposal of aviation and entertainment businesses, and a provision of $8.5 million for additional estimated pretax net operating losses from October 1, 2000 through the anticipated dates of sales of those remaining businesses. Results of operations from those businesses were substantially offset by legal, accounting, consulting and overhead expenses incurred in connection with the discontinuance of those businesses and accelerated depreciation in connection with shortened estimated useful lives of management information systems. Nine Months Ended September 30, 2001 vs. Nine Months Ended September 30, 2000 Continuing Operations: Revenues for the nine months ended September 30, 2001 were $64.7 million higher than the comparable period of 2000 primarily reflecting an increase in Other segment revenues of $42.8 million, and an increase in Energy segment revenues of $20.2 million. Service Revenues in 2001 decreased $1.8 million compared to the first nine months of 2000. Energy service revenues in 2001 decreased $41.7 million primarily due to a decrease of $59.4 million related to the environmental consulting business which was sold in November 2000, partially offset by an increase of $17.7 million due mainly to contractual annual escalation adjustments at many plants, increases in the supplemental waste business, increased Dual Sand System sales and a water service operating agreement with the City of Bessemer which began in October 2000. The Other segment's service revenues increased $39.9 million mainly due to the inclusion in continuing operations of $44.9 million related to unsold aviation and entertainment businesses in 2001, which were included in discontinued operations in 2000, partially offset by a decrease of $4.9 million due to the sale of ADTI in the first quarter of 2000. Electricity and steam sales revenue increased $62.5 million compared to the same period in 2000, attributable mainly to the Samalpatti project commencing operation and increased production and favorable energy pricing experienced primarily at plants in California as well as increased pricing experienced at certain waste-to-energy plants with merchant energy capacity. Equity in income of investees and joint ventures for the nine months ended September 30, 2001 increased $3.7 million compared to the same period in 2000. The increase is primarily attributable to the Quezon project in the Philippines, which commenced operations in the second quarter of 2000, partially offset by a decrease at a joint venture due to lower contractual energy rates. Construction revenues for the nine months ended September 30, 2001 decreased $18.6 million from the comparable period in 2000. The decrease is attributable to the completion of the retrofit construction activity mandated by the Clean Air Act Amendments of 1990, the decision to wind-down activities in the civil construction business, and the completion of construction of a wastewater project in the third quarter of 2000, partially offset by the commencement of the water desalination project. Other sales - net decreased $3.6 million compared to the first three quarters of 2000 due to decreased activity in the operations of Datacom. Other revenues - net increased $17.6 million compared to the same period in 2000. Other revenues in 2001 included a $19.6 million insurance settlement and other matters related to the Lawrence, Massachusetts facility, $5.7 million of development fees and other matters related to the Quezon plant in the Philippines, and insurance proceeds related to a waste wood plant. 2000 included a $12.2 million insurance settlement related to the Lawrence facility. Net gain on sale of businesses for the nine months ended September 30, 2001 included the gain of $1.9 million on the sale of the aviation ground handling operations at the Rome, Italy airport, a gain of $.8 million representing an adjustment on the sale of the aviation fixed base operations, and a gain of $1.4 million on the sale of the Company's interest in the airport privatization business in Colombia, South America partially offset by a loss of $.3 million on the sale of the ground handling business in Spain. The net loss on sale of businesses in the comparable period of 2000 included a loss of $1.0 million on the sale of ADTI. Total costs and expenses in the first nine months of 2001 increased by $18.9 million compared to the first nine months of 2000. This increase reflects an increase in the Other segment of $65.7 million due mainly to the inclusion of unsold aviation and entertainment businesses in 2001 partially offset by a decrease in the Energy segment of $25.3 million and a decrease in corporate unallocated overhead of $21.5 million. The Energy segment's plant operating expenses increased by $3.2 million in the nine months ended September 30, 2001 compared to the same period of 2000. Operating expenses increased due to increased fuel costs attributable to higher natural gas and oil prices, higher generation, primarily at waste-wood plants in California, the effect of increased provisions for doubtful accounts of approximately $8.0 million related mainly to receivables from California utilities (see Liquidity/Cash Flow below), the commencement of operations at the Samalpatti project and the commencement of operations at a wastewater project. These increases were partially offset by a decrease of $47.5 million in the environmental business, which was sold in November 2000. Construction costs decreased by $14.9 million for the nine months ended 2001 compared to the comparable period of 2000. The decrease is due to the completion of the retrofit construction activity mandated by the Clean Air Act Amendments of 1990, completion of the construction of a wastewater project in the third quarter of 2000, and a decrease in the civil construction business (which management anticipates will cease in 2002), partially offset by an increase due to the commencement of construction of a water desalination project. Depreciation and amortization expense decreased by $8.3 million in the first three quarters of 2001 compared to the comparable period in 2000. This decrease is primarily related to a $9.8 million decrease in corporate and other segment depreciation and amortization, which in 2000 included $8.6 million of accelerated amortization of a new data processing system. Also, Energy's depreciation and amortization expense increased by $2.1 million in the nine months ended September 30, 2001 compared to 2000 primarily due to commencement of operation of the Samalpatti project in 2001, partially offset by the effect of accelerated depreciation in 2000 related to certain air pollution control equipment being replaced in connection with the Clean Air Act Amendments of 1990. Debt service charges increased by $.5 million in the first three quarters of 2001 compared to the comparable period of 2000. The increase is primarily due to project debt outstanding related to the Samalpatti project, partially offset by lower debt service expense due to lower project debt related to various facilities cause by redemption and maturity of bonds. The Energy segment had one interest rate swap agreement outstanding that resulted in additional debt service expense of $1.5 million and $.8 million for the nine month periods ended September 30, 2001 and 2000, respectively. Other operating costs and expenses for the first nine months of 2001 increased $31.6 million due to activity in the Other segment. This increase was due mainly to the inclusion of unsold aviation and entertainment businesses in 2001, which were included in discontinued operations in 2000. This increase was partially offset by the effect of the sale of ADTI in 2000. Costs of goods sold for the first three quarters of 2001 increased $5.5 million compared to the three quarters of 2000 due to activity in Other segment, mainly increased product costs at Datacom. Selling, administrative and general expenses for the first nine months of 2001 increased $2.8 million compared to the same period of 2001. This increase is due mainly to the inclusion in continuing operations of the unsold aviation and entertainment businesses in 2001. That increase was partially offset by a decrease in unallocated corporate overhead expenses that was fundamentally the result of a decrease in most overhead costs due to the wind-down of the Company's New York office. Selling, administrative and general expenses for the Energy segment decreased $6.2 million compared to the first nine months of 2000 principally due to the sale in November 2000 of the environmental consulting business. Project development expenses in the nine months ended September 30, 2001 decreased by $11.8 million from the same period in 2000. The decrease is mainly due to a decrease in overhead and other costs related to development in Asian market. Other expenses-net decreased $9.9 million compared to the first three quarters of 2000. This increase is due mainly to costs incurred in 2000 representing fees and expenses incurred in connection with the waiver by certain creditors of certain covenants and the extension of credit through November 2000, and fees and expenses incurred in connection with financing efforts to support the then-proposed recapitalization plan. In 2001, the effect of these 2000 costs was partially offset by the amortization of the Company's costs in securing its Revolving Credit and Participation Agreement (the "Agreement") in March 2001. Such costs are being amortized over one year. Write-down of net assets held for sale in the nine months ended September 30, 2001 relates to the Company's investments in its Australian venue management business, Datacom and CGS. In the second and third quarters of 2001, Covanta management considered the status of recent offers and negotiations leading to the sale of Datacom in November 2001 and the anticipated disposal of CGS and the Australian venue management business, and recorded pre-tax losses of $20.4 million. Interest expense-net in the first nine months of 2001 decreased $4.2 million compared to the same period of 2000. Corporate interest expense-net decreased $2.3 million primarily due to lower average debt outstanding and lower rates on variable-rate debt, partially offset by a decrease in interest income on cash balances. The Energy segment's interest expense - net decreased by $3.2 million in 2001 compared to 2000 due mainly to interest income on cash balances and a decrease in interest expense caused mainly by payments on debt associated with the Quezon project. This debt was fully paid in March 2001. These decreases were partially offset by the Other segment's interest expense-net which increased $1.3 million due to the inclusion in continuing operations of the unsold aviation and entertainment businesses in 2001. The effective tax rate for the nine months ended September 30, 2001 was 41.3% compared to 25.6% for the same period of 2000. This increase in the effective rate was primarily due to pretax earnings in the current year period, versus pretax losses in the 2000 period for which certain tax benefits were not recognized, and increased domestic income in the current year resulting in an overall higher effective tax rate. Discontinued Operations: In the first three quarters of 2000 the loss from discontinued operations totaled $128.9 million. The loss before interest and taxes from discontinued operations was $154.5 million, primarily reflecting accrued net losses of $102.3 million on the disposal of aviation and entertainment businesses, a provision of $8.5 million for additional estimated pretax net operating losses from October 1, 2000 through the anticipated dates of sales of those remaining businesses, legal, accounting, consulting and overhead expenses incurred in connection with the discontinuance of those businesses, and accelerated depreciation in connection with shortened estimated useful lives of management information systems. Property, plant and equipment - net increased $135.9 million during the first nine months of 2001 due mainly to the consolidation of two energy project companies that were previously accounted for under the equity method. CAPITAL INVESTMENTS AND COMMITMENTS For the nine months ended September 30, 2001, capital investments amounted to $58.7 million, virtually all of which related to Energy. At September 30, 2001, capital commitments amounted to $9.9 million for normal replacement and growth in Energy. Other capital commitments for Energy as of September 30, 2001 amounted to approximately $12.9 million. This amount includes a commitment to pay, in 2008, $10.6 million for a service contract extension at an energy facility. In addition, this amount includes $2.3 million for an oil-fired project in India which commenced operations in September 2001. Covanta and certain of its subsidiaries have issued or are party to performance bonds and guarantees and related contractual obligations undertaken mainly pursuant to agreements to construct and operate certain energy, entertainment and other facilities. In the normal course of business, they are involved in legal proceedings in which damages and other remedies are sought. Management does not expect that these contractual obligations, legal proceedings, or any other contingent obligations incurred in the normal course of business will have a material adverse effect on Covanta's Consolidated Financial Statements. (See Liquidity/Cash Flow below.) The Company did not include its interests in either the Arrowhead Pond in Anaheim, California or the Corel Centre near Ottawa, Canada as part of the sale of its Venue Management business in September 2000. The Company manages the Arrowhead Pond under a long-term contract. As part of this contract, the Company is a party, along with the City of Anaheim, to a reimbursement agreement, in connection with a letter of credit in the amount of approximately $119.0. Under the reimbursement agreement, the Company is responsible for draws, if any, under the letter of credit caused by the Company's failure to perform its duties under its management contract at that venue which include its obligation to pay shortfalls, if any, if net revenues of the venue are insufficient to pay debt service underlying the venue. The Company is also the reimbursement party on a $26 million letter of credit relating to a lease transaction for that facility. The Company is exploring alternatives for disposing of these operations along with the reimbursement agreement and related obligations. During 1994, a subsidiary of Covanta entered into a 30-year facility management contract at the Corel Centre pursuant to which it agreed to advance funds to a customer, and if necessary, to assist the customer's refinancing of senior secured debt incurred in connection with the construction of the facility. Covanta is obligated to purchase such senior debt in the amount of $86.1 million on December 23, 2002, if the debt is not refinanced prior to that time. Covanta is also required to repurchase the outstanding amount of certain subordinated secured debt of such customer in the amount of $45.7 million on December 23, 2002. The Company expects that both series of debt will be refinanced for an additional 5 years upon terms substantially similar to those currently in effect. In addition, as of September 30, 2001, the Company had guaranteed $3.2 million of senior secured term debt of an affiliate and principal tenant (the NHL Ottawa Senators) of this customer. Further, Covanta is obligated to purchase $19.0 million of the tenant's secured subordinated indebtedness on January 29, 2004, if such indebtedness has not been repaid or refinanced prior to that time. Of these commitments, approximately $119 million are secured by letters of credit. The Company is also exploring alternatives for disposing of these operations along with the related obligations. The Company is engaged in ongoing investigation and remediation actions with respect to seven airports where it provides aviation fueling services on a cost-plus basis pursuant to contracts with individual airlines, consortia of airlines and operators of airports. The Company estimates the costs of those ongoing actions will be approximately $4,000,000 (over several years), and that airlines, airports and others will reimburse it for substantially all these costs. To date, the Company's right to reimbursement for remedial costs has been challenged successfully in one prior case in which the court found that the cost-plus contract in question did not provide for recovery of costs resulting from the Company's own negligence. Except in that instance, and in one other, the Company has not been alleged to have acted with negligence. LIQUIDITY/CASH FLOW Net cash provided by operating activities of continuing operations for the nine months ended September 30, 2001 was $53.6 million compared to $52.2 million in cash used by operating activities in the first half of 2000, resulting in an increase of $105.8 million. This increase primarily reflects an increase in net income from continuing operations of $29.6 million, a decrease in accounts payable and accrued expenses of $9.7 million and $94.7 million and increases in deferred income taxes, provisions for doubtful accounts and other of $5.8 million, $15.0 million, and $22.3 million, respectively. These increases were partially offset by increases in receivables and other assets of $35.3 million and $35.7 million, respectively. Net cash used in investing activities of continuing operations was $20.2 million lower than the comparable period of 2000 primarily relating to an increase in distributions from investees and joint ventures of $16.5 million, an increase in proceeds from sales of businesses of $17.5 million, and a decrease in investments in and advances to investees and joint ventures of $13.5 million. These decreases in cash used in investing activities were partially offset by an increase in investments in facilities of $29.1 million. Net cash used in financing activities of continuing operations for the first three quarters of 2001 was $50.1 million compared to cash used in financing activities of $196.2 million in the first three quarters of 2000. This decrease in cash used of $146.0 million is due primarily to a decrease in restricted cash of $194.1 million (used to repay debt) in the 2001 period and an increase in restricted cash of $148.0 million in the 2000 period. This net increase in cash provided was partially offset by a decrease in outstanding debt of $166.4 million, and an increase in funds held in trust of $31.2 million. In addition, cash provided by discontinued operations in the nine months of 2000 totaled $249.9 million representing mainly proceeds from the sales of Entertainment businesses partially offset by operating losses of discontinued businesses. During the first nine months of 2001, the Company sold a) its aviation ground handling business in Rome, Italy for gross proceeds of approximately $10.0 million, b) its interest in the aviation business in Spain for approximately $1.8 million; and c) its interest in the airport privatization business in Colombia, South America for $9.7 million. In connection with several of the sales of its noncore businesses, the Company is also entitled to certain deferred payments, subject to certain contingencies. In addition, the Company has contingent obligations under most of the related sale agreements with respect to liabilities arising before and, in some cases, after the consummation of the sale. At September 30, 2001, the Company had approximately $69.1 million in cash and cash equivalents, of which $7.9 million related to net assets held for sale. In addition, as previously reported, the Company entered into a credit facility on March 14, 2001, which is more fully described below. The Company's revolving credit and participation agreement (the "Master Credit Facility"), which matures on May 31, 2002 and is secured by substantially all of the Company's assets, provides the Company with a credit line of approximately $146 million, including a subfacility that may only be used to provide certain letters of credit that would potentially be required to be posted by the Company in the event that the Company's long-term debt rating were downgraded to below investment grade. As of September 30, 2001, letters of credit have been issued in the ordinary course for the Company's benefit using up most of the available line other than the subfacility. The Company does not expect to need other letters of credit to be issued under the main facility. The Master Credit Facility also provides for the coordinated administration of certain letters of credit issued in the normal course of business to secure performance under certain energy contracts (totaling $208 million), letters of credit issued to secure obligations relating to the Entertainment businesses (totaling $274 million) largely with respect to the Anaheim and Corel projects described above under "Capital Investments and Commitments," letters of credit issued in connection with the Company's insurance program (totaling $40 million) and letters of credit used for general corporate purposes (totaling $127 million). Of these letters of credit, approximately $195 million secure indebtedness included in the Company's balance sheet and $238 million relate to other obligations that are reflected in the notes to the financial statements. These letters of credit can be drawn upon if the Company defaults on the obligations secured by the letter of credit or fails to provide replacement letters of credit as the current ones expire. The balance relates principally to the Company's obligation under Energy contracts to pay damages. The Company believes it is unlikely that such material defaults will occur. On September 28, 2001, the Company amended its Master Credit Facility with its lenders. The amendments to the agreement include adjustments to financial covenants until December 31, 2001 to reflect changes in the schedule of payments for the past energy sales to California utilities and the timing of the Company's remaining non-core asset sales, the Company's agreement not to make investments in newly identified independent power projects until maturity of the facility in May 2002, and requisite approval of at least 8 banks holding more than 60% of the aggregate revolving loan exposure held by the 32 banks in the bank group as a condition to the issuance of letters of credit the Company might be required to deliver were its credit rating reduced below investment grade. The financial covenants of the Master Credit Facility include the following: Minimum Debt Service Coverage Ratio - This is the ratio of the (a) the sum of Consolidated Operating Income (as shown in our Consolidated Statement of Income), plus LOC Fees (defined in the Master Credit Facility as letter of credit, fees, commitment fees and amortization of agency and termination fees) to the extent included in Operating Income, and Minority Interest (as shown on our consolidated statement of income) to (b) the total interest expense on our indebtedness, plus LOC Fees, less interest income of the Company. For this purpose, indebtedness does not include indebtedness with respect to which recourse is limited to the assets financed with the proceeds of such indebtedness or the equity securities of the borrower ("project debt" as shown on the balance sheet). The numerator of this ratio is referred to as "Adjusted EBIT." The Master Credit Facility provides that this ratio must not be less than the following: Fiscal Quarter Ending: March 31, 2001 0.53 : 1.00 June 30, 2001 1.00 : 1.00 September 30, 2001 1.34 : 1.00 December 31, 2001 1.41 : 1.00 March 31, 2002 1.73 : 1.00 Maximum Leverage Ratio - This is the ratio of the Company's net indebtedness to Adjusted EBIT for the four quarters then ended. For this purpose, net indebtedness is the Company's obligations for borrowed money plus deferred purchase price, if any, recorded on its consolidated balance sheet (which was zero at December 31, 2000), less cash and domestic cash equivalents, less the Convertible Debentures, less Project Debt. The Master Credit Facility provides that this ratio must exceed the following: Fiscal Quarter Ending: March 31, 2001 7.86 : 1.00 June 30, 2001 3.41 : 1.00 September 30, 2001 2.58 : 1.00 December 31, 2001 2.29 : 1.00 March 31, 2002 2.00 : 1.00 Consolidated Net Worth - This is the sum of capital stock, capital surplus and earned surplus as shown on the Company's consolidated balance sheet. The Master Credit Facility provides that for the first quarter of 2001, consolidated net worth must exceed the amount of consolidated net worth shown on the Company's consolidated balance sheet as of December 31, 2000. For each succeeding quarter, the permitted minimum net worth is increased by 75% of the Company's consolidated net income (but not net loss) for such quarter. On August 15, 2001, the Company disclosed in its Quarterly Report on Form 10-Q for the period ended June 30, 2001, that it does not have any current plans to make newly identified investment commitments in 2001 in order to support the Company's cash position and liquidity. However, it does not expect any substantial impact on the Company's anticipated business results in the current year or in 2002 as a result of these decisions. The Company believes that funds from operations, continued asset sales and access to the capital markets will be adequate for these purposes during 2002. However, access to these sources may not be available on a timely basis, and the Company may need to obtain additional short-term borrowing from its current lenders. The Company is developing a financing plan which it believes will be acceptable by its lenders for these purposes but there are no assurances that the lenders will agree. The Company is targeting to complete the sale of a portion of its aviation fueling business by December 31, 2001 and the remaining portion of its aviation fueling business and the remaining non-core businesses in the next twelve months. As previously noted, the Company executed a definitive agreement for sale of the aviation fueling business in July 2001. The successful completion of the sales processes for non-core assets and the actual amounts received may be impacted by general economic conditions in the markets in which these assets must be sold, and in some instances, necessary regulatory and third party consents. Receivables from California Utilities: Recent events in the California energy markets affected the state's two largest utilities and resulted in delayed payments for energy delivered by the Company's facilities in late 2000 and early 2001. Pacific Gas & Electric Company ("PG&E") and Southern California Edison Company ("SCE") both suspended payments under long term power purchase agreements in the beginning of 2001. On March 26, 2001 the California Public Utilities Commission ("CPUC") approved a substantial rate increase and directed the utilities to make payments to suppliers for current energy deliveries. SCE has made payments for energy delivered since March 26, 2001. On April 6, 2001, PG&E filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Since that time PG&E is also in compliance with the CPUC order and is making payments for current energy deliveries. In mid-June the CPUC issued an order declaring as reasonable and prudent any power purchase amendment at a certain fixed-price for a five-year term. On June 18, 2001 and July 31, 2001 the Company entered into several agreements and amendments to power purchase agreements with SCE which contained the CPUC approved pricing for a term of five years, to commence upon the occurrence of events relating to improvements in SCE's financial condition. In addition, in June SCE paid 10% of the outstanding receivables and agreed to a timetable by which the remaining 90% would be paid, which outstanding amount will earn interest. The agreements with SCE contemplated the passage of legislation by the California State Legislature or other actions that would trigger payment to the Company. In late October SCE reached a settlement of a lawsuit brought against the CPUC concerning the CPUC's failure to allow SCE to pass cost increases through to its ratepayers. The settlement achieved the same goals as the proposed legislation which was to provide a path for SCE to achieve creditworthiness. The SCE Agreements are not impacted by the settlement except for the timing of the payment of past due amounts and the start of the fixed price period for energy sales. The Company is in discussions with SCE regarding the timing issues. The settlement was approved by the Federal Court. A consumer group has requested a stay pending an appeal. In July, the Company also entered into agreements with similar terms with PG&E. These agreements also contain the CPUC approved price and term, both of which are effective immediately. Unlike SCE, PG&E made no cash payments but did agree that the amount owed to the Company will earn interest at a rate to be determined by the Bankruptcy Court. PG&E agreed to assume the Company's power purchase agreements and elevate the outstanding payable to priority administrative claim status. The amount of the claim and interest will be settled prior to the finalization of PG&E's plan of reorganization. The Bankruptcy Court approved the agreements, the power purchase agreements and the assumption of the contracts on July 13, 2001. On October 30, 2001, the Company transferred $14.9 million of the outstanding PG&E receivables for $13.4 million to a financial institution. Of this amount, $8.5 million (which related to receivables not subject to pricing disputes with PG&E) was paid in immediate cash. The balance, $4.9 million (which related to receivables to which there are pricing disputes) was placed in escrow until the resolution of those disputes or the conclusion of the PG&E bankruptcy. The remaining $1.5 million represents the 10% discount charged by the financial institution. Disagreements with both SCE and PG&E exist regarding the valuation of the pre-March 26, 2001 receivables. Resolution of these disagreements and payment of the receivables is likely to occur only upon the restoration of SCE to creditworthiness, the resolution of the pricing issues by the CPUC and in the case of PG&E, the resolution of the PG&E bankruptcy. Although this matter is not free of doubt, the Company believes it will ultimately receive payments in full of the net amount of these receivables. Under its Master Credit Facility, the Company agreed to meet budgeted cash flows. The Company's ability to meet these tests has been adversely affected due to the late payment of receivables for California power sales and the delays in completion of non-core asset sales. As a result of these business conditions, the Company has requested and received amendments to its financial covenants under the Master Credit Facility through December 31, 2001. At this time, the Company expects that it will require amendments to the financial covenants regarding the Company's cash usage and its net worth to remain in compliance with the terms of the Master Credit Facility. Although amendments to the Company's financial covenants are not assured, it believes that it will be able to construct a plan that will be accepted by the lender banks and thereby be able to obtain the required amendments to allow the Company to conduct its operations in the ordinary course of business. Such plan could involve further rescheduling of expenditures, accessing capital markets (either private or public) and other strategic alternatives. Further, to date the Company has been able to work with its creditors for certain obligations relating to the financing of its California assets to assure compliance with related project finance obligations that might have been adversely impacted by payment delay, and it expects that it will continue to be able to do so unless the status of the California utilities substantially deteriorates or for other unforeseen reasons. The Company has commenced preliminary discussions with its banks to replace and/or extend the Master Credit Facility, which currently expires May 31, 2002. In conjunction with these efforts, the Company has begun to take steps to reduce the amount of letters of credit outstanding. Once a new facility is obtained, such facility will have to provide for such letters of credit that remain outstanding as of the termination date of the current Master Credit Facility. The Company filed a universal shelf registration statement on July 17, 2001 in the amount of $350 million. Once the registration statement is effective, the Company expects to have additional flexibility to effectuate a transaction, or transactions, in the capital markets, that could provide for the refinancing or extinguishment of existing obligations that mature over the next several years, as well as to provide additional liquidity for both working capital purposes and for investments in electric power generation growth projects. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has not entered into derivative financial instruments, as defined by SFAS No. 133, for trading purposes. All such derivatives are entered into for other than trading purposes. At December 31, 2000 the Company had entered into only one such derivative (see below). Interest Rate Risk The Company has long-term debt and project debt outstanding that subject the Company to the risk of increased interest expense due to rising market interest rates. Of the Company's total long-term debt, approximately $260,000,000 was floating rate at December 31, 2000, of which $113.7 million was paid off in March 2001. Of the project debt, $406.5 million was floating rate at December 31 2000. However, of that floating rate project debt, $139 million related to waste-to-energy projects where, because of their contractual structure, interest rate risk is borne by our client communities since debt service is passed through to those clients. Although the Company has from time to time entered into financial instruments to reduce the impact of changes in interest rates, the Company had only one interest rate swap outstanding at December 31, 2000 in the notional amounts of $80,220,000 related to floating rate project debt. Gains and losses on this swap are for the account of the client community. The Company does not typically hedge its interest rate exposure on its debt. Foreign Currency Exchange Rate Risk The Company has investments in Energy projects in various foreign countries, including the Philippines, China, India, Thailand, and Bangladesh, and to a much lesser degree, Italy and Spain. The Company does not enter into currency transactions to hedge its exposure to fluctuations in currency exchange rates. Instead the Company attempts to mitigate its currency risks by structuring its project contracts so that its revenues and fuel costs are denominated in U.S. dollars, or so that its revenues are indexed to or "linked" to the U.S. dollar. This leads the Company to treat the U.S. dollar as the functional currency at most of its international projects. Therefore, only local operating expenses are exposed to currency risks. However, at projects where the functional currency is other than the U.S. dollar, exchange fluctuations generally also have the effect of increasing or decreasing the foreign currency translation adjustment included in the Company' stockholders' equity on its balance sheet. At December 31, 2001, the Company had recorded a $3.4 million loss in cumulative net translation adjustments. The cumulative translation adjustments will be reflected in earnings and cash flows only when the related projects are disposed of. Certain exceptions to this exist. At December 31, 2000, the Company has $11,400,000 of project debt denominated in Thai Baht in connection with the Sahacogen project in Thailand. Exchange rate fluctuations related to this debt are recorded as adjustments to the recorded amount of the debt and as foreign currency gains and losses included in net income. This is the only debt on the Company's balance sheet that is denominated in a foreign currency. Commodity Price Risk The Company has not entered into futures, forward contracts, swaps and options to hedge purchase and sale commitments, fuel requirements, inventories or other commodities. The Company attempts to mitigate the risk of market fluctuations of energy and fuel by structuring contracts related to its Energy projects as fixed price contracts to that energy sales and fuel costs are "locked in" for the same term. Certain power sales agreements related to domestic projects provide for energy sales prices linked to the "avoided costs" of producing such energy and, therefore, fluctuate with various economic factors. The Company is exposed to commodity price risk at those projects. At other plants, fuel costs are contractually included in our electricity revenues, or fuel is provided by our customers. Also, at most of our waste-to-energy facilities, commodity price risk is mitigated in that either most commodity costs used in the operation of those facilities are borne by our client communities, or our service revenues are adjusted to reflect fluctuations in various price indices which are indicative of, in part, changes in prices of natural gas, electricity, auxiliary fuel, and the cost of certain commodities used in the operation of those facilities. Generally, the Company is protected against fluctuations in the cost of waste disposal (i.e., "tip fees") through long-term disposal contracts at its waste-to-energy facilities. At three owned waste-to-energy facilities, differing amounts of waste disposal capacity are not subject to long-term contracts and, therefore, the Company is exposed to the risk of fluctuations in tip fees. ANY STATEMENTS IN THIS COMMUNICATION WHICH MAY BE CONSIDERED TO BE "FORWARD-LOOKING STATEMENTS," AS THAT TERM IS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, ARE SUBJECT TO CERTAIN RISK AND UNCERTAINTIES. THE FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE SUGGESTED BY ANY SUCH STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED OR IDENTIFIED FROM TIME TO TIME IN THE COMPANY'S PUBLIC FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION AND MORE GENERALLY, GENERAL ECONOMIC CONDITIONS, INCLUDING CHANGES IN INTEREST RATES AND THE PERFORMANCE OF THE FINANCIAL MARKETS; CHANGES IN DOMESTIC AND FOREIGN LAWS, REGULATIONS, AND TAXES, CHANGES IN COMPETITION AND PRICING ENVIRONMENTS; AND REGIONAL OR GENERAL CHANGES IN ASSET VALUATIONS. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company has various legal proceedings involving matters arising in the ordinary course of business. The Company does not believe that there are any pending legal proceedings, other than ordinary routine litigation incidental to its business, to which the Company is a party or to which any of its property is subject, the outcome of which would have a material adverse effect on the Company's consolidated position or results of operation. The Company's operations are subject to various federal, state and local environmental laws and regulations, including the Clean Air Act, the Clean Water Act, the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) and the Resource Conservation and Recovery Act (RCRA). Although the Company's operations are occasionally subject to proceedings and orders pertaining to emissions into the environment and other environmental violations, the Company believes that it is in substantial compliance with existing environmental laws and regulations. The Company may be identified, along with other entities, as being among parties potentially responsible for contribution for costs associated with the correction and remediation of environmental contamination at disposal sites subject to CERCLA and/or analogous state laws. In certain instances the Company may be exposed to joint and several liability for remedial action or damages. The Company's ultimate liability in connection with such environmental claims will depend on many factors, including its volumetric share of waste, the total cost of remediation, the financial viability of other companies that also sent waste to a given site and, in the case of divested operations, its contractual arrangement with the purchaser of such operations. The Company is engaged in ongoing investigation and remediation actions with respect to seven airports where it provides aviation fueling services on a cost-plus basis pursuant to contracts with individual airlines, consortia of airlines and operators of airports. The Company estimates the costs of those ongoing actions (determined as of October 1, 2001) will be about $4,000,000, and that airlines, airports and others will reimburse it for substantially all of these costs. To date, the Company's right to reimbursement for remedial costs has been challenged successfully in one prior case in which the court found that the cost-plus contract in question did not provide for recovery of costs resulting from the Company's own negligence. Except in that instance, and in the United/American litigation noted below, the Company has not been alleged to have acted with negligence. The potential costs related to all of the foregoing matters and the possible impact on future operations are uncertain due in part to the complexity of government laws and regulations and their interpretations, the varying costs and effectiveness of cleanup technologies, the uncertain level of insurance or other types of recovery and the questionable level of the Company's responsibility. Although the ultimate outcome and expense of any litigation, including environmental remediation, is uncertain, the Company believes that the following proceedings will not have a material adverse effect on the Company's consolidated financial position or results of operations. (a) Environmental Matters (i) On June 8, 2001, we received from the United States Environmental Protection Agency (EPA) a "General Notice Letter" pursuant to CERCLA, naming Ogden Martin Systems of Haverhill, Inc. as one of 2000 named PRPs with respect to the Beede Waste Oil Superfund Site ("Site"), Plaistow, New Hampshire. EPA alleges that the Haverhill facility disposed approximately 45,000 gallons of waste oil at the Site, a former recycling facility. The total volume of waste allegedly disposed by all PRPs at the Site is estimated by EPA as approximately 14,519,232 gallons. EPA's letter states that, to date, the costs of response actions completed or underway at the Site total approximately $14,900,000, exclusive of interest. EPA expects to issue its proposed remedy for the Site by December 31, 2001, and has indicated that its proposed remedy will cost approximately $46,000,000. EPA has invited all named PRPs to participate in settlement discussions with respect to their alleged liability at the Site. On August 7, 2001, we responded to EPA's General Notice Letter by stating our willingness to participate in settlement discussions along with other PRPs. As a result of uncertainties regarding the source and scope of contamination, the large number of PRPs and the varying degrees of responsibility among various classes of potentially responsible parties, our share of liability, if any, cannot be determined at this time. (ii) On April 9, 2001, Ogden Ground Services, Inc. and "Ogden Aviation" (collectively "Ogden"), together with approximately 250 other parties, were named by the County Attorney of Metropolitan Dade County, Florida as PRPs, pursuant to CERCLA, RCRA and state law, with respect to an environmental cleanup that is underway at Miami International Airport. A total of 17 PRPs, not including the Ogden entities, already have been sued by the County in this matter. The County Attorney alleges that, as a result of releases of hazardous substances, petroleum, and other wastes to soil, surface water, and groundwater at the Airport, the County has expended over $200,000,000 in response and investigation costs and expects to spend an additional $250,000,000 to complete necessary response actions. The County has invited all named PRPs who are not parties to the litigation to participate in settlement discussions with respect to their alleged liability at the Site. An Interim Joint Defense Group has been formed among PRPs, including Ogden entities. As a result of uncertainties regarding the source and scope of the contamination, the large number of PRPs and the varying degrees of responsibility among various classes of potentially responsible parties, our share of liability, if any, cannot be determined at this time. (iii) On December 26, 2000, I. Schumann & Co. named us, Ogden Alloys, Inc., Ogden Metals, Inc. and American Motorists Insurance Company in a lawsuit filed in the United States District Court for the Northern District of Ohio. The lawsuit sought reimbursement for response costs at a site formerly owned and operated by our subsidiary related entities, damages for breach of contract and judgment declaring that we and our named subsidiaries are responsible for certain future remediation costs. The plaintiff sought response costs in excess of $3,000,000 and unspecified damages from us. The Company moved to dismiss the Complaint, and on August 9, 2001, the magistrate judge recommended to the Court that the Company's motion be denied in part and granted in part. The Company has settled this case without the Company owing any payment to the plaintiff. On November 1, 2001, plaintiff filed with the Court a Stipulation of Dismissal With Prejudice. (iv) On May 25, 2000 the California Regional Water Quality Control Board, Central Valley Region (the "Board"), issued a cleanup and abatement order to Pacific-Ultrapower Chinese Station ("Chinese Station"), a general partnership in which one of our subsidiaries owns 50% and which operates a wood-burning power plant located in Jamestown, California. This order arises from the use as fill material, by Chinese Station's neighboring property owner, of boiler bottom ash generated by Chinese Station. The order was issued jointly to Chinese Station and to the neighboring property owner as co-respondents. As required by the order, Chinese Station prepared an environmental site assessment and a clean closure work plan for the removal of the material, procured required permits, and conducted removal activities. On November 2, 2001, Chinese Station submitted its Clean Closure Report to the Board. The Board, by letter dated June 14, 2001, has alleged respondents have a potential civil liability, as of that date, of $975,000. This matter remains under investigation by the Board and other state agencies with respect to alleged civil and criminal violations associated with the management of the material. Chinese Station believes it has valid defenses, and has filed a petition for review of the order. (v) On January 4, 2000 and January 21, 2000, United Air Lines, Inc. ("United") and American Airlines, Inc. ("American"), respectively, named Ogden New York Services, Inc. ("Ogden New York"), in two separate lawsuits filed in the Supreme Court of the State of New York. The lawsuits seek judgment declaring that Ogden New York is responsible for petroleum contamination at airport terminals formerly or currently leased by United and American at New York's Kennedy International Airport. These cases have been consolidated for joint trial. Both United and American allege that Ogden New York negligently caused discharges of petroleum at the airport and that Ogden New York is obligated to indemnify the airlines pursuant to the Fuel Services Agreements between Ogden New York and the respective airline. United and American further allege that Ogden New York is liable under New York's Navigation Law, which imposes liability on persons responsible for discharges of petroleum, and under common law theories of indemnity and contribution. The United complaint is asserted against Ogden New York, American, Delta Air Lines, Inc., Northwest Airlines Corporation and American Eagle Airlines, Inc. United is seeking $1,540,000 in technical contractor costs and $432,000 in legal expenses related to the investigation and remediation of contamination at the airport, as well as a declaration that Ogden New York and the airline defendants are responsible for all or a portion of future costs that United may incur. The American complaint, which is asserted against both Ogden New York and United, sets forth essentially the same legal basis for liability as the United complaint. American is seeking reimbursement of all or a portion of $4,600,000 allegedly expended in cleanup costs and legal fees it expects to incur to complete an investigation and cleanup that it is conducting under an administrative order with the New York State Department of Environmental Conservation. The estimate of those sums alleged in the complaint is $70,000,000. We dispute the allegations and believe that the damages sought are overstated in view of the Airlines' responsibility for the alleged contamination and that we have other defenses under our respective leases and permits with the Port Authority of New York and New Jersey. (vi) On December 23, 1999 Allied Services, Inc. ("Allied") was named as a third-party defendant in an action filed in the Superior Court of the State of New Jersey. The third-party complaint alleges that Allied generated hazardous substances at a reclamation facility known as the Swope Oil and Chemical Company Site, and that contamination migrated from the Swope Oil Site. Third-party plaintiffs seek contribution and indemnification from Allied and over 90 other third-party defendants for costs incurred and to be incurred for cleanup. This action was stayed, pending the outcome of first- and second-party claims. As a result of uncertainties regarding the source and scope of contamination, the large number of potentially responsible parties and the varying degrees of responsibility among various classes of potentially responsible parties, our share of liability, if any, cannot be determined at this time. (vii) On January 12, 1998, the Province of Newfoundland filed an Information against Airconsol Aviation Services Limited ("Airconsol") alleging that Airconsol violated provincial environmental laws in connection with a fuel spill on or about January 14, 1997 at Airconsol's fuel facility at the Deer Lake, Canada Airport. Airconsol contested the allegations and prevailed. The Court voided the Information. The Crown has appealed the Court's decision. We will continue to contest its alleged liability on appeal. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 3.0 Articles of Incorporation and By-laws. 3.1 (a) The Company's Restated Certificate of Incorporation as amended.* (b) Certificate of Ownership and Merger, merging Ogden-Covanta, Inc. into Ogden Corporation, dated March 7, 2001.* 3.2 The Company's By-Laws, as amended through April 8, 1998.* 4.0 Instruments Defining Rights of Security Holders. 4.1 Fiscal Agency Agreement between the Company and Bankers Trust Company, dated as of June 1, 1987, and Offering Memorandum dated June 12, 1987, relating to U.S. $85 million 6% Convertible Subordinated Debentures Due 2002.* 4.2 Fiscal Agency Agreement between the Company and Bankers Trust Company, dated as of October 15, 1987, and Offering Memorandum, dated October 15, 1987, relating to U.S. $75 million 5-3/4% Convertible Subordinated Debentures Due 2002.* 4.3 Indenture dated as of March 1, 1992 from the Company to Wells Fargo Bank Minnesota, National Association, as Trustee (as successor in such capacity to The Bank of New York, Trustee), relating to U.S. $100 million principal amount of 9 1/4% Debentures Due 2022.* 4.4 Amended and Restated Rights Agreement between the Company and The Bank of New York, dated as of September 28, 2000.* 10.0 Material Contracts 10.1(a) First Amendment to Revolving Credit and Participation Agreement, dated as of July 30, 2001, among the Company, the Subsidiaries listed on the signature pages thereof as Borrowers, the Loan Parties listed therein, Bank of America, N.A., as Administrative Agent, and Deutsche Bank AG, New York Branch, as Documentation Agent, transmitted herewith as Exhibit 10.1(a). 10.1(b) Second Amendment to Revolving Credit and Participation Agreement, dated as of August 31, 2001, among the Company, the Subsidiaries listed on the signature pages thereof as Borrowers, the Loan Parties listed therein, Bank of America, N.A., as Administrative Agent, and Deutsche Bank AG, New York Branch, as Documentation Agent, transmitted herewith as Exhibit 10.1(b). * INCORPORATED BY REFERENCE AS SET FORTH IN THE EXHIBIT INDEX OF THIS QUARTERLY REPORT ON FORM 10-Q. (b) Reports on Form 8-K Form 8-K Current Reports filed on July 17, 2001, August 15, 2001, August 21, 2001, and August 28, 2001 are incorporated herein by reference. SIGNATURES ---------- Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COVANTA ENERGY CORPORATION (Registrant) Date: November 14, 2001 By: /s/ EDWARD W. MONEYPENNY ---------------------------------- Edward W. Moneypenny Executive Vice President and Chief Financial Officer Date: November 14, 2001 By: /s/ WILLIAM J. METZGER --------------------------------- William J. Metzger Vice President and Chief Accounting Officer EXHIBIT INDEX ------------- EXHIBIT NO. DESCRIPTION OF DOCUMENT FILING INFORMATION ----------- ----------------------- ------------------ 3 Articles of Incorporation and By-Laws. 3.1 (a) The Company's Restated Certificate of Filed as Exhibit (3)(a) to the Company's Form 10-K for Incorporation as amended. the fiscal year ended December 31, 1988 and incorporated herein by reference. (b) Certificate of Ownership and Merger, Merging Filed as Exhibit 3.1(b) to the Company's Form 10-K for Ogden-Covanta, Inc., into Ogden Corporation, dated the fiscal year ended December 31, 2000 and March 7, 2001. incorporated herein by reference. 3.2 The Company's By-Laws as amended. Filed as Exhibit 3.2 to the Company's Form 10-Q for the quarterly period ended March 31, 1998 and incorporated herein by reference. 4 Instruments Defining Rights of Security Holders. 4.1 Fiscal Agency Agreement between the Company and Filed as Exhibits (C)(3) and (C)(4) to the Company's Bankers Trust Company, dated as of June 1, 1987 and Form 8-K filed with the Securities and Exchange Offering Memorandum dated June 12, 1987, relating Commission on July 7, 1987 and incorporated herein by to U.S. $85 million 6% Convertible Subordinated reference. Debentures Due 2002. 4.2 Fiscal Agency Agreement between the Company and Filed as Exhibit (4) to the Company's Form S-3 Bankers Trust Company, dated as of October 15, Registration Statement filed with the Securities and 1987, and Offering Memorandum, dated October 15, Exchange Commission on December 4, 1987, Registration 1987, relating to U.S. $75 million 5-3/4% No. 33-18875, and incorporated herein by reference. Convertible Subordinated Debentures Due 2002. 4.3 Indenture dated as of March 1, 1992 from the Filed as Exhibit (4)(C) to the Company's Form 10-K for Company to Wells Fargo Bank Minnesota, National the fiscal year ended December 31, 1991 and Association, as Trustee (as successor in such incorporated herein by reference. capacity to The Bank of New York, Trustee), relating to U.S. $100 million 9-1/4% Debentures Due 2022. 4.4 Amended and Restated Rights Agreement between the Filed as Exhibit 1 to Amendment No. 1 to the Company's Company and The Bank of New York, dated as of Form 8-A filed with the Securities and Exchange September 28, 2000. Commission on September 29, 2000 and incorporated herein by reference. 10.1(a) First Amendment to Revolving Credit and Filed herewith as Exhibit 10.1(a). Participation Agreement, dated as of July 30, 2001, among the Company, the Subsidiaries listed on the signature pages thereof as Borrowers, the Loan Parties listed therein, Bank of America, N.A., as Administrative Agent, and Deutsche Bank AG, New York Branch, as Documentation Agent, transmitted herewith as Exhibit 10.1(a). 10.1(b) Second Amendment to Revolving Credit and Filed herewith as Exhibit 10.1(b). Participation Agreement, dated as of August 31, 2001, among the Company, the Subsidiaries listed on the signature pages thereof as Borrowers, the Loan Parties listed therein, Bank of America, N.A., as Administrative Agent, and Deutsche Bank AG, New York Branch, as Documentation Agent, transmitted herewith as Exhibit 10.1(b).