e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2006
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number: 1-06732
COVANTA HOLDING
CORPORATION
(Exact name of registrant as
specified in its charter)
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Delaware
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95-6021257
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(I.R.S. Employee
Identification No.)
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40 Lane Road, Fairfield,
N.J.
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07004
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(Address of Principal Executive
Offices)
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(Zip Code)
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Registrants telephone number, including area code:
(973) 882-9000
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $0.10 par value
per share
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
N/A
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act.
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of June 30, 2006, the aggregate market value of the
registrants common stock held by non-affiliates of the
registrant was $1,685,252,693 based on the closing sale price as
reported on the New York Stock Exchange (the exchange upon which
the registrants common stock was listed on such date).
Indicate the number of shares outstanding of each of the
issuers classes of common stock, as of the latest
practicable date.
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Class
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February 14, 2007
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Common Stock, $0.10 par value
per share
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153,616,322 shares
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Documents
Incorporated By Reference:
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Part of
Form 10-K
of Covanta Holding Corporation
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Documents Incorporated by Reference
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Part III
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Portions of the Proxy Statement to
be filed with the Securities and Exchange Commission in
connection with the Annual Meeting of Stockholders.
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CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on
Form 10-K
may constitute forward-looking statements as defined
in Section 27A of the Securities Act of 1933 (the
Securities Act), Section 21E of the Securities
Exchange Act of 1934 (the Exchange Act), the Private
Securities Litigation Reform Act of 1995 (the PSLRA)
or in releases made by the Securities and Exchange Commission
(SEC), all as may be amended from time to time. Such
forward-looking statements involve known and unknown risks,
uncertainties and other important factors that could cause the
actual results, performance or achievements of Covanta Holding
Corporation and its subsidiaries (Covanta) or
industry results, to differ materially from any future results,
performance or achievements expressed or implied by such
forward-looking statements. Statements that are not historical
fact are forward-looking statements. Forward-looking statements
can be identified by, among other things, the use of
forward-looking language, such as the words plan,
believe, expect, anticipate,
intend, estimate, project,
may, will, would,
could, should, seeks, or
scheduled to, or other similar words, or the
negative of these terms or other variations of these terms or
comparable language, or by discussion of strategy or intentions.
These cautionary statements are being made pursuant to the
Securities Act, the Exchange Act and the PSLRA with the
intention of obtaining the benefits of the safe
harbor provisions of such laws. Covanta cautions investors
that any forward-looking statements made by Covanta are not
guarantees nor are they indicative of future performance.
Important assumptions and other important factors that could
cause actual results to differ materially from those
forward-looking statements with respect to Covanta, include, but
are not limited to, the risks and uncertainties affecting their
businesses described in Item 1A of this Annual Report on
Form 10-K
for the year ended December 31, 2006 and in other
securities filings by Covanta.
Although Covanta believes that its plans, intentions and
expectations reflected in or suggested by such forward-looking
statements are reasonable, actual results could differ
materially from a projection or assumption in any of its
forward-looking statements. Covantas future financial
condition and results of operations, as well as any
forward-looking statements, are subject to change, inherent
risks and uncertainties. The forward-looking statements
contained in this Annual Report on
Form 10-K
are made only as of the date hereof and Covanta does not have or
undertake any obligation to update or revise any forward-looking
statements whether as a result of new information, subsequent
events or otherwise, unless otherwise required by law.
AVAILABILITY
OF INFORMATION
You may read and copy any materials Covanta files with the SEC
at the SECs Public Reference Room at 100 F Street, N.E.,
Room 1580, Washington, D.C. 20549. Copies of such
material also can be obtained at the SECs website,
www.sec.gov or by mail from the Public Reference Room of
the SEC, at prescribed rates. Please call the SEC at
1-800-SEC-0330
for further information on the Public Reference Room.
Covantas SEC filings are also available to the public,
free of charge, on its corporate website,
www.covantaholding.com as soon as reasonably practicable
after Covanta electronically files such material with, or
furnishes it to, the SEC. Covantas common stock is traded
on the New York Stock Exchange. Material filed by Covanta can be
inspected at the offices of the New York Stock Exchange at
20 Broad Street, New York, N.Y. 10005.
3
PART I
About
Covanta Holding Corporation
This report discusses the business of Covanta Holding
Corporation, a holding company incorporated in Delaware on
April 16, 1992. The financial statements in this report
represent the consolidation of Covanta Holding Corporation and
its wholly-owned and majority-owned subsidiaries. Covanta
Holding Corporation conducts all of its operations through
subsidiaries which are engaged in the businesses of waste and
energy services, and insurance services. Covanta Holding
Corporations predominant business is the waste and energy
services business.
The terms we, our, ours,
us, Covanta and Company
refer to Covanta Holding Corporation and its subsidiaries; the
term Covanta Energy refers to our subsidiary Covanta
Energy Corporation and its subsidiaries; the term ARC
Holdings refers to our subsidiary Covanta ARC Holdings,
Inc. and its subsidiaries; the term TransRiver
refers to our subsidiary TransRiver Marketing Company, L.P.; the
term CPIH refers to our subsidiary Covanta Power
International Holdings, Inc.; the term DIND refers
to our subsidiary Danielson Indemnity Company; and the term
NAICC refers to our subsidiary National American
Insurance Company of California and its subsidiaries.
We are a leading developer, owner and operator of infrastructure
for the conversion of energy-from-waste, waste disposal and
renewable energy production in the United States. We also engage
in the independent power production business outside the United
States. We own or operate 51 energy generation facilities, 41 of
which are in the United States and 10 of which are located
outside the United States. Our energy generation facilities use
a variety of fuels, including municipal solid waste, water
(hydroelectric), natural gas, coal, wood waste, landfill gas and
heavy fuel-oil. We also own or operate several businesses that
are associated with our energy-from-waste business, including a
waste procurement business, two landfills, and several waste
transfer stations. We also operate one domestic water treatment
facility.
We also have investments in subsidiaries engaged in insurance
operations in California primarily in property and casualty
insurance. NAICC writes non-standard private automobile
insurance policies in California.
Our
Business Strategy
We believe our business offers solutions to public sector
leaders around the world in two related elements of critical
infrastructure: post-recycling waste disposal, and energy
generation. We believe the environmental benefits of
energy-from-waste, as an alternative to landfilling, are clear
and compelling: utilizing energy-from-waste reduces greenhouse
gas emissions, lowers the risk of groundwater contamination, and
conserves land. At the same time, energy-from-waste generates
clean reliable energy from a renewable fuel source, thus
reducing dependence on fossil fuels. As public planners address
their needs for more environmentally sensitive waste disposal
and energy generation in the years ahead, we believe
energy-from-waste will be an increasingly attractive alternative.
Our mission is to be the worlds leading energy-from-waste
company, with a complementary network of waste disposal and
energy generation assets. We expect to build value for our
stockholders by satisfying our clients waste disposal and
energy generation needs with safe, reliable and environmentally
superior solutions. In order to accomplish this mission, we
intend to:
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leverage our core competencies and experienced management team
by:
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providing outstanding client service,
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developing and utilizing world-class technologies and
operational expertise,
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applying proven asset management, construction management and
cost control,
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completing and implementing transactions and
acquisitions; and
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maximize long-term value of our existing portfolio by:
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continuing to execute effective maintenance programs and operate
at historic production levels,
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extending operating contracts,
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enhancing the value of the facilities we own after expiration of
existing contracts; and
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capitalize on growth opportunities by:
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expanding our existing energy-from-waste facilities, and
building or acquiring new energy-from-waste facilities,
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seeking new ownership opportunities or operating contracts for
energy-from-waste and other energy generation and waste disposal
projects,
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developing or acquiring additional waste transfer,
transportation, processing and landfill assets that will
compliment our existing facilities; and
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penetrating international markets with opportunities to build,
own, and operate energy-from-waste facilities.
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2007
Recapitalization Plan
On January 19, 2007, we announced a comprehensive
recapitalization plan utilizing a series of equity and debt
financings. Subsequent to this announcement, we completed the
following transactions:
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the refinancing of Covanta Energys debt facilities with
new Covanta Energy debt facilities, comprised of a
$300 million revolving credit facility, a $320 million
funded letter of credit facility, and a $650 million term
loan (collectively referred to as the New Credit
Facilities);
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an underwritten public offering of 6.118 million shares of
our common stock, in which we received proceeds of approximately
$136.6 million, net of underwriting discounts and
commissions;
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an underwritten public offering of approximately
$373.75 million aggregate principal amount of convertible
debentures (the Debentures) issued by us, from which
we received proceeds of approximately $364.4 million, net
of underwriting discounts and commissions; and
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the repayment, by means of a tender offer, of approximately
$604.4 million in aggregate principal amount of outstanding
notes previously issued by Covanta Energys intermediate
subsidiaries.
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We completed our public offerings of equity and debt, including
over-allotment options exercised by underwriters, on
January 31, 2007 and February 6, 2007, and we closed
on the New Credit Facilities on February 9, 2007. We
completed our tender offer for approximately $604.4 million
in aggregate principal amount of outstanding notes on
February 22, 2007. Additional information about our
recapitalization plan is provided in Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations Liquidity and Capital
Resources and in Note 30. Subsequent Events of the
Notes to the Consolidated Financial Statements
(Notes).
Business
Segments
Our business segments are Waste and Energy Services, which is
comprised of Covanta Energys domestic and international
operations, and Other Services, which is comprised of the
holding company and insurance subsidiaries operations. Our
Waste and Energy Services segment is substantially larger than
our Other Services segment. Each of these segments is described
below.
Additional information about our business segments is contained
in Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations
Overview Our Business Segments and in
Note 1. Organization and Summary of Significant Accounting
Policies and Note 27. Business Segments of the Notes.
5
WASTE AND
ENERGY SERVICES BUSINESS
Our strategic acquisitions of Covanta Energy and ARC Holdings
have made us a leader in the waste and energy services markets.
We acquired Covanta Energy in connection with Covanta
Energys emergence from Chapter 11 proceedings. On
March 5, 2004, the Bankruptcy Court confirmed Covanta
Energys proposed plans of reorganization and on
March 10, 2004, we acquired 100% of Covanta Energys
equity for approximately $30 million. We acquired ARC
Holdings on June 24, 2005 by purchasing 100% of the issued
and outstanding shares of ARC Holdings capital stock. We
paid approximately $747 million in cash and transaction
costs and assumed ARC Holdings consolidated net debt of
$1.3 billion at June 24, 2005 ($1.5 billion of
consolidated indebtedness net of $0.2 billion of cash and
restricted funds held in trust). We financed both acquisitions
through a combination of debt and equity financings. The equity
component of each financing was effected through rights
offerings to our shareholders.
See Note 3. Acquisitions and Dispositions of the Notes for
a detailed description of the financings associated with these
acquisitions.
Energy-From-Waste
Projects
The fundamental purpose of our energy-from-waste projects is to
provide waste disposal services, typically to municipal clients
who sponsor the projects. The electricity or steam generated is
generally sold to local utilities or industrial customers, and
most of the resulting revenues reduce the overall cost of waste
disposal services to the municipal clients. These projects are
capable of providing waste disposal services and generating
electricity or steam, if properly operated and maintained, for
several decades. Generally, we provide these waste disposal
services and sell the electricity and steam generated under
long-term contracts, which expire on various dates between 2008
and 2028. Many of our service contracts may be renewed for
varying periods of time, at the option of the municipal client.
We receive revenue in the form of fees pursuant to the service
or waste contracts, and in some cases, energy purchase
agreements, at facilities we own or operate. TransRiver, one of
our subsidiaries, markets waste disposal services to third
parties predominantly to efficiently utilize that portion of the
waste disposal capacity of our energy-from-waste projects which
is not dedicated to municipal clients.
We currently operate energy-from-waste projects in
15 states, identified below under Domestic Project
Summaries. Most of our operating energy-from-waste
projects were developed and structured contractually as part of
competitive procurement processes conducted by municipal
entities. As a result, many of these projects have common
features. However, each service agreement is different to
reflect the specific needs and concerns of a client community,
applicable regulatory requirements and other factors. The
following describes features generally common to these
agreements, as well as important distinctions among them:
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We design the facility, help to arrange for financing and then
we either construct and equip the facility on a fixed price and
schedule basis, or we undertake an alternative role, such as
construction management, if that better meets the goals of our
municipal client.
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Financing for the domestic energy-from-waste projects we own is
generally accomplished through tax-exempt and taxable revenue
bonds issued by or on behalf of the client community. For these
facilities, the bond issuer loans the bond proceeds to us to pay
for facility construction and to fund a debt service reserve for
the project, which is generally sufficient to pay principal and
interest for one year. Project-related debt is included as
project debt and the debt service reserves are
included as restricted funds held in trust in our
consolidated financial statements. Generally, project debt is
secured by the revenues pledged under the respective indentures
and is collateralized by the facility and the contracts and
other assets of our project subsidiary.
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Following construction and during operations, we receive revenue
from two primary sources: fees we receive for operating projects
or for processing waste received, and payments we receive for
electricity
and/or steam
we sell. We have 23 energy-from-waste projects at which we
receive a fixed fee (which escalates over time pursuant to
contractual indices) which we refer to as having a Service
Fee structure. We also have 8 energy-from-waste projects
at which we receive a per-ton fee under contracts for processing
waste, which we refer to as having a Tip Fee
structure. At our Tip Fee projects, we contract on both a
long-term and short-term basis to utilize project disposal
capacity, and as such we have a greater exposure to waste market
price fluctuation, as well as a greater exposure to project
operating disruptions that may cause us to reduce waste
acceptance.
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At projects we own where a Service Fee structure exists, a
portion of the revenue we receive represents payments by the
client community of debt service on project debt, which we pass
along to a bond trustee for payment to bondholders of principal
and interest when due. We record, as income on our consolidated
financial statements, the portion of these payments representing
principal on our project debt. These payments will continue
until cash in project debt service reserves is sufficient to pay
all remaining debt service payments.
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We generally sell the output from our projects pursuant to
long-term contracts to local utilities. Where a Service Fee
structure exists, our client community usually retains a portion
(generally 90%) of the energy revenues generated and pays the
balance to us. Where Tip Fee structures exist, we retain 100% of
the energy revenues. At three of our projects, we sell energy
output under short-term contracts or on a spot-basis into the
regional electricity grid. At our Tip Fee projects, we generally
have a greater exposure to energy market price fluctuation, as
well as a greater exposure to project operating performance.
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We agree to operate the facility and meet minimum waste
processing capacity and efficiency standards, energy production
levels and environmental standards. Failure to meet these
requirements or satisfy the other material terms of our
agreement (unless the failure is caused by our client community
or by events beyond our control), may result in liquidated
damages charged to us or, if the breach is substantial,
continuing and unremedied, termination of the applicable
agreement. In the case of such a termination, we may owe
material damages, including amounts necessary to discharge
project indebtedness. At three publicly-owned facilities we
operate, our client community may terminate the operating
contract under limited circumstances but without cause.
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The client community generally must deliver minimum quantities
of municipal solid waste to the facility on a
put-or-pay
basis and is obligated to pay a fee for its disposal. A
put-or-pay
commitment means that the client community promises to deliver a
stated quantity of waste and pay an agreed amount for its
disposal. Even if the client community delivers less than the
full amount of waste promised, it must pay the contractual fee.
Where a Service Fee structure exists, portions of the service
fee escalate to reflect indices for inflation. In many cases the
client community must also pay for other costs, such as
insurance, taxes, and transportation and disposal of the ash
residue to the disposal site. Generally, expenses resulting from
the delivery of unacceptable and hazardous waste on the site are
also borne by the client community. In addition, the contracts
generally require the client community to pay increased expenses
and capital costs resulting from unforeseen circumstances,
subject to specified limits.
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Covanta Energy and certain of its subsidiaries have issued
performance guarantees to our client communities and, in some
cases other parties, which guarantee that our operating
subsidiaries will perform in accordance with contractual terms
including, where required, the payment of damages. Such
contractual damages could be material, and in circumstances
where one or more subsidiarys contract has been terminated
for its default, such damages could include amounts sufficient
to repay project debt. For facilities owned by client
communities and operated by our subsidiaries, Covanta
Energys potential maximum liability as of
December 31, 2006 associated with the repayment of project
debt on such facilities was approximately $1 billion in
aggregate. If Covanta Energy must perform under one or more of
such guarantees, its liability for damages upon contract
termination would be reduced by funds held in trust and proceeds
from sales of the facilities securing the project debt and is
presently not estimable. To date, Covanta Energy has not
incurred material liabilities under such performance guarantees.
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Our service and waste disposal agreements, as well as our energy
contracts, expire at various times. The extent to which any such
expiration will affect us will depend upon a variety of factors,
including whether we own the project, market conditions then
prevailing, and whether the municipal client exercises options
it may have to extend the contract term. As our contracts expire
we will become subject to greater market risk in maintaining and
enhancing our revenues. As service agreements at
municipally-owned facilities expire, we intend to seek to enter
into renewal or replacement contracts to operate such
facilities. We also will seek to bid competitively in the market
for additional contracts to operate other facilities as similar
contracts of other vendors expire. As our service and waste
disposal agreements at facilities we own or lease begin to
expire, we intend to seek replacement or additional contracts,
and because project debt on these facilities will be paid off at
such time, we expect to be able to offer rates that will attract
sufficient quantities of waste while providing acceptable
revenues to us. At facilities we own, the expiration of existing
energy contracts will require us to sell our output either into
the local electricity grid at prevailing rates or pursuant to
new contracts. We cannot provide assurance that we will be able
to enter into such renewals, replacement or additional
contracts, or that the terms available in the market at the time
will be favorable.
To date, we have been successful in extending our existing
contracts to operate energy-from-waste facilities owned by
municipal clients where market conditions and other factors make
it attractive for both us and our municipal clients to do so. We
have entered into extensions both in the context of expansions
of facilities (see discussion below regarding our Lee County,
Florida and Hillsborough County, Florida projects), or other
negotiated extensions such as at our Lancaster County,
Pennsylvania and Hennepin County, Minnesota projects. The extent
to which additional extensions will be attractive to us and to
our municipal clients who own their projects will depend upon
the market and other factors noted above. However, we do not
believe that either our success or lack of success in entering
into additional negotiated extensions to operate such facilities
will have a material impact on our cash flow and profitability.
See Item 1A. Risk Factors Covanta Energy may
face increased risk of market influences on its domestic
revenues after its contracts expire.
Other
Waste-Related Businesses
TransRiver provides waste procurement services to our waste
disposal and transfer facilities which have available capacity
to receive waste. In doing so, TransRiver seeks to maximize our
revenue, and ensures that our facilities are being utilized most
efficiently, taking into account maintenance schedules and
operating restrictions that may exist from time to time at each
facility. TransRiver also provides management and marketing of
ferrous and non-ferrous metals recovered from energy-from-waste
operations, as well as services related to non-hazardous special
waste destruction and residue management for our
energy-from-waste projects.
Our waste-related business also includes the operations of five
transfer stations and two landfills in the northeast United
States, which we utilize to supplement and manage more
efficiently the fuel and ash disposal requirements at our
energy-from-waste operations.
Renewable
Energy Projects
We also engage domestically in developing, owning
and/or
operating renewable energy production facilities utilizing a
variety of energy sources including water (hydroelectric), waste
wood (biomass) and landfill gas. We sell the electrical output
from each facility, with one exception, to local utilities. We
derive our revenues from the renewable energy production
facilities primarily from the sale of energy and capacity under
energy contracts. The facilities and locations are identified
below under Domestic Project Summaries.
Hydroelectric
We own a 50% equity interest in two
run-of-river
hydroelectric facilities which have a combined gross generating
capacity of 17 megawatts (MW). Both facilities are
located in the State of Washington and both sell energy and
capacity to Puget Sound Energy under long-term energy contracts.
We provide operation and maintenance services at one of the
facilities under a cost plus fixed-fee agreement.
8
Waste
Wood
We own three wood-fired generation facilities and a 50% interest
in a partnership which owns a fourth wood-fired generation
facility, all of which are located in northern California. Fuel
for the facilities is procured from local sources, primarily
through short-term supply agreements. The price of the fuel
varies depending on the time of the year, supply and price of
energy. These projects have a combined gross generating capacity
of 67.1 MW and sell energy and capacity to Pacific
Gas & Electric Company under energy contracts that
expire between 2015 and 2017.
Landfill
Gas
We own and operate four landfill gas projects located in
California which produce electricity by burning methane gas
produced in landfills. One of these projects, located in
San Diego, was expanded in 2006, doubling its capacity. A
fifth landfill gas project located in California and a sixth
landfill gas project located in Maryland were closed in 2006.
The four remaining projects have a total gross generating
capacity of 15.3 MW and sell energy to various California
utilities. Upon the expiration of the energy contracts, we
expect that these projects will enter into new power off-take
arrangements or will be shut down.
Water
Project
We designed, built and now operate and maintain a
24 million gallon per day (mgd) potable water
treatment facility and associated transmission and pumping
equipment in Alabama. Under a long-term contract with a public
utility authority, we receive a fixed-fee plus pass-through
costs for delivering processed water to a municipal water
distribution system.
Domestic
Project Summaries
Summary information with respect to our domestic projects that
are currently operating is provided in the following table:
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Contract Expiration
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Design Capacity
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Dates
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Waste
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Gross
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Service/
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Disposal
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Electric
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Waste
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Location
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(TPD)
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(MW)
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Nature of Interest
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Disposal
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Energy
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A.
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ENERGY-FROM-WASTE
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TIP FEE
STRUCTURES
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|
|
|
1.
|
|
Alexandria/Arlington
|
|
Virginia
|
|
|
975
|
|
|
|
22.0
|
|
|
Owner/Operator
|
|
|
2013
|
|
|
|
2023
|
|
2.
|
|
Delaware Valley
|
|
Pennsylvania
|
|
|
2,688
|
|
|
|
87.0
|
|
|
Lessee/Operator
|
|
|
2017
|
|
|
|
2016
|
|
3.
|
|
Haverhill
|
|
Massachusetts
|
|
|
1,650
|
|
|
|
44.6
|
|
|
Owner/Operator
|
|
|
N/A
|
|
|
|
2019
|
|
4.
|
|
Hempstead
|
|
New York
|
|
|
2,671
|
|
|
|
75.0
|
|
|
Owner/Operator
|
|
|
2009
|
|
|
|
2009
|
|
5.
|
|
Niagara(1)
|
|
New York
|
|
|
2,250
|
|
|
|
50.0
|
|
|
Owner/Operator
|
|
|
N/A
|
|
|
|
2014
|
|
6.
|
|
Southeast Massachusetts(2)
|
|
Massachusetts
|
|
|
2,700
|
|
|
|
78.0
|
|
|
Owner/Operator
|
|
|
N/A
|
|
|
|
2015
|
|
7.
|
|
Union County
|
|
New Jersey
|
|
|
1,440
|
|
|
|
42.1
|
|
|
Lessee/Operator
|
|
|
2023
|
|
|
|
N/A
|
|
8.
|
|
Warren County
|
|
New Jersey
|
|
|
400
|
|
|
|
11.8
|
|
|
Owner/Operator
|
|
|
N/A
|
|
|
|
2013
|
|
|
|
SERVICE FEE
STRUCTURES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.
|
|
Babylon
|
|
New York
|
|
|
750
|
|
|
|
16.8
|
|
|
Owner/Operator
|
|
|
2019
|
|
|
|
2019
|
|
10.
|
|
Bristol
|
|
Connecticut
|
|
|
650
|
|
|
|
16.3
|
|
|
Owner/Operator
|
|
|
2014
|
|
|
|
2014
|
|
11.
|
|
Detroit(1)(2)(3)
|
|
Michigan
|
|
|
2,832
|
|
|
|
68.0
|
|
|
Lessee/Operator
|
|
|
2009
|
|
|
|
2008
|
|
12.
|
|
Essex County
|
|
New Jersey
|
|
|
2,700
|
|
|
|
64.0
|
|
|
Owner/Operator
|
|
|
2020
|
|
|
|
2021
|
|
13.
|
|
Fairfax County
|
|
Virginia
|
|
|
3,000
|
|
|
|
93.0
|
|
|
Owner/Operator
|
|
|
2011
|
|
|
|
2015
|
|
14.
|
|
Hartford(2)(4)
|
|
Connecticut
|
|
|
2,000
|
|
|
|
68.5
|
|
|
Operator
|
|
|
2012
|
|
|
|
2012
|
|
15.
|
|
Hennepin County
|
|
Minnesota
|
|
|
1,212
|
|
|
|
38.7
|
|
|
Operator
|
|
|
2018
|
|
|
|
2018
|
|
16.
|
|
Hillsborough County(5)
|
|
Florida
|
|
|
1,800
|
|
|
|
46.5
|
|
|
Operator
|
|
|
2027
|
|
|
|
2010
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Expiration
|
|
|
|
|
|
|
|
Design Capacity
|
|
|
|
|
Dates
|
|
|
|
|
|
|
|
Waste
|
|
|
Gross
|
|
|
|
|
Service/
|
|
|
|
|
|
|
|
|
|
|
Disposal
|
|
|
Electric
|
|
|
|
|
Waste
|
|
|
|
|
|
|
|
|
Location
|
|
(TPD)
|
|
|
(MW)
|
|
|
Nature of Interest
|
|
Disposal
|
|
|
Energy
|
|
|
17.
|
|
Honolulu(2)(3)
|
|
Hawaii
|
|
|
2,160
|
|
|
|
57.0
|
|
|
Lessee/Operator
|
|
|
2010
|
|
|
|
2015
|
|
18.
|
|
Huntington(6)
|
|
New York
|
|
|
750
|
|
|
|
24.3
|
|
|
Owner/Operator
|
|
|
2012
|
|
|
|
2012
|
|
19.
|
|
Huntsville(1)
|
|
Alabama
|
|
|
690
|
|
|
|
|
|
|
Operator
|
|
|
2016
|
|
|
|
2016
|
|
20.
|
|
Indianapolis(1)
|
|
Indiana
|
|
|
2,362
|
|
|
|
6.5
|
|
|
Owner/Operator
|
|
|
2008
|
|
|
|
2028
|
|
21.
|
|
Kent County(1)
|
|
Michigan
|
|
|
625
|
|
|
|
16.8
|
|
|
Operator
|
|
|
2010
|
|
|
|
2022
|
|
22.
|
|
Lake County
|
|
Florida
|
|
|
528
|
|
|
|
14.5
|
|
|
Owner/Operator
|
|
|
2014
|
|
|
|
2014
|
|
23.
|
|
Lancaster County
|
|
Pennsylvania
|
|
|
1,200
|
|
|
|
33.1
|
|
|
Operator
|
|
|
2016
|
|
|
|
2016
|
|
24.
|
|
Lee County(7)
|
|
Florida
|
|
|
1,836
|
|
|
|
57.3
|
|
|
Operator
|
|
|
2024
|
|
|
|
2015
|
|
25.
|
|
Marion County
|
|
Oregon
|
|
|
550
|
|
|
|
13.1
|
|
|
Owner/Operator
|
|
|
2014
|
|
|
|
2014
|
|
26.
|
|
Montgomery County
|
|
Maryland
|
|
|
1,800
|
|
|
|
63.4
|
|
|
Operator
|
|
|
2016
|
|
|
|
2010
|
|
27.
|
|
Onondaga County(8)
|
|
New York
|
|
|
990
|
|
|
|
36.8
|
|
|
Owner/Operator
|
|
|
2015
|
|
|
|
2025
|
|
28.
|
|
Pasco County
|
|
Florida
|
|
|
1,050
|
|
|
|
29.7
|
|
|
Operator
|
|
|
2011
|
|
|
|
2024
|
|
29.
|
|
Southeast Connecticut
|
|
Connecticut
|
|
|
689
|
|
|
|
17.0
|
|
|
Owner/Operator
|
|
|
2015
|
|
|
|
2017
|
|
30.
|
|
Stanislaus County
|
|
California
|
|
|
800
|
|
|
|
22.4
|
|
|
Owner/Operator
|
|
|
2010
|
|
|
|
2010
|
|
31.
|
|
Wallingford
|
|
Connecticut
|
|
|
420
|
|
|
|
11.0
|
|
|
Owner/Operator
|
|
|
2010
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUBTOTAL
|
|
|
46,168
|
|
|
|
1,225.2
|
|
|
|
|
|
|
|
|
|
|
|
B.
|
|
OTHER WASTE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LANDFILLS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32.
|
|
Haverhill
|
|
Massachusetts
|
|
|
555
|
|
|
|
N/A
|
|
|
Lessee/Operator
|
|
|
N/A
|
|
|
|
N/A
|
|
33.
|
|
CMW Semass
|
|
Massachusetts
|
|
|
1,700
|
|
|
|
N/A
|
|
|
Operator
|
|
|
2016
|
|
|
|
N/A
|
|
|
|
TRANSFER
STATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34.
|
|
Braintree
|
|
Massachusetts
|
|
|
1,200
|
|
|
|
N/A
|
|
|
Owner/Operator
|
|
|
2015
|
|
|
|
N/A
|
|
35.
|
|
Lynn
|
|
Massachusetts
|
|
|
885
|
|
|
|
N/A
|
|
|
Owner/Operator
|
|
|
N/A
|
|
|
|
N/A
|
|
36.
|
|
Derwood
|
|
Maryland
|
|
|
2,500
|
|
|
|
N/A
|
|
|
Operator
|
|
|
2015
|
|
|
|
N/A
|
|
37.
|
|
Danvers
|
|
Massachusetts
|
|
|
250
|
|
|
|
N/A
|
|
|
Operator
|
|
|
2011
|
|
|
|
N/A
|
|
38.
|
|
Essex
|
|
Massachusetts
|
|
|
6
|
|
|
|
N/A
|
|
|
Operator
|
|
|
2015
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUBTOTAL
|
|
|
7,096
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
C.
|
|
HYDROELECTRIC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39.
|
|
Koma Kulshan(9)
|
|
Washington
|
|
|
N/A
|
|
|
|
12.0
|
|
|
Part Owner/Operator
|
|
|
N/A
|
|
|
|
2037
|
|
40.
|
|
Weeks Falls(9)
|
|
Washington
|
|
|
N/A
|
|
|
|
5.0
|
|
|
Part Owner
|
|
|
N/A
|
|
|
|
2022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUBTOTAL
|
|
|
N/A
|
|
|
|
17.0
|
|
|
|
|
|
|
|
|
|
|
|
D.
|
|
WOOD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41.
|
|
Burney Mountain
|
|
California
|
|
|
N/A
|
|
|
|
11.4
|
|
|
Owner/Operator
|
|
|
N/A
|
|
|
|
2015
|
|
42.
|
|
Mount Lassen
|
|
California
|
|
|
N/A
|
|
|
|
11.4
|
|
|
Owner/Operator
|
|
|
N/A
|
|
|
|
2015
|
|
43.
|
|
Pacific Oroville
|
|
California
|
|
|
N/A
|
|
|
|
18.7
|
|
|
Owner/Operator
|
|
|
N/A
|
|
|
|
2016
|
|
44.
|
|
Pacific Ultrapower Chinese
Station(9)
|
|
California
|
|
|
N/A
|
|
|
|
25.6
|
|
|
Part Owner
|
|
|
N/A
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUBTOTAL
|
|
|
N/A
|
|
|
|
67.1
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Expiration
|
|
|
|
|
|
|
|
Design Capacity
|
|
|
|
|
Dates
|
|
|
|
|
|
|
|
Waste
|
|
|
Gross
|
|
|
|
|
Service/
|
|
|
|
|
|
|
|
|
|
|
Disposal
|
|
|
Electric
|
|
|
|
|
Waste
|
|
|
|
|
|
|
|
|
Location
|
|
(TPD)
|
|
|
(MW)
|
|
|
Nature of Interest
|
|
Disposal
|
|
|
Energy
|
|
|
E.
|
|
LANDFILL GAS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45.
|
|
Otay
|
|
California
|
|
|
N/A
|
|
|
|
7.4
|
|
|
Owner/Operator
|
|
|
N/A
|
|
|
|
2009-2015
|
|
46.
|
|
Oxnard
|
|
California
|
|
|
N/A
|
|
|
|
5.6
|
|
|
Owner/Operator
|
|
|
N/A
|
|
|
|
2009
|
|
47.
|
|
Salinas
|
|
California
|
|
|
N/A
|
|
|
|
1.5
|
|
|
Owner/Operator
|
|
|
N/A
|
|
|
|
2007
|
|
48.
|
|
Stockton
|
|
California
|
|
|
N/A
|
|
|
|
0.8
|
|
|
Owner/Operator
|
|
|
N/A
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUBTOTAL
|
|
|
N/A
|
|
|
|
15.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
|
|
|
53,264
|
|
|
|
1,324.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F.
|
|
WATER
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49.
|
|
Bessemer
|
|
Alabama
|
|
|
N/A
|
|
|
|
24 mgd
|
|
|
Operator
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
(1) |
|
These facilities have been designed to export steam for sale. |
|
(2) |
|
These facilities use a refuse-derived fuel technology. |
|
(3) |
|
We lease these projects from third party lessors under
arrangements where the lease benefits and burdens are primarily
those of the related client community. |
|
(4) |
|
Under contracts with the Connecticut Resource Recovery
Authority, we operate only the boilers and turbines for this
facility. |
|
(5) |
|
With respect to this project, we have entered into agreements to
expand waste processing capacity from 1,200 tpd to
1,800 tpd and to increase gross electricity capacity from
29.0 MW to 46.5 MW. The agreements will also extend
the contract term from 2007 to 2027. See Hillsborough County,
Florida discussion below. |
|
(6) |
|
Owned by a limited partnership in which the limited partners are
not affiliated with Covanta Energy. |
|
(7) |
|
With respect to this project, we have entered into agreements to
expand waste processing capacity from 1,200 tpd to 1,836
tpd and to increase gross electricity capacity from 36.9 MW
to 57.3 MW. The agreements will also extend the contract
term from 2014 to 2024. Construction of the expansion is
scheduled to be complete during 2007. |
|
(8) |
|
On December 27, 2006, we acquired all limited partnership
interests held by unaffiliated entities in our subsidiary
Covanta Onondaga Limited Partnership. |
|
(9) |
|
We have a 50% ownership interest in these projects. |
Domestic
Business Development
In our domestic business development efforts, we encounter
competition from other companies in pursuing opportunities in
the waste disposal and energy markets. With the New Credit
Facilities, we will have greater flexibility to pursue such
opportunities by investing in the business and making
acquisitions.
Our business is capital intensive because it is based upon
building and operating municipal solid waste processing and
energy generating projects. In order to provide meaningful
growth through development, we must be able to invest our funds,
obtain equity
and/or debt
financing, and provide support to our operating subsidiaries.
Our domestic project development has recently concentrated on
working with our client communities to expand existing
energy-from-waste project capacities. We are pursuing additional
project expansion opportunities, contract extension
opportunities, acquisition opportunities, and opportunities in
businesses ancillary to our existing business, such as
additional waste transfer, transportation, processing and
landfill businesses.
Our development efforts regarding project expansions, contract
extensions and new contracts are described below.
11
Hillsborough
County, Florida
We designed, constructed and now operate and maintain this 1,200
tpd mass-burn energy-from-waste facility located in and owned by
Hillsborough County. Due to the growth in the amount of
municipal solid waste generated in Hillsborough County,
Hillsborough County informed us of its desire to expand the
facilitys waste processing and electricity generation
capacities, a possibility contemplated by the original contract
between Covanta Energy and Hillsborough County. In August 2005,
Covanta Energy and Hillsborough County entered into agreements
to implement this expansion, and to extend the agreement under
which Covanta Energy operates the facility, which would
otherwise expire in 2007, through 2027. Environmental and other
project related permits have been secured and the expansion
construction commenced on December 29, 2006.
Lee
County, Florida
We designed, constructed and now operate and maintain this 1,200
tpd mass-burn energy-from-waste facility located in and owned by
Lee County. Due to the growth in the amount of municipal solid
waste generated in Lee County, Lee County informed us of its
desire to engage us to manage the expansion of the
facilitys waste processing and electricity generation
capacities, a possibility contemplated by the original contract
between Covanta Energy and Lee County. As part of the agreement
to implement this expansion, Covanta Energy received a long-term
operating contract extension expiring in 2024. Contracts for
construction of the expansion and contracts for operation and
maintenance of the expanded facility have been executed by the
parties. The principal environmental permit for the expansion
has been received and construction of the expansion has
commenced. Completion of the expansion, and commencement of the
operation of the expanded project, is expected during 2007.
Harrisburg,
Pennsylvania
In December 2006, we discussed with officials of the City of
Harrisburg and the Harrisburg Authority (the
Authority) a potential transaction to purchase,
lease or operate, on a long-term basis, the Authoritys 800
tpd energy-from-waste facility located in Harrisburg,
Pennsylvania. The facility has been experiencing certain
operating difficulties following significant capital
improvements undertaken by another company on the
Authoritys behalf. A subsidiary of Covanta Energy has
entered into an interim agreement to operate and maintain the
facility through March 31, 2007 as the Authoritys
contractor. Based upon the understanding we will obtain in the
course of operating and maintaining the facility during this
period, we expect to provide the Authority with a proposal
regarding a long-term relationship.
International
Waste and Energy Services Business
We conduct our international energy business through our foreign
subsidiaries and affiliates. The largest element of our
international waste and energy services business is our 26%
ownership in and operation of a 510 MW (gross) pulverized
coal-fired electric generating facility in the Philippines. We
also have interests in other fossil fuel generating projects in
Bangladesh, China, India and the Philippines, an
energy-from-waste project in Italy and two small hydroelectric
projects in Costa Rica. In general, these projects provide cash
returns primarily from equity distributions and, to a lesser
extent, operating fees. The projects sell the electricity and
steam they generate under long-term contracts or market
concessions to utilities, governmental agencies providing power
distribution, creditworthy industrial users, or local
governmental units. In select cases, such sales of electricity
and steam may be provided under short-term arrangements as well.
We presently have interests in international power projects with
an aggregate generating capacity of approximately 952 MW
(gross) with our portion of the ownership in these facilities
representing approximately 377 MW. In addition to our
headquarters in Fairfield, New Jersey, our international
business is facilitated through field offices in Shanghai,
China; Chennai, India; Manila, Philippines; Birmingham, England;
and Bangkok, Thailand.
General
Approach to International Projects
In developing our international business, we have employed the
same general approach to projects as is described above with
respect to domestic projects. We intend to seek to develop or
participate in additional
12
international projects, particularly energy-from-waste projects
where the regulatory or market environment is attractive. For
information related to the revenues and identifiable assets of
the international business, see Note 27. Business Segments
of the Notes.
The ownership and operation of facilities in foreign countries
entails significant political and financial uncertainties that
typically are not encountered in such activities in the United
States as described in Item 1A. Risk Factors
Exposure to international economic and political factors may
materially and adversely affect our international businesses.
Many of the countries in which we currently operate are lesser
developed countries or developing countries where the political,
social and economic conditions are typically less stable than in
the United States. The financial condition and creditworthiness
of the potential purchasers of power and services we provide or
of the suppliers of fuel for projects in these countries may not
be as strong as those of similar entities in developed
countries. The obligations of the purchasers under our energy
contracts, the service recipients under our related service
agreements and the suppliers under our fuel supply agreements
generally are not guaranteed by any host country or other
creditworthy governmental agency. When a project is developed,
we undertake a credit analysis of the proposed power purchaser
or fuel supplier and to the extent appropriate and achievable
within the commercial parameters of a project, require such
entities to provide financial instruments, such as letters of
credit or arrangements regarding the escrowing of receivables.
We have typically sought to negotiate long-term contracts for
the supply of fuel with creditworthy and reliable suppliers.
However, the reliability of fuel deliveries may be compromised
by one or more of several factors that may be more acute or may
occur more frequently in developing countries than in developed
countries, including a lack of sufficient infrastructure to
support deliveries under all circumstances; bureaucratic delays
in the import, transportation and storage of fuel in the host
country; customs and tariff disputes; and local or regional
unrest or political instability. In most of the foreign projects
in which we participate, we have sought, to the extent
practicable, to shift the consequences of interruptions in the
delivery of fuel (whether due to the fault of the fuel supplier
or due to reasons beyond the fuel suppliers control) to
the electricity purchaser or service recipient by securing a
suspension of the projects operating responsibilities
under the applicable agreements and an extension of our
operating concession under such agreements. In some instances,
we require the energy purchaser or service recipient to continue
to make payments of fixed costs if such interruptions occur. In
order to mitigate the effect of short-term interruptions in the
supply of fuel, we have also endeavored to provide
on-site
storage of fuel in sufficient quantities to address such
interruptions.
Payment for services that we provide will often be made in whole
or in part in the domestic currencies of the host countries.
Local governments generally do not assure conversion of such
currencies into U.S. dollars, which may be subject to
limitations in the currency markets, as well as restrictions of
the host country. In addition, fluctuations in the value of such
currencies against the value of the U.S. dollar may cause
our participation in such projects to yield less return than
expected. Transfer of earnings, capital and profits in any form
beyond the borders of the host country may be subject to special
taxes or limitations imposed by host country laws. We have
sought to participate in projects where the host country has
allowed the convertibility of its currency into
U.S. dollars and repatriation of earnings, capital and
profits subject to compliance with local regulatory
requirements. In most cases, components of project costs
incurred or funded in U.S. dollars are recovered without
risk of currency fluctuation through negotiated contractual
adjustments to the price charged for electricity or service
provided. This contractual structure may cause the cost in local
currency to the projects power purchaser or service
recipient to rise from time to time in excess of local
inflation, and consequently there is risk in such situations
that such power purchaser or service recipient will, at least in
the near-term, be less able or willing to pay for the
projects power or service.
We have sought to manage and mitigate these risks through all
appropriate means, including: political and financial analysis
of the host countries and the key participants in each project;
guarantees of relevant agreements with creditworthy entities;
political risk and other forms of insurance; participation by
United States
and/or
international development finance institutions in the financing
of projects; and joint ventures with other companies to pursue
the development, financing and construction of these projects.
We determine which mitigation measures to apply based on our
ability to balance the risks presented, the availability of such
measures and their cost.
13
In addition, we have generally participated in projects which
provide services that are treated as a matter of national or key
economic importance by the laws and politics of the host
country. Therefore, there is a risk that the assets constituting
the facilities of these projects could be temporarily or
permanently expropriated or nationalized by a host country, made
subject to local or national control or be subject to
unfavorable legislative action, regulatory decisions or changes
in taxation.
In certain cases, Covanta Energy and certain of its subsidiaries
have issued guarantees on behalf of our international operating
subsidiaries with respect to contractual obligations to operate
certain international power projects and one energy-from-waste
project. The potential damages we may owe under such
arrangements may be material. Depending upon the circumstances
giving rise to such damages, the contractual terms of the
applicable contracts, and the contract counterpartys
choice of remedy at the time a claim against a guarantee is
made, the amounts owed pursuant to one or more of such
guarantees could be greater than our then-available sources of
funds. To date, we have not incurred any material liabilities
under such guarantees on international projects.
Our international power projects are identified below under
International Project Summaries. The
following describes the important features of these projects, by
fuel type:
Energy-From-Waste
We own a 13% equity interest in an 18 MW mass-burn
energy-from-waste project at Trezzo sullAdda in the
Lombardy Region of Italy which burns up to 500 metric tons per
day of municipal solid waste. The remainder of the equity in the
project is held by a subsidiary of Falck S.p.A. and the
municipality of Trezzo sullAdda. The project is operated
by Ambiente 2000 S.r.l., an Italian special purpose limited
liability company of which we own 40%. The solid waste supply
for the project comes from municipalities and privately-owned
waste haulers under long-term contracts. The electrical output
from the Trezzo project is sold at governmentally established
preferential rates under a long-term purchase contract to
Italys state-owned grid operator, Gestore della Rete di
Trasmissione Nazionale S.p.A.
Hydroelectric
We operate two hydroelectric facilities in Costa Rica through an
operating subsidiary pursuant to long-term contracts. We also
have a nominal equity investment in each project. The electric
output from both of these facilities is sold to Instituto
Costarricense de Electricidad, a Costa Rica national electric
utility.
Coal
A partnership, in which we hold a 26% equity interest, owns a
510 MW (gross) coal-fired electric power generation
facility located in Mauban, Quezon Province, the Philippines
(Quezon). The remaining equity interests are held by
an affiliate of International Generating Company, an affiliate
of General Electric Capital Corporation, and an entity owned by
the original project developer. The Quezon project sells
electricity to the Manila Electric Company
(Meralco), the largest electric distribution company
in the Philippines, which serves the area surrounding and
including metropolitan Manila.
Under an energy contract expiring in 2025, Meralco is obligated
to
take-or-pay
for stated minimum annual quantities of electricity at an all-in
price which consists of capacity, operating, energy,
transmission and other fees adjusted for inflation, fuel cost
and foreign exchange fluctuations. The Quezon project has
entered into two coal supply contracts expiring in 2015 and
2022. Under these supply contracts, the cost of coal is
determined using a base energy price adjusted to fluctuations of
specified international benchmark prices. Our wholly-owned
subsidiary, Covanta Philippines Operating, Inc., operates the
project under a long-term agreement with the Quezon project and
we have obtained political risk insurance for our equity
investment in this project.
Project management continues to negotiate with Meralco with
respect to proposed amendments to the contract to modify certain
commercial terms and to resolve issues relating to the
projects performance during its first year of operation.
Resolution of these issues is not expected to materially
adversely affect the Quezon project or the ownership interest in
it.
14
We also have majority equity interests in two coal-fired
cogeneration facilities in different provinces in the
Peoples Republic of China. The project entity, in which we
hold a majority interest, operates these projects. During 2006,
we sold our interest in a third coal-fired project in China.
Parties holding minority positions in the projects include a
private company, a local government enterprise and affiliates of
the local municipal government. While the steam produced at each
of the projects is intended to be sold under long-term contracts
to the industrial hosts, in practice, steam has been sold on
either a short-term basis to local industries or the industrial
hosts, in each case at varying rates and quantities. In both
cases, the electric power is sold at an average grid
rate to subsidiaries of the provincial power bureaus.
Natural
Gas
We hold a 45% equity interest in a barge-mounted 126 MW
(gross) diesel/natural gas-fired electric power generation
facility located near Haripur, Bangladesh. The remaining equity
interests are held by an affiliate of Globaleq Asia Holdings
Limited and an affiliate of Wartsila North America, Inc. The
electrical output of the project is sold to the Bangladesh Power
Development Board (BPDB) pursuant to an energy
contract with minimum energy off-take provisions at an all-in
price divided into a fuel component and an other
component. The fuel component reimburses the fuel cost incurred
by the project up to a specified heat rate. The
other component consists of a pre-determined base
rate which is adjusted for the actual load factor and foreign
exchange fluctuations. The BPDB also supplies all of the
projects natural gas requirements at a pre-determined base
cost adjusted to fluctuations on actual landed cost of the fuel
in Bangladesh. The Government of Bangladesh guarantees the
BPDBs contractual obligations. We operate the project
under a long-term agreement with the project company and we have
obtained political risk insurance for our equity interest in
this project.
Diesel/Heavy
Fuel-Oil
We hold majority equity interests in two 106 MW (gross)
heavy fuel-oil fired electric power generation facilities in
India. We hold a 60% equity interest in the first project (the
Samalpatti project), which is located near
Samalpatti, in the state of Tamil Nadu. The remaining equity
interests in the Salmalpatti project are held by affiliates of
Shapoorji Pallonji Infrastructure Capital Co. Ltd. and by
Wartsila India Power Investment, LLC. We hold a 77% equity
interest in the second project (the Madurai
project), which is located at Samayanallur, also in the
state of Tamil Nadu. The remaining equity interest in the
Madurai project is held by an Indian company controlled by the
original project developer. Both projects sell their electrical
output to the Tamil Nadu Electricity Board (TNEB)
pursuant to long-term agreements with a full pass-through all-in
pricing structure that takes into account specified heat rates,
operation and maintenance costs, and equity returns. TNEBs
obligations are guaranteed by the government of the state of
Tamil Nadu. Indian oil companies supply the oil requirements of
both projects through
15-year fuel
supply agreements based on market prices. We operate both
projects through subsidiaries under long-term agreements with
the project companies.
Disputing several contractual provisions, TNEB has failed to pay
the full amount due under the energy contracts for both the
Samalpatti and Madurai projects. To date, TNEB has paid the
undisputed portion of its payment obligations (approximately 95%
of total billings) representing each projects operating
costs, fuel costs, debt service and some equity return. Similar
to many Indian state electricity boards, TNEB has also failed to
fund an escrow account or post a letter of credit required under
the project energy contracts, which failure constitutes a
default under the project finance documents. Project lenders for
both projects have either granted periodic waivers of such
default or potential default
and/or
otherwise approved scheduled equity distributions. Neither such
default nor potential default in the project financing
arrangements constitutes a default under Covanta Energys
financing arrangements. It is possible that the issue of the
escrow account
and/or
letter of credit requirement will be resolved as part of the
overall negotiation with TNEB with respect to the disputed
receivables in both projects.
We also own a minority interest in a 7 MW heavy fuel-oil
fired electric power generation facility located in the province
of Mindoro, the Philippines (the Island Power
project) that has a long-term power sales contract.
15
International
Project Summaries
Summary information with respect to our international projects
that are currently operating is provided in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric
|
|
|
|
|
Contract Expiration Dates
|
|
|
|
|
|
|
|
Capacity
|
|
|
|
|
Operation and
|
|
|
|
|
|
|
|
|
Location
|
|
(MW)
|
|
|
Nature of Interest
|
|
Maintenance
|
|
|
Energy
|
|
|
A
|
|
ENERGY-FROM-WASTE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.
|
|
Trezzo(1)
|
|
Italy
|
|
|
18
|
|
|
Part Owner/Operator
|
|
|
2023
|
|
|
|
2023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
B.
|
|
HYDROELECTRIC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.
|
|
Don Pedro(2)
|
|
Costa Rica
|
|
|
14
|
|
|
Part Owner/Operator
|
|
|
2009
|
|
|
|
2009
|
|
3.
|
|
Rio Volcan(2)
|
|
Costa Rica
|
|
|
17
|
|
|
Part Owner/Operator
|
|
|
2009
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUBTOTAL
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C.
|
|
COAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
|
Linan(3)(4)
|
|
China
|
|
|
24
|
|
|
Part Owner/Operator
|
|
|
N/A
|
|
|
|
N/A
|
|
5.
|
|
Quezon(5)
|
|
Philippines
|
|
|
510
|
|
|
Part Owner/Operator
|
|
|
2025
|
|
|
|
2025
|
|
6.
|
|
Yanjiang(3)(6)
|
|
China
|
|
|
24
|
|
|
Part Owner/Operator
|
|
|
N/A
|
|
|
|
NA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUBTOTAL
|
|
|
558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D.
|
|
NATURAL GAS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
|
Haripur(7)
|
|
Bangladesh
|
|
|
126
|
|
|
Part Owner/Operator
|
|
|
2014
|
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
E.
|
|
DIESEL/HEAVY FUEL-OIL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.
|
|
Island Power(8)
|
|
Philippines
|
|
|
7
|
|
|
Part Owner
|
|
|
N/A
|
|
|
|
2010
|
|
9.
|
|
Madurai(9)
|
|
India
|
|
|
106
|
|
|
Part Owner/Operator
|
|
|
2016
|
|
|
|
2016
|
|
10.
|
|
Samalpatti(10)
|
|
India
|
|
|
106
|
|
|
Part Owner/Operator
|
|
|
2016
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUBTOTAL
|
|
|
219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL INTERNATIONAL GROSS MW IN
OPERATION
|
|
|
|
|
952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We have a 13% interest in this project and a 40% interest in the
operator Ambiente 2000 S.r.l. |
|
(2) |
|
We have nominal ownership interests in these projects. |
|
(3) |
|
Assets of these projects revert back to the local Chinese
partner at the expiration of the Joint Venture Agreement in 2017. |
|
(4) |
|
We have an approximate 64% ownership interest in this project. |
|
(5) |
|
We have an approximate 26% ownership interest in this project. |
|
(6) |
|
We have an approximate 96% ownership interest in this project. |
|
(7) |
|
We have an approximate 45% ownership interest in this project.
This project is capable of operating through combustion of
diesel oil in addition to natural gas. |
|
(8) |
|
We have an approximate 20% ownership interest in this project. |
|
(9) |
|
We have an approximate 77% ownership interest in this project. |
|
(10) |
|
We have a 60% ownership interest in this project. |
16
International
Business Development
As with our domestic business, the New Credit Facilities afford
greater flexibility to invest in and grow our international
business. We are pursuing international waste
and/or
energy business opportunities, particularly in markets where the
market demand, regulatory environment or other factors encourage
technologies such as energy-from-waste in order to reduce
dependence on landfilling, such as Italy, the United Kingdom,
China or island nations where landfilling is a less desirable
disposal option.
China
Joint Venture
On February 12, 2007, we entered into agreements relating
to the subscription for a 40% equity interest in Chongqing
Sanfeng Environmental Industry Co., Ltd. (Sanfeng).
Sanfeng, a company located in Chongqing Municipality, China, is
engaged in the business of owning and operating
energy-from-waste projects and providing design and engineering,
procurement and construction services for energy-from-waste
facilities in China. Sanfeng currently owns minority equity
interests in two 1,200 metric tons per day, 24 MW mass-burn
energy-from-waste projects. Energy-from-waste facility design
and engineering services are provided by Sanfeng using
technology under license from Martin GmbH fur Umwelt und
Energietechnik.
Our investment in Sanfeng is subject to various regulatory and
other conditions precedent and is expected to be completed
during the second quarter of 2007. Upon completion of our
investment, Sanfeng will be converted into a Sino-foreign equity
joint venture under Chinese law in which Sanfengs current
shareholder, Chongqing Iron & Steel Company (Group)
Limited, will hold the remaining 60% equity interest. We intend
to expand the business of the joint venture company through the
development of additional mass-burn energy-from-waste projects
in China in which Covanta intends to co-invest with the joint
venture company.
OTHER
SERVICES BUSINESS
Discussion
of Other Services Business
The operations of the holding company prior to the acquisition
of Covanta Energy on March 10, 2004, primarily included
general and administrative expenses related to officer salaries,
legal and other professional fees and insurance. Subsequent to
the acquisition of Covanta Energy, these expenses are reimbursed
by Covanta Energy under an administrative services agreement.
The holding company operations also include income earned on its
investments.
Insurance
Business
Following the acquisitions of Covanta Energy and ARC Holdings,
the relative contribution of our insurance business to our cash
flow and its relative percentage of our financial obligations
were significantly reduced. Consequently, our insurance business
neither contributes materially to our cash flow nor imposes
material financial obligations on us.
Our insurance business continues to represent an important
element of our structure in that our net operating loss
carryforwards (NOLs) were primarily generated
through the operations of former subsidiaries of DIND. Our
ability to utilize that portion of the NOLs will depend upon the
continued inclusion of our insurance business in our
consolidated federal income tax return. See Note 21. Income
Taxes of the Notes for more information on our NOLs.
Our insurance operations are conducted through wholly-owned
subsidiaries, principally NAICC. NAICC has historically managed
its business across four principal lines of business:
non-standard private passenger automobile; commercial
automobile; workers compensation; and property and
casualty. As of December 31, 2006, NAICC was engaged in
writing exclusively non-standard private passenger automobile
primarily in California. NAICC intends to also engage in the
specialty surety business in order to expand its business
incrementally.
Our insurance businesses have succeeded in reducing their loss
ratio by adjusting rate filings, tightening underwriting
criteria, exiting unprofitable lines of business and focusing on
writing more profitable lines of
17
business through its arrangements with third parties providing
marketing, underwriting and administration services. Such third
parties do not have rate making authority or authority to enter
into reinsurance arrangements. Such third parties are paid flat
commission on new and renewal policies written and they
participate in an incentive compensation arrangement dictated
solely by underwriting results.
Insurers admitted in California are required to obtain approval,
from the California Department of Insurance, of rates
and/or forms
prior to their use. Many of the other states in which NAICC is
authorized to conduct business have similar requirements. Rates
and policy forms are developed by NAICC and filed with the
regulators in each of the relevant states, depending upon each
states requirements. NAICC relies upon its own, as well as
industry, experience in establishing rates.
Non-standard automobile liability risks relate to those segments
of the driving public which generally are not considered
preferred business, such as drivers with a record of
prior accidents or driving violations, drivers involved in
particular occupations or driving certain types of vehicles, or
those drivers whose policies have not been renewed or whose
policies have been declined by another insurance company.
Generally, in order to address the associated higher risk of
non-standard private automobile insurance, premium rates are
higher than standard premium rates while policy limits are lower
than typical policy limits. Policyholder selection is governed
by underwriting guidelines established by NAICC. NAICC believes
that it is able to achieve underwriting success through
refinement of various risk profiles, thereby dividing the
non-standard market into more defined segments which can be
adequately priced. Additionally, traditional lower policy limits
lend themselves to quicker claims processing allowing NAICC to
respond more quickly to changing loss trends, by revising
underlying underwriting guidelines and class and rate filings
accordingly.
NAICC maintains reserves with respect to net unpaid losses and
loss adjustment expenses (LAE), representing the
estimated indemnity cost and expense necessary to cover the
ultimate net cost of investigating and settling claims. Such
estimates are based upon estimates for reported losses,
historical company experience of losses reported by reinsured
companies for insurance assumed and actuarial estimates based
upon historical company and industry experience for development
of reported and unreported claims (incurred but not reported).
Any changes in estimates of ultimate liability are reflected in
current operating results. Inflation is assumed, along with
other factors, in estimating future claim costs and related
liabilities. NAICC does not discount any of its loss reserves.
NAICC believes its provisions for unpaid losses and LAE are
adequate to cover the net cost of losses and loss expenses
incurred to date, and that it satisfies all reserve-based
capital requirements imposed under applicable insurance
regulations.
In its normal course of business, NAICC typically reinsures a
portion of its exposure with other insurance companies so as to
effectively limit its maximum loss arising out of any one
occurrence. Contracts of reinsurance do not legally discharge
the original insurer from its primary liability. Estimated
reinsurance receivables arising from these contracts of
reinsurance are reported separately as assets in accordance with
generally accepted accounting principles in the United States.
MARKETS,
COMPETITION AND BUSINESS CONDITIONS
General
Business Conditions
Our business can be adversely affected by general economic
conditions, war, inflation, adverse competitive conditions,
governmental restrictions and controls, changes in laws, natural
disasters, energy shortages, fuel costs, weather, the adverse
financial condition of customers and suppliers, various
technological changes and other factors over which we have no
control.
We expect in the foreseeable future that competition for new
contracts and projects will be intense in all markets in which
we conduct or intend to conduct businesses, and our businesses
will be subject to a variety of competitive, regulatory and
market influences.
With respect to our waste-related businesses, including our
energy-from-waste and TransRiver businesses, we compete in the
waste disposal market, which is highly competitive. While we
currently process for disposal over 5%
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of the municipal solid waste in the United States, the market
for waste disposal is almost entirely price-driven and is
greatly influenced by economic factors within regional
waste sheds. These factors include:
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regional population and overall waste production rates;
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the number of other waste disposal sites (including principally
landfills and transfer stations) in existence or in the planning
or permitting process;
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the available disposal capacity (in terms of tons of waste per
day) that can be offered by other regional disposal
sites; and
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the availability and cost of transportation options (rail,
intermodal, trucking) to provide access to more distant disposal
sites, thereby affecting the size of the waste shed itself.
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In the waste disposal market, disposal service providers seek to
obtain waste supplies to their facilities by competing on
disposal price (usually on a per-ton basis) with other disposal
service providers. At all but eight of our energy-from-waste
facilities, we typically do not compete in this market because
we do not have the contractual right to solicit waste. At these
facilities, the client community is responsible for obtaining
the waste, if necessary by competing on price to obtain the tons
of waste it has contractually promised to deliver to us. At
eight of our energy-from-waste facilities and at our TransRiver
businesses, we are responsible for obtaining material amounts of
waste supply, and therefore, actively compete in these markets
to enter into spot, medium- and long-term contracts. All of
these energy-from-waste projects are in densely populated areas,
with high waste generation rates and numerous large and small
participants in the regional market. Certain of our competitors
in these markets are vertically-integrated waste companies which
include waste collection operations, and thus have the ability
to control supplies of waste which may restrict our ability to
offer disposal services at attractive prices. Our business does
not include waste collection operations.
Our waste operations are largely concentrated in the
northeastern United States. See Item 1A. Risk
Factors Our waste operations are concentrated in one
region, and expose us to regional economic or market declines
for additional information concerning this geographic
concentration.
If a long-term contract expires and is not renewed or extended
by a client community, our percentage of contracted disposal
capacity will decrease, and we will need to compete in the
regional market for waste disposal. At that point, we will
compete on price with landfills, transfer stations, other
energy-from-waste facilities and other waste disposal
technologies that are then offering disposal service in the
region. See discussion under Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations Overview Contract Duration
for additional information concerning the expiration of
existing contracts.
We may develop or acquire, ourselves or jointly with others,
additional waste or energy projects or businesses. If we were to
do so in a competitive procurement, we would face competition in
the selection process from other companies, some of which may
have greater financial resources. If we were selected, the
amount of market competition we would thereafter face would
depend upon the extent to which the capacity at any such project
would be committed under contract. If we were to develop or
acquire additional projects or businesses not in the context of
a competitive procurement, we would face competition in the
regional market and compete on price with landfills, transfer
stations, other energy-from-waste facilities, other energy
producers and other waste disposal or energy generation
technologies that are then offering service in the region.
With respect to our electricity sales from our energy-from-waste
projects and independent power projects, we primarily sell our
output pursuant to long-term contracts. Accordingly, we
generally do not sell our output into markets where we must
compete on price. As these contracts expire, we will participate
in such markets if we are unable to enter into new or renewed
long-term contracts. See discussion under Item 1A. Risk
Factors Covanta Energy may face increased risk of
market influences on its domestic revenues after its contracts
expire for additional information concerning the expiration
of existing contracts.
Once a contract is awarded or a project is financed and
constructed, our business can be impacted by a variety of risk
factors which can affect profitability over the life of a
project. Some of these risks are at least partially within our
control, such as successful operation in compliance with laws
and the presence or absence of labor difficulties or
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disturbances. Other risk factors are largely out of our control
and may have an adverse impact on a project over a long-term.
See Item 1A. Risk Factors for more information on
these types of risks.
Technology,
Research and Development
We have the exclusive right to market the proprietary mass-burn
technology of Martin GmbH fur Umwelt und Energietechnik,
referred to herein as Martin in the United States,
Canada, Mexico, Bermuda and certain Caribbean countries (the
Territory). The principal feature of the Martin
technology is the reverse-reciprocating stoker grate upon which
the waste is burned. The patent for the basic stoker grate
technology used in the Martin technology has expired and there
are various other expired and unexpired patents relating to the
Martin technology. We believe that it is Martins know-how
and worldwide reputation in the energy-from-waste industry, and
our know-how in designing, constructing and operating
energy-from-waste facilities, rather than the use of patented
technology, that is important to our competitive position in the
energy-from-waste industry in the United States. We do not
believe that the expiration of the remaining patents covering
portions of the Martin technology will have a material adverse
effect on our financial condition or competitive position.
Since 1984, our rights to the Martin technology have been
provided pursuant to a cooperation agreement with Martin which
gives us exclusive rights to market, and distribute parts and
equipment for the Martin technology in the Territory. Martin is
obligated to assist us in installing, operating and maintaining
facilities incorporating the Martin technology. The cooperation
agreement renews automatically each year unless notice of
termination is given, in which case, the cooperation agreement
would terminate ten years after such notice. Any termination
would not affect our rights to design, construct, operate,
maintain or repair energy-from-waste facilities for which
contracts have been entered into or proposals made prior to the
date of termination.
We believe that mass-burn technology is now the predominant
technology used for the combustion of municipal solid waste. We
believe that the Martin technology is a proven and reliable
mass-burn technology, and that our association with Martin has
created significant name recognition and value for our domestic
energy-from-waste business. Through facility acquisitions, we
own and/or
operate some energy-from-waste facilities which utilize
additional technologies, including non-Martin mass-burn
technologies, and refuse-derived fuel technologies which include
pre-combustion waste processing not required with a mass-burn
design. As we continue our efforts to develop
and/or
acquire additional energy-from-waste projects internationally,
we will consider mass-burn and other technologies, including
Martin systems, which best fit the needs of the local
environment of a particular project.
We believe energy-from-waste technologies offer an
environmentally superior solution to waste disposal and energy
challenges faced by leaders around the world, and that our
efforts to expand our domestic and international businesses,
will be enhanced by the development of additional technologies
in such fields as emission controls, residue disposal,
alternative waste treatment processes, and combustion controls.
During 2006, we advanced our research and development efforts in
these areas, and have developed, along with Martin, a
proprietary waste combustion process that we expect will reduce
emissions of nitrogen oxides. We also developed a proprietary
process to improve the handling of the residue from our
energy-from-waste facilities. We intend to maintain a focus in
the years ahead on research and development of technologies in
these and other areas we believe will enhance our competitive
position and complement our business.
REGULATION OF
BUSINESS
Our waste and energy services business and our insurance
business are both highly regulated.
Regulations
Affecting Our Domestic Waste and Energy Services
Business
Environmental
Regulations
Our business activities in the United States are pervasively
regulated pursuant to federal, state and local environmental
laws. Federal laws, such as the Clean Air Act and Clean Water
Act, and their state counterparts, govern discharges of
pollutants to air and water. Other federal, state and local laws
comprehensively govern the generation, transportation, storage,
treatment and disposal of solid and hazardous waste and also
regulate the
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storage and handling of chemicals and petroleum products (such
laws and regulations are referred to collectively as the
Environmental Regulatory Laws).
Other federal, state and local laws, such as the Comprehensive
Environmental Response Compensation and Liability Act commonly
known as CERCLA, and collectively referred to with
such other laws as the Environmental Remediation
Laws, make us potentially liable on a joint and several
basis for any onsite or offsite environmental contamination
which may be associated with our activities and the activities
at sites. These include landfills that our subsidiaries have
owned, operated or leased or, at which there has been disposal
of residue or other waste generated, handled or processed by
such subsidiaries. Some state and local laws also impose
liabilities for injury to persons or property caused by site
contamination. Some service agreements provide for
indemnification of operating subsidiaries from certain
liabilities. In addition, other subsidiaries involved in
landfill gas projects have access rights to landfill sites
pursuant to certain leases that permit the installation,
operation and maintenance of landfill gas collection systems. A
portion of these landfill sites have been federally-designated
Superfund sites. Each of these leases provide for
indemnification of our subsidiaries from some liabilities
associated with these sites.
The Environmental Regulatory Laws require that many permits be
obtained before the commencement of construction and operation
of any waste, renewable energy or independent power project or
water facility, and further require that permits be maintained
throughout the operating life of the facility. We can provide no
assurance that all required permits will be issued or re-issued,
and the process of obtaining such permits can often cause
lengthy delays, including delays caused by third-party appeals
challenging permit issuance. Our failure to meet conditions of
these permits or of the Environmental Regulatory Laws can
subject us or our operating subsidiaries to regulatory
enforcement actions by the appropriate governmental unit, which
could include fines, penalties, damages or other sanctions, such
as orders requiring certain remedial actions or limiting or
prohibiting operation. See Item 1A. Risk
Factors Compliance with environmental laws could
adversely affect our results of operations. To date, we have
not incurred material penalties, been required to incur material
capital costs or additional expenses, or been subjected to
material restrictions on our operations as a result of
violations of Environmental Regulatory Laws or permit
requirements.
Although our operations are occasionally subject to proceedings
and orders pertaining to emissions into the environment and
other environmental violations, which may result in fines,
penalties, damages or other sanctions, we believe that we are in
substantial compliance with existing Environmental Regulatory
Laws. We may be identified, along with other entities, as being
among parties potentially responsible for contribution to costs
associated with the correction and remediation of environmental
conditions at disposal sites subject to CERCLA
and/or
analogous state Environmental Remediation Laws. In certain
instances, we may be exposed to joint and several liability for
remedial action or damages. Our ultimate liability in connection
with such environmental claims will depend on many factors,
including our volumetric share of waste, the total cost of
remediation, and the financial viability of other companies that
have also sent waste to a given site and, in the case of
divested operations, our contractual arrangement with the
purchaser of such operations.
The Environmental Regulatory Laws are subject to revision. New
technology may be required or stricter standards may be
established for the control of discharges of air or water
pollutants, for storage and handling of petroleum products or
chemicals, or for solid or hazardous waste or ash handling and
disposal. Thus, as new technology is developed and proven, we
may be required to incorporate it into new facilities or major
modifications to existing facilities. This new technology may
often be more expensive than the technology we use currently.
On May 10, 2006, the Environmental Protection Agency
(EPA) issued revisions to the New Source Performance
Standards (NSPS) and Emission Guidelines
(EG) applicable to new and existing municipal waste
combustion (MWC) units (the Revised MACT
Rule). The Revised MACT Rule lowered the emission limits
for most of the regulated air pollutants emitted by MWCs. The
general compliance deadline for the revised EG is April 28,
2009; however, the actual compliance date for a particular
facility may be earlier depending on the state in which the
facility is located. We anticipate that one existing
energy-from-waste facility, which we operate on behalf of a
municipality, will require capital improvements to comply with
revised EG, and have initiated discussions with such
municipality regarding implementation and its intended financing
options. Most existing facilities also will
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incur increased operating and maintenance costs to meet the
revised EG requirements, none of which are expected to be
material.
On October 17, 2006, EPA issued a final rule to implement
the revised National Ambient Air Quality Standards for fine
particulate matter, or PM2.5 (PM2.5 Rule). Unlike
the Revised MACT Rule discussed above, the PM2.5 Rule is not
specific to energy-from-waste facilities, but instead is a
nationwide standard for ambient air quality. The primary impact
of the PM2.5 Rule will be on those counties in certain states
that are designated by EPA as non-attainment with
respect to those standards. EPAs PM2.5 Rule will guide how
states achieve compliance with the PM2.5 Rule, and could result
in more stringent regulation of certain energy-from-waste
facility emissions that already are regulated by the Revised
MACT Rule. EPA is expected to make non-attainment
designations by November 2009; however, state plans to meet the
PM2.5 Rule will not be due until April 2013.
The costs to meet new rules for existing facilities owned by
municipal clients generally will be borne by the municipal
clients. For projects we own or lease, the municipal clients
generally have the obligation to fund such capital improvements,
and at certain of our projects we may be required to fund a
portion of the related costs. In certain cases, we are required
to fund the full cost of capital improvements.
We believe that most costs incurred to meet the Revised MACT
Rule and PM2.5 Rule at facilities we operate may be recovered
from municipal clients and other users of our facilities through
increased fees permitted to be charged under applicable
contracts.
The Environmental Remediation Laws prohibit disposal of
regulated hazardous waste at our municipal solid waste
facilities. The service agreements recognize the potential for
inadvertent and improper deliveries of hazardous waste and
specify procedures for dealing with hazardous waste that is
delivered to a facility. Although under some service agreements,
we are responsible for some costs related to hazardous waste
deliveries, to date no operating subsidiary has incurred
material hazardous waste disposal costs.
During 2006, increased public and political debate occurred over
the need for additional regulation of greenhouse gasses
(principally carbon dioxide
(CO2)
and methane) as a contributor to global warming, that could in
the future affect our business. While the political discussion
has not been aimed specifically at the waste or
energy-from-waste businesses, regulatory initiatives developed
to date are broad in scope and are generally designed to promote
renewable energy, development of a certified inventory and
ultimately reduction of greenhouse gas emissions. Most of these
initiatives are at the state or regional levels, but with debate
currently underway in Congress, federal regulation is possible
as well, and may need to be reconciled with state and regional
efforts. We believe that energy-from-waste is a mitigating
technology that provides net reductions in greenhouse gas
emissions, because it avoids
CO2
emissions from fossil fuel power plants and methane from
landfills. For policymakers at the local level, who make
decisions on waste disposal alternatives, we believe using
energy-from-waste instead of landfilling will result in
significantly lower net greenhouse gas emissions, while also
introducing more control over the cost and supply of local
electrical power.
Some regulatory initiatives exist in regions where we have
projects. For example, during 2006, a group of seven
northeastern states, including Connecticut, New Jersey and New
York, acting through the Regional Greenhouse Gas Initiative
(RGGI), issued a model rule to implement
reductions in greenhouse gas emissions. The model rule
establishes a cap and trade program with a
market-based emissions trading system aimed at reducing
emissions of
CO2,
and may be followed in individual state rulemakings. The model
rule establishes an initial cap for regional
CO2
emissions equivalent to 1990 levels, with incremental reductions
below those levels after 2014. To date, RGGI is focused on
fossil fuel-fired electric generators; however, we continue to
monitor developments with respect to state implementation of
RGGI and intend to participate in rulemaking.
Also during 2006, California enacted the California Global
Warming Solutions Act of 2006 (AB 32). AB 32
requires annual reporting of greenhouse gas emissions for
sources deemed significant by the state Air
Resources Board (ARB) and sets emission limits to
cut Californias emissions to 1990 levels by 2020. During
2006, we joined the California Climate Action Registry,
certifying our greenhouse gas emissions from our California
facilities. As a member, we will participate in the evolving
regulatory process by which the ARB will implement the
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requirements of AB 32. Until the ARB issues its regulations, it
is not possible to predict with certainty the impact of AB 32 on
our California facilities.
Energy
Regulation
Our businesses are subject to the provisions of federal, state
and local energy laws applicable to the development, ownership
and operation of domestic facilities. Pursuant to the Public
Utility Regulatory Policies Act of 1978 (PURPA), the
Federal Energy Regulatory Commission (FERC) has
promulgated regulations that exempt qualifying facilities
(cogeneration facilities and other facilities making use of
non-fossil fuel power sources such as waste, which meet certain
size, ownership and other applicable requirements, referred to
as QFs) from compliance with certain provisions of
the Federal Power Act (FPA), the Public Utility
Holding Company Act of 1935 (PUHCA) (repealed
effective February 2006), and certain state laws regulating the
rates charged by, or the financial and organizational activities
of, electric utilities. PURPA was enacted in 1978 to encourage
the development of, among other things, requiring electric
utilities to offer to purchase electric energy from and sell
electric energy to QFs at nondiscriminatory rates. The
exemptions afforded by PURPA to QFs from regulation under the
FPA and most aspects of state electric utility regulation are of
great importance to us and our competitors in the
energy-from-waste and independent power industries. Except with
respect to energy-from-waste facilities with a net power
production capacity in excess of 30 MW (where rates are set
by the FERC), state public utility commissions must approve the
rates, and in some instances other contract terms, by which
public utilities purchase electric power from QFs.
The Energy Policy Act of 2005, passed in August 2005, makes
certain changes to the federal energy laws applicable to our
business, the most significant of which are described below:
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The Energy Policy Act repealed PUHCA, effective February 2006,
which eliminated any remote risk we might have faced by being
subject to PUHCAs extensive, utility-type regulation and
reporting requirements imposed on holding companies under PUHCA.
The repeal of PUHCA has been balanced with increased FERC
authority to cause record keeping and conduct investigations
under appropriate circumstances. As a company that owns only
QFs, exempt wholesale generators
and/or
foreign utility companies, we are generally exempt from such
record keeping and such investigations.
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The Energy Policy Act amends certain provisions of PURPA. It
terminated PURPAs mandatory purchase (and sale) obligation
imposed on utilities for the benefit of QFs where the QF has
nondiscriminatory access to competitive power markets. Existing
contracts are grandfathered, but many expansions, renewals and
new development projects must rely on competitive power markets,
rather than PURPA protections, in establishing and maintaining
their viability in most geographic regions in which we operate.
The Energy Policy Act also eliminates the utility ownership
limitation for QFs. In October 2006, FERC issued final
regulations under the Energy Policy Act providing for, among
other things, a rebuttable presumption that (1) the
competitive power market requirement is satisfied in regions
served by Midwest Independent Transmission System Operator, PJM
Interconnection, L.L.C., ISO New England, Inc., New York
Independent System Operator and the Electric Reliability Council
of Texas, and (2) QFs with a capacity greater than
20 MW have non-discriminatory access to those markets. As
to QFs with a capacity at or below 20 MW, the regulations
provide for a rebuttable presumption that such QFs do not have
non-discriminatory access to any market.
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This change might have the effect of making some transactions
and development projects more likely to be consummated. This
could result in greater utility ownership of QFs than previously
was the case due to PURPA and PUHCA restrictions and
considerations. If these transactions and development projects
occur in the areas of energy-from-waste, other renewable energy
and independent power, it could serve to increase competition
with our businesses by bringing greater utility participation to
these markets.
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The Energy Policy Act extends or establishes certain renewable
energy incentives and tax credits which might be helpful to
expand our businesses or for new development.
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Regulations
Affecting Our International Business
We presently have ownership and operating interests in electric
generating projects outside the United States. Most countries
have expansive systems for the regulation of the power business.
These generally include provisions relating to ownership,
licensing, rate setting and financing of generation and
transmission facilities.
We aim to provide energy generating and other infrastructure
through environmentally protective project designs, regardless
of the location of a particular project. This approach is
consistent with the stringent environmental requirements of
multilateral financing institutions, such as the World Bank, and
also with our experience in domestic energy-from-waste projects,
where environmentally protective facility design and performance
is required. Compliance with environmental standards comparable
to those of the United States may be conditions to the provision
of credit by multilateral banking agencies, as well as other
lenders or credit providers. The laws of other countries also
may require regulation of emissions into the environment, and
provide governmental entities with the authority to impose
sanctions for violations, although these requirements are
generally different from those applicable in the United States.
See Item 1A. Risk Factors Exposure to
international economic and political factors may materially and
adversely affect our international
businesses and Compliance with
environmental laws could adversely affect our results of
operations. As with domestic project development, we can
provide no assurance that all required permits will be issued,
and the process can often cause lengthy delays.
Certain international markets in which we compete have recently
adopted regulatory or policy frameworks that encourage
energy-from-waste as an important component of waste management
planning and practice. For example, China currently has a
favorable regulatory environment for the development of
energy-from-waste projects. The National Plan issued by the
Ministry of Construction calls for an increase in municipal
solid waste incineration from 1.65% (2005 estimate) to 30% by
2030. Energy-from-waste is designated by the Chinese central
government as an encouraged industry, and China
accordingly has various promotional policies in place to promote
energy-from-waste projects including value added tax refunds,
prioritized commercial bank loans, state subsidies for loan
interest, and a guaranteed subsidized price for the sale of
electricity.
Similarly, the European Union has adopted regulations which
require member countries to reduce utilization of and reliance
upon landfill disposal. The legislation emanating from the
European Union is primarily in the form of
Directives. These are not directly applicable within
the member states. Rather, they need enabling domestic
legislation to implement them, which results in significant
variance between the legislative schemes introduced by member
states. Certain Directives notably affect the regulation of
energy-from-waste facilities across the European Union. These
include (1) Directive 96/61/EC concerning integrated
pollution prevention and control (known as the PPC
Directive) which governs the emissions to air, land and
water from certain large industrial installations,
(2) Directive 1999/31/EC concerning the landfill of waste
(known as the Landfill Directive) which imposes
operational and technical controls on landfills and restricts,
on a reducing scale to the year 2020, the amount of
biodegradable municipal waste which member states may dispose of
to landfill, and (3) Directive 2000/76/EC on the
incineration of waste (known as the Waste Incineration
Directive or WID), which imposes limits on
emissions to air on the incineration and co-incineration of
waste. In response to these Directives, member countries have
begun to implement such measures as imposing incremental fees on
landfill disposal and providing rate subsidies for energy
generated at energy-from-waste projects.
Regulations
Affecting Our Insurance Business
Insurance companies are subject to insurance laws and
regulations established by the states in which they transact
business. The agencies established pursuant to these state laws
have broad administrative and supervisory powers relating to the
granting and revocation of licenses to transact business,
regulation of trade practices, establishment of guaranty
associations, licensing of agents, approval of policy forms,
premium rate filing requirements, reserve requirements, the form
and content of required regulatory financial statements, capital
and surplus requirements and the maximum concentrations of
certain classes of investments. Most states also have enacted
legislation regulating insurance holding company systems,
including acquisitions, extraordinary dividends, the terms of
affiliate transactions and other related matters. We and our
insurance subsidiaries have registered as holding companies
pursuant to such legislation in California and Montana, and
routinely report to other
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jurisdictions. The National Association of Insurance
Commissioners has formed committees and appointed advisory
groups to study and formulate regulatory proposals on such
diverse issues as the use of surplus debentures, accounting for
reinsurance transactions and the adoption of risk-based capital
requirements. It is not possible to predict the impact of future
state and federal regulation on the operations of our insurance
business.
NAICC is an insurance company domiciled in the State of
California and is regulated by the California Department of
Insurance for the benefit of policyholders. The California
Insurance Code does not permit the payment of an extraordinary
shareholder dividend without prior approval from the California
Insurance Commissioner. Dividends are considered extraordinary
if they exceed the greater of net income or 10% of statutory
surplus as of the preceding December 31st. For the
foreseeable future, NAICC is not expected to have sufficient
accumulated earned surplus to pay dividends.
A model for determining the risk-based capital requirements,
referred to as RBC requirements, for property and
casualty insurance companies was adopted in December 1993. The
model generally assesses the assets at risk and underwriting
operations and determines policyholders surplus levels
necessary to support such activity. NAICC has calculated its RBC
requirement under the most recent RBC requirement model and, as
of December 31, 2006, it had capital in excess of the
regulatory Authorized Control level.
EMPLOYEES
As of December 31, 2006, we employed approximately
3,300 full-time employees worldwide, of which a majority
are employed in the United States.
Of our employees in the United States, approximately 13% are
represented by organized labor. Currently, we are party to seven
collective bargaining agreements: three expire in 2007, two
expire in 2008 and two expire in 2009.
We consider relations with our employees to be good and do not
anticipate any significant labor disputes in 2007.
EXECUTIVE
OFFICERS
A list of our executive officers and their business experience
follows. Ages shown are as of February 23, 2007.
Anthony J. Orlando was named President and Chief
Executive Officer in October 2004. Mr. Orlando was elected
as one of our directors in September 2005 and is a member of the
Public Policy Committee and the Finance Committee. Previously,
he had been President and Chief Executive Officer of Covanta
Energy since November 2003. From March 2003 to November 2003, he
served as Senior Vice President, Business and Financial
Management of Covanta Energy. From January 2001 until March
2003, Mr. Orlando served as Covanta Energys Senior
Vice President,
Waste-to-Energy.
Previously, he served as Executive Vice President of Covanta
Energy Group, Inc. Mr. Orlando joined Covanta Energy in
1987. Age: 47.
Mark A. Pytosh has served as Senior Vice President and
Chief Financial Officer since September 2006. Previously,
Mr. Pytosh served as Executive Vice President from February
2004 to August 2006 and Chief Financial Officer from May 2005 to
August 2006 of Waste Services, Inc., a publicly-traded
integrated waste services company. Prior to his tenure with
Waste Services Inc., Mr. Pytosh served as a Managing
Director in Investment Banking at Lehman Brothers where he led
the firms Global Industrial Group, from November 2000 to
February 2004. Before joining Lehman Brothers in 2000,
Mr. Pytosh had 15 years of investment banking
experience at Donaldson, Lufkin & Jenrette and Kidder,
Peabody. Age: 42.
John M. Klett was appointed Senior Vice President and
Chief Operating Officer of Covanta Energy in May 2006.
Mr. Klett has served as Senior Vice President, Operations
of Covanta Energy since March 2003. Prior thereto he served as
Executive Vice President of Covanta Waste to Energy, Inc. for
more than five years. Mr. Klett joined Covanta Energy in
1986. Mr. Klett has been in the energy-from-waste business
since 1977. He has been in the power business since 1965. Age:
60.
Timothy J. Simpson has served as Senior Vice President,
General Counsel and Secretary since October 2004. Since March
2004, he has served as Senior Vice President, General Counsel
and Secretary of Covanta Energy. From
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June 2001 to March 2004, Mr. Simpson served as Vice
President, Associate General Counsel and Assistant Secretary of
Covanta Energy. Previously, he served as Senior Vice President,
Associate General Counsel and Assistant Secretary of Covanta
Energy Group, Inc. Mr. Simpson joined Covanta Energy in
1992. Age: 48.
Thomas E. Bucks has served as Vice President and Chief
Accounting Officer since April 2005. Mr. Bucks served as
Controller from February 2005 to April 2005. Previously,
Mr. Bucks served as Senior Vice President
Controller of Centennial Communications Corp., a leading
provider of regional wireless and integrated communications
services in the United States and the Caribbean, from March 1995
through February 2005, where he was the principal accounting
officer and was responsible for accounting operations and
external financial reporting. Age: 50.
Involvement
In Certain Legal Proceedings
Messrs. Orlando, Klett and Simpson were officers of Covanta
Energy when it filed for bankruptcy and have continued as
officers of Covanta Energy after its emergence from bankruptcy
and confirmation of its plan of reorganization. As further
described in the Business section above, Covanta Energys
Chapter 11 proceedings commenced on April 1, 2002.
Covanta Energy and most of its domestic subsidiaries filed
voluntary petitions for relief under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the
Southern District of New York. All of the bankruptcy cases were
jointly administered under the caption In re Ogden
New York Services, Inc., et al., Case Nos.
02-40826
(CB), et al. On March 5, 2004, the Bankruptcy
Court entered an order confirming the plan of reorganization and
plan for liquidation for subsidiaries involved in non-core
businesses and on March 10, 2004, both plans were effected.
The following risk factors could have a material adverse effect
on our business, financial condition and results of operations.
We
cannot be certain that our NOLs will continue to be available to
offset tax liability.
Our NOLs will expire in various amounts, if not used, between
2007 and 2025. The Internal Revenue Service (IRS)
has not audited any of our tax returns for any of the years
during the carryforward period including those returns for the
years in which the losses giving rise to the NOLs were reported.
We cannot assure you that we would prevail if the IRS were to
challenge the availability of the NOLs. If the IRS were
successful in challenging our NOLs, all or some portion of the
NOLs would not be available to offset our future consolidated
taxable income.
As of December 31, 2006, we estimated that we had
approximately $410 million of NOLs. In order to utilize the
NOLs, we must generate consolidated taxable income which can
offset such carryforwards. The NOLs are also utilized by income
from certain grantor trusts that were established as part of the
reorganization in 1990 of certain of our subsidiaries engaged in
the insurance business and are administered by state regulatory
agencies. As a result of uncertainty regarding the
administration of certain of these grantor trusts during June
2006, we reduced the aggregate amount of our available NOLs by
$46 million. During or at the conclusion of the
administration of these grantor trusts, taxable income could
result, which could utilize a portion of our NOLs and, in turn,
could accelerate the date on which we may be otherwise obligated
to pay incremental cash taxes.
In addition, if our existing insurance business were to require
capital infusions from us in order to meet certain regulatory
capital requirements, and we were to fail to provide such
capital, some or all of our subsidiaries comprising our
insurance business could enter insurance insolvency or
bankruptcy proceedings. In such event, such subsidiaries may no
longer be included in our consolidated tax return, and a
portion, which could constitute a significant portion, of our
remaining NOLs may no longer be available to us. In such event,
there may be a significant inclusion of taxable income in our
federal consolidated income tax return.
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Our
substantial indebtedness could adversely affect our business,
financial condition and results of operations and our ability to
meet our payment obligations under our
indebtedness.
The level of our consolidated indebtedness could have
significant consequences on our future operations, including:
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making it difficult for us to meet our payment and other
obligations under our outstanding indebtedness, including the
Debentures;
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limiting our ability to obtain additional financing to fund
working capital, capital expenditures, acquisitions and other
general corporate purposes;
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subjecting us to the risk of increased sensitivity to interest
rate increases on indebtedness under the New Credit Facilities;
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limiting our flexibility in planning for, or reacting to, and
increasing our vulnerability to, changes in our business, the
industries in which we operate and the general economy; and
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placing us at a competitive disadvantage compared to our
competitors that have less debt or are less leveraged.
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Any of the above-listed factors could have an adverse effect on
our business, financial condition and results of operations and
our ability to meet our payment obligations under our
consolidated debt, and the price of our common stock.
We
cannot assure you that our cash flow from operations will be
sufficient to service our indebtedness.
Our ability to meet our obligations under our indebtedness
depends on our subsidiaries ability to generate cash and
our ability to receive dividends and distributions from our
subsidiaries in the future. This, in turn, is subject to many
factors, some of which are beyond our control, including the
following:
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the continued operation and maintenance of our facilities,
consistent with historical performance levels;
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maintenance or enhancement of revenue from renewals or
replacement of existing contracts and from new contracts to
expand existing facilities or operate additional facilities;
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market conditions affecting waste disposal and energy pricing,
as well as competition from other companies for contract
renewals, expansions and additional contracts, particularly
after our existing contracts expire; and
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general economic, financial, competitive, legislative,
regulatory and other factors.
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We cannot assure you that our business will generate cash flow
from operations, or that future borrowings will be available to
us under the New Credit Facilities or otherwise, in an amount
sufficient to enable us to meet our payment obligations under
our outstanding indebtedness and to fund other liquidity needs.
If our subsidiaries are not able to generate sufficient cash
flow to service our debt obligations, we may need to refinance
or restructure our debt, sell assets, reduce or delay capital
investments, or seek to raise additional capital. If we are
unable to implement one or more of these alternatives, we may
not be able to meet our payment obligations under our
outstanding indebtedness, and which could have a material and
adverse affect on our financial condition.
Covanta
Energys debt agreements contain covenant restrictions that
may limit our ability to operate our business.
Covanta Energys New Credit Facilities contain, and any of
our other future debt agreements may contain, operating and
financial restrictions and covenants that impose operating and
financial restrictions on Covanta Energy and certain of its
subsidiaries and require Covanta Energy to meet certain
financial tests. Complying with these covenant restrictions may
have a negative impact on our business, results of operations
and financial condition by limiting Covanta Energys
ability to engage in certain transactions or activities,
including:
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incurring additional indebtedness or issuing guarantees, in
excess of specified amounts;
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creating liens, in excess of specified amounts;
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making certain investments, in excess of specified amounts;
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entering into transactions with our affiliates;
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selling certain assets, in excess of specified amounts;
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making cash distributions or paying dividends to us, in excess
of specified amounts;
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redeeming capital stock or making other restricted payments to
us, in excess of specified amounts; and
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merging or consolidating with any person.
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Covanta Energys ability to comply with these covenants is
dependent on our future performance, which will be subject to
many factors, some of which are beyond our control, including
prevailing economic conditions. As a result of these covenants,
our ability to respond to changes in business and economic
conditions and to obtain additional financing, if needed, may be
restricted, and we may be prevented from engaging in
transactions that might otherwise be beneficial to us, or in
declaring and paying dividends to our stockholders. In addition,
the failure to comply with these covenants in Covanta
Energys New Credit Facilities could result in a default
thereunder and a default under the Debentures. Upon the
occurrence of such an event of default, the lenders under
Covanta Energys New Credit Facilities could elect to
declare all amounts outstanding under such agreement, together
with accrued interest, to be immediately due and payable. If the
lenders accelerate the payment of the indebtedness under Covanta
Energys New Credit Facilities, we cannot assure you that
the assets securing such indebtedness would be sufficient to
repay in full that indebtedness and our other indebtedness,
including the Debentures, and which could have a material and
adverse affect on our financial condition.
Operation
of our facilities and the expansion of facilities involve
significant risks.
The operation of our waste and energy facilities and the
construction of new or expanded facilities involve many risks,
including:
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the inaccuracy of our assumptions with respect to the timing and
amount of anticipated revenues;
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supply interruptions;
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the breakdown or failure of equipment or processes;
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difficulty or inability to find suitable replacement parts for
equipment;
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the unavailability of sufficient quantities of waste;
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decreases in the fees for solid waste disposal;
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decreases in the demand or market prices for recovered ferrous
or non-ferrous metal;
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disruption in the transmission of electricity generated;
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permitting and other regulatory issues, license revocation and
changes in legal requirements;
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labor disputes and work stoppages;
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unforeseen engineering and environmental problems;
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unanticipated cost overruns;
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weather interferences, catastrophic events including fires,
explosions, earthquakes, droughts and acts of terrorism;
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the exercise of the power of eminent domain; and
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performance below expected levels of output or efficiency.
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We cannot predict the impact of these risks on our business or
operations. These risks, if they were to occur, could prevent
Covanta Energy and its subsidiaries from meeting their
obligations under their operating contracts.
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The
rapid growth of our operations could strain our resources and
cause our business to suffer.
We have experienced rapid growth and intend to further grow our
business. This growth has placed, and potential future growth
will continue to place, a strain on our management systems,
infrastructure and resources. Our ability to successfully offer
services and implement our business plan in a rapidly evolving
market requires an effective planning and management process. We
expect that we will need to continue to improve our financial
and managerial controls, reporting systems and procedures. We
will also need to expand, train and manage our workforce
worldwide. Furthermore, we expect that we will be required to
manage an increasing number of relationships with various
customers and other third parties. Failure to expand in any of
the foregoing areas efficiently and effectively could interfere
with the growth of our business as a whole.
Development,
construction and operation of new projects may not commence as
scheduled, or at all.
The development and construction of new waste and energy
facilities involves many risks including siting, permitting,
financing and construction delays and expenses,
start-up
problems, the breakdown of equipment and performance below
expected levels of output and efficiency. New facilities have no
operating history and may employ recently developed technology
and equipment. Our businesses maintain insurance to protect
against risks relating to the construction of new projects;
however, such insurance may not be adequate to cover lost
revenues or increased expenses. As a result, a new facility may
be unable to fund principal and interest payments under its debt
service obligations or may operate at a loss. In certain
situations, if a facility fails to achieve commercial operation,
at certain levels or at all, termination rights in the
agreements governing the facilitys financing may be
triggered, rendering all of the facilitys debt immediately
due and payable. As a result, the facility may be rendered
insolvent and we may lose our interest in the facility.
Our
efforts to grow our business will require us to incur
significant costs in business development, often over extended
periods of time, with no guarantee of success.
Our efforts to grow our waste and energy business will depend in
part on how successful we are in developing new projects and
expanding existing projects. The development period for each
project may occur over several years, during which we incur
substantial expenses relating to siting, design, permitting,
community relations, financing and professional fees associated
with all of the foregoing. Not all of our development efforts
will be successful, and we may decide to cease developing a
project for a variety of reasons. If the cessation of our
development efforts were to occur at an advanced stage of
development, we may have incurred a material amount of expenses
for which we will realize no return.
A
failure to identify suitable acquisition candidates and to
complete acquisitions could have an adverse effect on our
business strategy and growth plans.
As part of our business strategy, we intend to continue to
pursue acquisitions of complementary businesses. Although we
regularly evaluate acquisition opportunities, we may not be able
to successfully identify suitable acquisition candidates; to
obtain sufficient financing on acceptable terms to fund
acquisitions; or to complete acquisitions.
Our
insurance and contractual protections may not always cover lost
revenues, increased expenses or liquidated damages
payments.
Although our businesses maintain insurance, obtain warranties
from vendors, require contractors to meet certain performance
levels and, in some cases, pass risks we cannot control to the
service recipient or output purchaser, the proceeds of such
insurance, warranties, performance guarantees or risk sharing
arrangements may not be adequate to cover lost revenues,
increased expenses or liquidated damages payments.
Performance
reductions could materially and adversely affect us and our
projects may operate at lower levels than
expected.
Most service agreements for our energy-from-waste facilities
provide for limitations on damages and cross-indemnities among
the parties for damages that such parties may incur in
connection with their performance under
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the service agreement. In most cases, such contractual
provisions excuse our businesses from performance obligations to
the extent affected by uncontrollable circumstances and provide
for service fee adjustments if uncontrollable circumstances
increase our costs. We cannot assure you that these provisions
will prevent our businesses from incurring losses upon the
occurrence of uncontrollable circumstances or that if our
businesses were to incur such losses they would continue to be
able to service their debt.
Covanta Energy and certain of its subsidiaries have issued or
are party to performance guarantees and related contractual
obligations associated with its energy-from-waste, renewable
energy, independent power and water facilities. With respect to
its domestic businesses, Covanta Energy and certain of its
subsidiaries have issued guarantees to its municipal clients and
other parties that Covanta Energys subsidiaries will
perform in accordance with contractual terms, including, where
required, the payment of damages or other obligations. The
obligations guaranteed will depend upon the contract involved.
Many of Covanta Energys subsidiaries have contracts to
operate and maintain energy-from-waste facilities. In these
contracts, the subsidiary typically commits to operate and
maintain the facility in compliance with legal requirements; to
accept minimum amounts of solid waste; to generate a minimum
amount of electricity per ton of waste; and to pay damages to
contract counterparties under specified circumstances, including
those where the operating subsidiarys contract has been
terminated for default. Any contractual damages or other
obligations incurred by Covanta Energy and certain of its
subsidiaries could be material, and in circumstances where one
or more subsidiarys contract has been terminated for its
default, such damages could include amounts sufficient to repay
project debt. Additionally, damages payable under such
guarantees on Covanta Energys owned energy-from-waste
facilities could expose Covanta Energy to recourse liability on
project debt. Covanta Energy and certain of its subsidiaries
which have issued these guarantees may not have sufficient
sources of cash to pay such damages or other obligations. We
cannot assure you that Covanta Energy and such subsidiaries will
be able to continue to avoid incurring material payment
obligations under such guarantees or that, if Covanta Energy did
incur such obligations, that Covanta Energy would have the cash
resources to pay them.
Our
businesses generate their revenue primarily under long-term
contracts and must avoid defaults under those contracts in order
to service their debt and avoid material liability to contract
counterparties.
Covanta Energys subsidiaries must satisfy performance and
other obligations under contracts governing energy-from-waste
facilities. These contracts typically require Covanta
Energys subsidiaries to meet certain performance criteria
relating to amounts of waste processed, energy generation rates
per ton of waste processed, residue quantity and environmental
standards. The failure of Covanta Energys subsidiaries to
satisfy these criteria may subject them to termination of their
respective operating contracts. If such a termination were to
occur, Covanta Energys subsidiaries would lose the cash
flow related to the projects and incur material termination
damage liability, which may be guaranteed by Covanta Energy or
certain of its subsidiaries. In circumstances where the contract
of one or more subsidiaries has been terminated due to the
default of one of Covanta Energys subsidiaries they may
not have sufficient sources of cash to pay such damages. We
cannot assure you that Covanta Energys subsidiaries will
be able to continue to perform their respective obligations
under such contracts in order to avoid such contract
terminations, or damages related to any such contract
termination, or that if they could not avoid such terminations
that they would have the cash resources to pay amounts that may
then become due.
Covanta
Energy and certain of its subsidiaries have provided guarantees
and support in connection with its subsidiaries
projects.
Covanta Energy and certain of its subsidiaries are obligated to
guarantee or provide financial support for its
subsidiaries projects in one or more of the following
forms:
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support agreements in connection with service or operating
agreement-related obligations;
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direct guarantees of certain debt relating to three of its
facilities;
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contingent obligations to pay lease payment installments in
connection with three of its facilities;
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contingent credit support for damages arising from performance
failures;
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environmental indemnities; and
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contingent capital and credit support to finance costs, in most
cases in connection with a corresponding increase in service
fees, relating to uncontrollable circumstances.
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Many of these contingent obligations cannot readily be
quantified, but, if we were required to provide this support, it
may be material to our cash flow and financial condition.
Covanta
Energy may face increased risk of market influences on its
domestic revenues after its contracts expire.
Covanta Energys contracts to operate energy-from-waste
projects expire on various dates between 2008 and 2027, and our
contracts to sell energy output generally expire when the
projects operating contract expires. Expiration of these
contracts will subject Covanta Energy to greater market risk in
entering into new or replacement contracts at pricing levels
which will generate comparable or enhanced revenues. As its
operating contracts at municipally-owned projects approach
expiration, Covanta Energy will seek to enter into renewal or
replacement contracts to continue operating such projects.
However, we cannot assure you that Covanta Energy will be able
to enter into renewal or replacement contracts on terms
favorable to it, or at all. Covanta Energy will seek to bid
competitively for additional contracts to operate other
facilities as similar contracts of other vendors expire. The
expiration of existing energy sales contracts, if not renewed,
will require Covanta Energy to sell project energy output either
into the electricity grid or pursuant to new contracts.
At some of our facilities, market conditions may allow Covanta
Energy to effect extensions of existing operating contracts
along with facility expansions. Such extensions and expansions
are currently being considered at a limited number of our
facilities in conjunction with Covanta Energys clients. If
Covanta Energy is unable to reach agreement with its municipal
clients on the terms under which they would implement such
extensions and expansions, or if the implementation of these
extensions, including renewals and replacement contracts, and
expansions are materially delayed, this may adversely affect our
cash flow and profitability. We cannot assure you that Covanta
Energy will be able to enter into such contracts or that the
terms available in the market at the time will be favorable to
it.
Our
businesses depend on performance by third parties under
contractual arrangements.
Our waste and energy businesses depend on a limited number of
third parties to, among other things, purchase the electric and
steam energy produced by our facilities, and supply and deliver
the waste and other goods and services necessary for the
operation of our energy facilities. The viability of our
facilities depends significantly upon the performance by third
parties in accordance with long-term contracts, and such
performance depends on factors which may be beyond our control.
If those third parties do not perform their obligations, or are
excused from performing their obligations because of
nonperformance by our waste and energy businesses or other
parties to the contracts, or due to force majeure events or
changes in laws or regulations, our businesses may not be able
to secure alternate arrangements on substantially the same
terms, if at all, for the services provided under the contracts.
In addition, the bankruptcy or insolvency of a participant or
third party in our facilities could result in nonpayment or
nonperformance of that partys obligations to us.
Concentration
of suppliers and customers may expose us to heightened financial
exposure.
Our waste and energy businesses often rely on single suppliers
and single customers at our facilities, exposing such facilities
to financial risks if any supplier or customer should fail to
perform its obligations.
For example, our businesses often rely on a single supplier to
provide waste, fuel, water and other services required to
operate a facility and on a single customer or a few customers
to purchase all or a significant portion of a facilitys
output. In most cases our businesses have long-term agreements
with such suppliers and customers in order to mitigate the risk
of supply interruption. The financial performance of these
facilities depends on such customers and suppliers continuing to
perform their obligations under their long-term agreements. A
facilitys financial results could be materially and
adversely affected if any one customer or supplier fails to
fulfill its contractual obligations and we are unable to find
other customers or suppliers to produce the same level of
profitability. We cannot assure you that such performance
failures by third parties will not occur, or that if they do
occur, such failures will not adversely affect the cash flows or
profitability of our businesses.
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In addition, for their energy-from-waste facilities, our
subsidiaries rely on their municipal clients as a source not
only of waste for fuel but also of revenue from the fees for
disposal services our subsidiaries provide. Because contracts of
our subsidiaries with their municipal clients are generally
long-term, our subsidiaries may be adversely affected if the
credit quality of one or more of their municipal clients were to
decline materially.
Our
business is subject to pricing fluctuations caused by the waste
disposal and energy markets.
While our businesses sell the majority of their waste disposal
capacity and energy output pursuant to long-term contracts, a
material portion of this capacity and output is subject to
market price fluctuation. Consequently, our operating results
may be adversely affected by fluctuations in waste disposal and
energy prices.
Our
waste operations are concentrated in one region, and expose us
to regional economic or market declines.
The majority of our waste disposal facilities are located in the
northeastern United States, primarily along the
Washington, D.C. to Boston, Massachusetts corridor. Adverse
economic developments in this region could affect regional waste
generation rates and demand for waste disposal services provided
by us. Adverse market developments caused by additional waste
disposal capacity in this region could adversely affect waste
disposal pricing. Either of these developments could have a
material adverse effect on our revenues and cash generation.
Some
of our energy contracts involve greater risk of exposure to
performance levels which could result in materially lower
revenues.
Eight of our 31 energy-from-waste facilities receive 100% of the
energy revenues they generate. As a result, if we are unable to
operate these facilities at their historical performance levels
for any reason, our revenues from energy sales could materially
decrease.
Exposure
to international economic and political factors may materially
and adversely affect our international businesses.
Our international operations expose us to legal, tax, currency,
inflation, convertibility and repatriation risks, as well as
potential constraints on the development and operation of
potential business, any of which can limit the benefits to us of
a foreign project.
Our projected cash distributions from existing international
facilities come from facilities located in countries with
sovereign ratings below investment grade. The financing,
development and operation of projects outside the United States
can entail significant political and financial risks, which vary
by country, including:
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changes in law or regulations;
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changes in electricity tariffs;
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changes in foreign tax laws and regulations;
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changes in United States federal, state and local laws,
including tax laws, related to foreign operations;
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compliance with United States federal, state and local foreign
corrupt practices laws;
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changes in government policies or personnel;
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changes in general economic conditions affecting each country,
including conditions in financial markets;
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changes in labor relations in operations outside the United
States;
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political, economic or military instability and civil unrest;
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expropriation and confiscation of assets and facilities; and
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credit quality of entities that purchase our power.
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The legal and financial environment in foreign countries in
which we currently own assets or projects could also make it
more difficult for us to enforce our rights under agreements
relating to such projects.
Any or all of the risks identified above with respect to our
international projects could adversely affect our revenue and
cash generation. As a result, these risks may have a material
adverse effect on our business, consolidated financial condition
and results of operations.
Exposure
to foreign currency fluctuations may affect our costs of
operations.
We have sought to participate in projects where the host country
has allowed the convertibility of its currency into
U.S. dollars and repatriation of earnings, capital and
profits subject to compliance with local regulatory
requirements. In most cases, components of project costs
incurred or funded in the currency of the United States are
recovered with limited exposure to currency fluctuations through
negotiated contractual adjustments to the price charged for
electricity or service provided. This contractual structure may
cause the cost in local currency to the projects power
purchaser or service recipient to rise from time to time in
excess of local inflation. As a result, there is a risk in such
situations that such power purchaser or service recipient will,
at least in the near term, be less able or willing to pay for
the projects power or service.
Exposure
to fuel supply prices may affect our costs and results of
operations for our international projects.
Changes in the market prices and availability of fuel supplies
to generate electricity may increase our cost of producing
power, which could adversely impact our energy businesses
profitability and financial performance.
The market prices and availability of fuel supplies for some of
our international facilities fluctuate. Any price increase,
delivery disruption or reduction in the availability of such
supplies could affect our ability to operate the facilities and
impair their cash flow and profitability. We may be subject to
further exposure if any of our future international operations
are concentrated in facilities using fuel types subject to
fluctuating market prices and availability. We may not be
successful in our efforts to mitigate our exposure to supply and
price swings.
Our
inability to obtain resources for operations may adversely
affect our ability to effectively compete.
Our energy-from-waste facilities depend on solid waste for fuel,
which provides a source of revenue. For most of our facilities,
the prices we charge for disposal of solid waste are fixed under
long-term contracts and the supply is guaranteed by sponsoring
municipalities. However, for some of our energy-from-waste
facilities, the availability of solid waste to us, as well as
the tipping fee that we must charge to attract solid waste to
our facilities, depends upon competition from a number of
sources such as other energy-from-waste facilities, landfills
and transfer stations competing for waste in the market area. In
addition, we may need to obtain waste on a competitive basis as
our long-term contracts expire at our owned facilities. There
has been consolidation and there may be further consolidation in
the solid waste industry which would reduce the number of solid
waste collectors or haulers that are competing for disposal
facilities or enable such collectors or haulers to use wholesale
purchasing to negotiate favorable below-market disposal rates.
The consolidation in the solid waste industry has resulted in
companies with vertically integrated collection activities and
disposal facilities. Such consolidation may result in economies
of scale for those companies as well as the use of disposal
capacity at facilities owned by such companies or by affiliated
companies. Such activities can affect both the availability of
waste to us for disposal at some of our energy-from-waste
facilities and market pricing.
Compliance
with environmental laws could adversely affect our results of
operations.
Costs of compliance with federal, state and local existing and
future environmental regulations could adversely affect our cash
flow and profitability. Our waste and energy businesses are
subject to extensive environmental regulation by federal, state
and local authorities, primarily relating to air, waste
(including residual ash from combustion) and water. We are
required to comply with numerous environmental laws and
regulations and to obtain
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numerous governmental permits in operating our facilities. Our
businesses may incur significant additional costs to comply with
these requirements. Environmental regulations may also limit our
ability to operate our facilities at maximum capacity or at all.
If our businesses fail to comply with these requirements, we
could be subject to civil or criminal liability, damages and
fines. Existing environmental regulations could be revised or
reinterpreted and new laws and regulations could be adopted or
become applicable to us or our facilities, and future changes in
environmental laws and regulations could occur. This may
materially increase the amount we must invest to bring our
facilities into compliance. In addition, lawsuits or enforcement
actions by federal
and/or state
regulatory agencies may materially increase our costs. Stricter
environmental regulation of air emissions, solid waste handling
or combustion, residual ash handling and disposal, and waste
water discharge could materially affect our cash flow and
profitability. Certain environmental laws make us potentially
liable on a joint and several basis for the remediation of
contamination at or emanating from properties or facilities we
currently or formerly owned or operated or properties to which
we arranged for the disposal of hazardous substances. Such
liability is not limited to the cleanup of contamination we
actually caused. Although we seek to obtain indemnities against
liabilities relating to historical contamination at the
facilities we own or operate, we cannot provide any assurance
that we will not incur liability relating to the remediation of
contamination, including contamination we did not cause.
Our businesses may not be able to obtain or maintain, from time
to time, all required environmental regulatory approvals. If
there is a delay in obtaining any required environmental
regulatory approvals or if we fail to obtain and comply with
them, the operation of our facilities could be jeopardized or
become subject to additional costs.
Energy
regulation could adversely affect our revenues and costs of
operations.
Our waste and energy businesses are subject to extensive energy
regulations by federal, state and foreign authorities. We cannot
predict whether the federal, state or foreign governments will
modify or adopt new legislation or regulations relating to the
solid waste or energy industries. The economics, including the
costs, of operating our facilities may be adversely affected by
any changes in these regulations or in their interpretation or
implementation or any future inability to comply with existing
or future regulations or requirements.
The FPA regulates energy generating companies and their
subsidiaries and places constraints on the conduct of their
business. The FPA regulates wholesale sales of electricity and
the transmission of electricity in interstate commerce by public
utilities. Under PURPA our domestic facilities are exempt from
most provisions of the FPA and state rate regulation. Our
foreign projects are also exempt from regulation under the FPA.
The Energy Policy Act of 2005 enacted comprehensive changes to
the domestic energy industry which may affect our businesses.
The Energy Policy Act removed certain regulatory constraints
that previously limited the ability of utilities and utility
holding companies to invest in certain activities and
businesses, which may have the effect over time of increasing
competition in energy markets in which we participate. In
addition, the Energy Policy Act includes provisions that may
remove some of the benefits provided to non-utility electricity
generators, like us, after our existing energy sale contracts
expire. As a result, we may face increased competition after
such expirations occur.
If our businesses lose existing exemptions under the FPA, the
economics and operations of our energy projects could be
adversely affected, including as a result of rate regulation by
the FERC, with respect to our output of electricity, which could
result in lower prices for sales of electricity. In addition,
depending on the terms of the projects power purchase
agreement, a loss of our exemptions could allow the power
purchaser to cease taking and paying for electricity under
existing contracts. Such results could cause the loss of some or
all contract revenues or otherwise impair the value of a project
and could trigger defaults under provisions of the applicable
project contracts and financing agreements. Defaults under such
financing agreements could render the underlying debt
immediately due and payable. Under such circumstances, we cannot
assure you that revenues received, the costs incurred, or both,
in connection with the project could be recovered through sales
to other purchasers.
Failure
to obtain regulatory approvals could adversely affect our
operations.
Our waste and energy businesses are continually in the process
of obtaining or renewing federal, state and local approvals
required to operate our facilities. While our businesses
currently have all necessary operating approvals, we may not
always be able to obtain all required regulatory approvals, and
we may not be able to obtain any
34
necessary modifications to existing regulatory approvals or
maintain all required regulatory approvals. If there is a delay
in obtaining any required regulatory approvals or if we fail to
obtain and comply with any required regulatory approvals, the
operation of our facilities or the sale of electricity to third
parties could be prevented, made subject to additional
regulation or subject our businesses to additional costs or a
decrease in revenue.
The
energy industry is becoming increasingly competitive, and we
might not successfully respond to these changes.
We may not be able to respond in a timely or effective manner to
the changes resulting in increased competition in the energy
industry in both domestic and international markets. These
changes may include deregulation of the electric utility
industry in some markets, privatization of the electric utility
industry in other markets and increasing competition in all
markets. To the extent competitive pressures increase and the
pricing and sale of electricity assumes more characteristics of
a commodity business, the economics of our business may come
under increasing pressure.
Changes
in technology may have a material adverse effect on our
profitability.
Research and development activities are ongoing to provide
alternative and more efficient technologies to dispose of waste
or produce power. It is possible that advances in these or other
technologies will reduce the cost of waste disposal or power
production from these technologies to a level below our costs.
Furthermore, increased conservation efforts could reduce the
demand for power or reduce the value of our facilities. Any of
these changes could have a material adverse effect on our
revenues and profitability.
Our
reputation could be adversely affected if opposition to our
efforts to grow our business results in adverse publicity or our
businesses were to fail to comply with United States or foreign
laws or regulations.
With respect to our efforts to renew our contracts and grow our
waste and energy business both domestically and internationally,
we sometimes experience opposition from advocacy groups or
others intended to halt a development effort or other
opportunity we may be pursuing. Such opposition is often
intended to discourage third parties from doing business with us
and may be based on inaccurate, incomplete or inflammatory
assertions. We cannot provide any assurance that our reputation
would not be adversely affected as a result of adverse publicity
resulting from such opposition. Some of our projects and new
business may be conducted in countries where corruption has
historically penetrated the economy to a greater extent than in
the United States. It is our policy to comply, and to require
our local partners and those with whom we do business to comply,
with all applicable anti-bribery laws, such as the
U.S. Foreign Corrupt Practices Act and with applicable
local laws of the foreign countries in which we operate. We
cannot provide any assurance that our reputation would not be
adversely affected if we were reported to be associated with
corrupt practices or if we or our local partners failed to
comply with such laws.
Our
controls and procedures may not prevent or detect all errors or
acts of fraud.
Our management, including our Chief Executive Officer and Chief
Financial Officer, believes that any disclosure controls and
procedures or internal controls and procedures, no matter how
well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect
the fact that there are resource constraints, and the benefits
of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, they cannot
provide absolute assurance that all control issues and instances
of fraud, if any, within our companies have been prevented or
detected. These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by an
unauthorized override of the controls. The design of any systems
of controls also is based in part upon certain assumptions about
the likelihood of future events, and we cannot assure you that
any design will succeed in achieving its stated goals under all
potential future conditions. Accordingly, because of the
inherent limitations in a cost effective control system,
misstatements due to error or fraud may occur and may not be
detected.
35
Failure
to maintain an effective system of internal control over
financial reporting may have an adverse effect on our stock
price.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002,
and the rules and regulations promulgated by the Securities and
Exchange Commission (SEC) to implement
Section 404, we are required to furnish a report by our
management to include in our annual report on
Form 10-K
regarding the effectiveness of our internal control over
financial reporting. The report includes, among other things, an
assessment of the effectiveness of our internal control over
financial reporting as of the end of our fiscal year, including
a statement as to whether or not our internal control over
financial reporting is effective. This assessment must include
disclosure of any material weaknesses in our internal control
over financial reporting identified by management.
We have in the past discovered, and may potentially in the
future discover, areas of internal control over financial
reporting which may require improvement. If we are unable to
assert that our internal control over financial reporting is
effective now or in any future period, or if our auditors are
unable to express an opinion on the effectiveness of our
internal controls, we could lose investor confidence in the
accuracy and completeness of our financial reports, which could
have an adverse effect on our stock price.
Concentrated
stock ownership may discourage unsolicited acquisition
proposals.
As of January 12, 2007, SZ Investments, L.L.C., together
with its affiliate, EGI-Fund
(05-07)
Investors, L.L.C., referred to as
Fund 05-07
and, collectively with SZ Investments, L.L.C. SZ
Investments, Third Avenue Trust, on behalf of Third Avenue
Value Fund, referred to as Third Avenue, and D. E.
Shaw Laminar Portfolios, L.L.C., referred to as
Laminar, separately own approximately 15.7%, 6.0%
and 9.0%, respectively, or when aggregated, approximately 30.7%
of our outstanding common stock. Although there are no
agreements among SZ Investments, Third Avenue and Laminar
regarding their voting or disposition of shares of our common
stock, the level of their combined ownership of shares of our
common stock could have the effect of discouraging or impeding
an unsolicited acquisition proposal. Further, as a result, these
stockholders may continue to have the ability to influence the
election or removal of our directors and influence the outcome
of matters presented for approval by our stockholders.
Circumstances may occur in which the interests of these
stockholders could be in conflict with the holders of the
Debentures.
Provisions
of our certificate of incorporation and Debentures could
discourage an acquisition by a third party.
Provisions of our restated certificate of incorporation could
make it more difficult for a third party to acquire control of
us. For example, our restated certificate of incorporation
authorizes our Board of Directors to issue preferred stock
without requiring any stockholder approval, and preferred stock
could be issued as a defensive measure in response to a takeover
proposal. These provisions could make it more difficult for a
third party to acquire us even if an acquisition might be in the
best interest of our stockholders. In addition, certain
provisions of the Debentures could make it more difficult or
more expensive for a third party to acquire us. Upon the
occurrence of certain transactions constituting a fundamental
change, the holders of the Debentures will have the right to
require us to repurchase their Debentures. We may also be
required to issue additional shares upon conversion or provide
for conversion based on the acquirers capital stock in the
event of certain fundamental changes. These possibilities could
discourage an acquisition of us.
The
market price of our common stock may fluctuate significantly,
and this may make it difficult for holders to resell our common
stock when they want or at prices that they find
attractive.
The price of our common stock on the New York Stock Exchange
constantly changes. We expect that the market price of our
common stock will continue to fluctuate. In addition, because
the Debentures are convertible into our common stock, volatility
or depressed prices for our common stock could have a similar
effect on the trading price of the Debentures. Consequently,
there can be no assurance as to the liquidity of an investment
in our common stock.
36
The market price of our common stock may fluctuate as a result
of a variety of factors, many of which are beyond our control.
These factors include:
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|
|
changes in the waste and energy market conditions;
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|
|
quarterly variations in our operating results;
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|
|
|
our operating results that vary from the expectations of
management, securities analysts and investors;
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|
changes in expectations as to our future financial performance;
|
|
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|
announcements of strategic developments, significant contracts,
acquisitions and other material events by us or our competitors;
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|
the operating and securities price performance of other
companies that investors believe are comparable to us;
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|
future sales of our equity or equity-related securities;
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|
changes in the economy and the financial markets;
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|
departures of key personnel;
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|
changes in governmental regulations; and
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|
geopolitical conditions, such as acts or threats of terrorism or
military conflicts.
|
In addition, in recent years, the stock market in general has
experienced extreme price and volume fluctuations. This
volatility has had a significant effect on the market price of
securities issued by many companies for reasons often unrelated
to their operating performance. These broad market fluctuations
may adversely affect the market price of our common stock,
regardless of our operating results.
Future
issuances of our common stock will dilute the ownership
interests of stockholders and may adversely affect the trading
price of our common stock.
We are not restricted from issuing additional shares of our
common stock, or securities convertible into or exchangeable for
our common stock. Future sales of substantial amounts of our
common stock or equity-related securities in the public market,
or the perception that such sales could occur, could materially
and adversely affect prevailing trading prices of our common
stock. In addition, the conversion of some or all of the
Debentures will dilute the ownership interests of our existing
stockholders. Any sales in the public market of our common stock
issuable upon such conversion could adversely affect prevailing
market prices of our common stock. In addition, the existence of
the Debentures may encourage short selling by market
participants because the conversion of the Debentures could
depress the trading price of our common stock.
37
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Item 1B.
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UNRESOLVED
STAFF COMMENTS
|
None.
Our executive offices are located at 40 Lane Road, Fairfield,
New Jersey, in an office building located on a 5.4 acre
site owned by a subsidiary. The following table summarizes
certain information relating to the locations of properties that
we or our subsidiaries own or lease:
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Approximate
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Size Site
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Nature of
|
Location
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(in Acres)(1)
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Site Use
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|
Interest(2)
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OTHER SERVICES
|
1.
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Fairfield, New Jersey
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5.4
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Office space
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Own
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2.
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Long Beach, California
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14,632 sq. ft.
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Office space
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Lease
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3.
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Calabasas, California
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5,713 sq. ft.
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Office space
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|
Lease
|
WASTE AND ENERGY
SERVICES
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Domestic
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4.
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Anderson, California
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2,000 sq. ft
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Office space
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Lease
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5.
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Sante Fe Springs, California
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3,194 sq. ft.
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Office space
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|
Lease
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6.
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Montvale, New Jersey
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34,000 sq. ft.
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Office space
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|
Lease
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7.
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Woodcliff Lake, New Jersey
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18,048 sq. ft.
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Office space
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|
Lease
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8.
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Imperial County, California
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83.0
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Undeveloped desert land
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Own
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9.
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Lake County, Florida
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15.0
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Energy-from-waste facility
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Own
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10.
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Marion County, Oregon
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15.2
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Energy-from-waste facility
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Own
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11.
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Bristol, Connecticut
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18.2
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Energy-from-waste facility
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Own
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12.
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Niagara Falls, New York
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12.5
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Energy-from-waste facility
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Own
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13.
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Rochester, Massachusetts
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123.2
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Energy-from-waste facility
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Own (90)%
|
14.
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Hempstead, New York
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14.9
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|
Energy-from-waste facility
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Lease
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15.
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Newark, New Jersey
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15.4
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Energy-from-waste facility
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Lease
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16.
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Preston, Connecticut
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11.9
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Energy-from-waste facility
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Lease
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17.
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Alexandria/Arlington, Virginia
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3.3
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Energy-from-waste facility
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Lease
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18.
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Indianapolis, Indiana
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23.5
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Energy-from-waste facility
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Lease
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19.
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Stanislaus County, California
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16.5
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Energy-from-waste facility
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Lease
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20.
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Babylon, New York
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9.5
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Energy-from-waste facility
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Lease
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21.
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Haverhill, Massachusetts
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12.7
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Energy-from-waste facility
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Lease
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22.
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Wallingford, Connecticut
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10.3
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Energy-from-waste facility
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Lease
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23.
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Fairfax County, Virginia
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22.9
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Energy-from-waste facility
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Lease
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24.
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Union County, New Jersey
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20.0
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Energy-from-waste facility
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Lease
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25.
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Huntington, New York
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13.0
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Energy-from-waste facility
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Lease
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26.
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Warren County, New Jersey
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19.8
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Energy-from-waste facility
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|
Lease
|
27.
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Onondaga County, New York
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12.0
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Energy-from-waste facility
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|
Lease
|
28.
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Chester, Pennsylvania
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51.2
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Energy-from-waste facility
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Lease
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29.
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Whatcom County, Washington
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N/A
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Hydroelectric project
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Own (50)%
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30.
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Weeks Falls, Washington
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N/A
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Hydroelectric project
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Lease
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31.
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Haverhill, Massachusetts
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20.2
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Landfill
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Lease
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32.
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Haverhill, Massachusetts
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16.8
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Landfill expansion
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Lease
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33.
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San Diego, California
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N/A
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|
Landfill gas project
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|
Lease
|
34.
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Oxnard, California
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N/A
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|
Landfill gas project
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|
Lease
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38
|
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|
|
|
|
|
|
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|
|
Approximate
|
|
|
|
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Size Site
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Nature of
|
Location
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|
(in Acres)(1)
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|
Site Use
|
|
Interest(2)
|
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35.
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Salinas, California
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N/A
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Landfill gas project
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Lease
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36.
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Stockton, California
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N/A
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Landfill gas project
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Lease
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37.
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Lawrence, Massachusetts
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11.8
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Vacant Land
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Own
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38.
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Burney, California
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40.0
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Wood waste project
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Lease
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39.
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Jamestown, California
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|
26.0
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Wood waste project
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Own (50)%
|
40.
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Westwood, California
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60.0
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|
Wood waste project
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|
Own
|
41.
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Oroville, California
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43.0
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|
Wood waste project
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Own
|
42.
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Braintree, Massachusetts
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6.7
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Transfer station
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Lease
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43.
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Lynn, Massachusetts
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|
1.4
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Transfer station
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|
Own
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|
|
International
|
|
|
|
|
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|
44.
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Manila, Philippines
|
|
2,812 sq. ft.
|
|
Office space
|
|
Lease
|
45.
|
|
Bangkok, Thailand
|
|
7,276 sq. ft.
|
|
Office space
|
|
Lease
|
46.
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|
Chennai, India
|
|
1,797 sq. ft.
|
|
Office space
|
|
Lease
|
47.
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|
Samalpatti, India
|
|
2,546 sq. ft.
|
|
Office space
|
|
Lease
|
48.
|
|
Samayanallur, India
|
|
1,300 sq. ft.
|
|
Office space
|
|
Lease
|
49.
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|
Shanghai, China
|
|
1,561 sq. ft.
|
|
Office space
|
|
Lease
|
50.
|
|
Zhejiang Province, Peoples
Republic of China
|
|
8.2
|
|
Coal-fired cogeneration
facility
|
|
(3)
|
51.
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|
Jiangsu Province, Peoples
Republic of China
|
|
16.1
|
|
Coal-fired cogeneration
facility
|
|
(3)
|
52.
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|
Samayanallur, India
|
|
17.1
|
|
Heavy fuel-oil project
|
|
Lease
|
53.
|
|
Samayanallur, India
|
|
2.3
|
|
Heavy fuel-oil project
|
|
Lease
|
54.
|
|
Samalpatti, India
|
|
30.3
|
|
Heavy fuel-oil project
|
|
Lease
|
|
|
|
(1) |
|
All sizes are in acres unless otherwise indicated. |
|
(2) |
|
All ownership or leasehold interests relating to projects are
subject to material liens in connection with the financing of
the related project, except those listed above under
items 25,
32-35, and
49-50. In
addition, all leasehold interests exist at least as long as the
term of applicable project contracts, and several of the
leasehold interests are subject to renewal
and/or
purchase options. |
|
(3) |
|
Land use right reverts to China joint venture partner upon
termination of joint venture agreement. |
|
|
Item 3.
|
LEGAL
PROCEEDINGS
|
For information regarding legal proceedings, see Note 20.
Commitments and Contingent Liabilities of the Notes to the
Consolidated Financial Statements in Item 8, which
information is incorporated herein by reference.
|
|
Item 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
The results of the proposals voted on at our Annual Meeting of
Stockholders held on May 31, 2006 were previously reported
in our Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2006 that was filed with the
SEC on August 3, 2006.
39
We held a Special Meeting of Stockholders on November 16,
2006. At that meeting, stockholders voted on the following
proposals:
|
|
|
|
1.
|
To approve an amendment to our certificate of incorporation to
delete Article FIFTH which restricted the acquisition and
transfer of common stock by owners of 5% or more of the
outstanding common stock.
|
|
|
|
|
|
|
|
|
|
Votes For
|
|
Votes Against
|
|
|
Abstentions
|
|
|
132,184,465
|
|
|
753,310
|
|
|
|
120,213
|
|
|
|
|
|
2.
|
To approve an amendment to our certificate of incorporation to
delete Section 4.3 which required stockholder approval of
the terms of any preferred stock issued by us to affiliates and
to holders of 1% or more of the common stock.
|
|
|
|
|
|
|
|
|
|
Votes For
|
|
Votes Against
|
|
|
Abstentions
|
|
|
103,803,566
|
|
|
29,128,276
|
|
|
|
126,146
|
|
PART II
|
|
Item 5.
|
MARKET
FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Our common stock was traded on the American Stock Exchange under
the symbol DHC until close of trading on
October 4, 2005. Since that date, our common stock has been
traded on the New York Stock Exchange under the symbol
CVA. On February 14, 2007, there were
approximately 1,055 holders of record of our common stock. On
February 14, 2007, the closing price of our common stock on
the New York Stock Exchange was $24.00 per share.
The following table sets forth the high and low stock prices of
our common stock for the last two years. These prices are as
reported on the American Stock Exchange Composite Tape with
respect to dates through the close of business on
October 4, 2005 and these prices are as reported on the New
York Stock Exchange Composite Tape with respect to dates on and
after October 5, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
18.15
|
|
|
$
|
14.61
|
|
|
$
|
17.34
|
|
|
$
|
7.95
|
|
Second Quarter
|
|
$
|
18.60
|
|
|
$
|
14.36
|
|
|
$
|
17.70
|
|
|
$
|
10.42
|
|
Third Quarter
|
|
$
|
21.84
|
|
|
$
|
16.04
|
|
|
$
|
13.64
|
|
|
$
|
11.67
|
|
Fourth Quarter
|
|
$
|
22.84
|
|
|
$
|
18.52
|
|
|
$
|
15.06
|
|
|
$
|
10.41
|
|
The prices above reflect the impact of a rights offering
announced in February 2005 and completed on June 24, 2005
and a rights offering announced in January 2006 and completed on
February 24, 2006.
We have not paid dividends on our common stock and do not expect
to declare or pay any dividends in the foreseeable future. Under
current financing arrangements there are restrictions on the
ability of our subsidiaries to transfer funds to us in the form
of cash dividends, loans or advances that would likely limit the
future payment of dividends on our common stock. See
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources 2007
Recapitalization Plan for more detailed information on our
2007 Recapitalization Plan.
40
|
|
Item 6.
|
SELECTED
FINANCIAL DATA
|
Given the significance of the Covanta Energy and ARC Holdings
acquisitions to our business, results of operations and
financial condition during the third quarter of 2005, we
combined the previously separate business segments of Insurance
Services and holding company operations into one reportable
segment referred to as Other Services. Certain prior
period amounts, such as holding company investment income, have
been reclassified in the consolidated financial statements to
conform to the current period presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005(1)
|
|
|
2004(2)
|
|
|
2003(3)
|
|
|
2002(4)
|
|
|
|
(In thousands of dollars, except per share amounts)
|
|
|
Statements of Operations
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
1,268,536
|
|
|
$
|
978,763
|
|
|
$
|
576,196
|
|
|
$
|
41,123
|
|
|
$
|
531,501
|
|
Equity in net income (loss) from
unconsolidated investments
|
|
|
28,636
|
|
|
|
25,609
|
|
|
|
17,024
|
|
|
|
(54,877
|
)
|
|
|
|
|
Net income (loss)
|
|
|
105,789
|
|
|
|
59,326
|
|
|
|
34,094
|
|
|
|
(69,225
|
)
|
|
|
(32,955
|
)
|
Income (loss) per share(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.73
|
|
|
|
0.49
|
|
|
|
0.39
|
|
|
|
(1.05
|
)
|
|
|
(0.58
|
)
|
Diluted
|
|
|
0.72
|
|
|
|
0.46
|
|
|
|
0.37
|
|
|
|
(1.05
|
)
|
|
|
(0.58
|
)
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
233,442
|
|
|
$
|
128,556
|
|
|
$
|
96,148
|
|
|
$
|
17,952
|
|
|
$
|
25,183
|
|
Restricted funds held in trust
|
|
|
407,921
|
|
|
|
447,432
|
|
|
|
239,918
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
2,637,923
|
|
|
|
2,724,843
|
|
|
|
819,400
|
|
|
|
254
|
|
|
|
654,575
|
|
Total assets
|
|
|
4,437,820
|
|
|
|
4,702,165
|
|
|
|
1,939,081
|
|
|
|
162,648
|
|
|
|
1,032,945
|
|
Long-term debt
|
|
|
1,260,123
|
|
|
|
1,308,119
|
|
|
|
312,896
|
|
|
|
40,000
|
|
|
|
597,246
|
|
Project debt
|
|
|
1,435,947
|
|
|
|
1,598,284
|
|
|
|
944,737
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
739,152
|
|
|
|
599,241
|
|
|
|
134,815
|
|
|
|
27,791
|
|
|
|
77,360
|
|
Book value per share of common
stock(5)
|
|
|
5.01
|
|
|
|
4.24
|
|
|
|
1.84
|
|
|
|
0.50
|
|
|
|
1.63
|
|
Shares of common stock
outstanding(5)
|
|
|
147,500
|
|
|
|
141,166
|
|
|
|
73,430
|
|
|
|
55,105
|
|
|
|
47,459
|
|
|
|
|
(1) |
|
For the year ended December 31, 2005, ARC Holdings
results of operations were included in our consolidated results
subsequent to June 24, 2005. As a result of the
consummation of the ARC Holdings acquisition on June 24,
2005, future performance will be significantly driven by the
combined performance of Covanta Energy and ARC Holdings
operations. As a result, the nature of our business, the risks
attendant to such business and the trends that we will face have
been significantly altered by the acquisitions of Covanta Energy
and ARC Holdings. Accordingly, our historical financial
performance and results of operations will not be indicative of
our future performance. |
|
(2) |
|
For the year ended December 31, 2004, Covanta Energys
results of operations were included in our consolidated results
since March 10, 2004. As a result of the consummation of
the Covanta Energy acquisition on March 10, 2004, our
future performance will predominantly reflect the performance of
Covanta Energys operations which are significantly larger
than our insurance operations. |
|
(3) |
|
American Commercial Lines LLC (ACL), which was
acquired on May 29, 2002, and certain of its subsidiaries,
filed a petition on January 31, 2003 with the
U.S. Bankruptcy Court for the Southern District of Indiana,
New Albany Division to reorganize under Chapter 11 of the
U.S. Bankruptcy Code. As a result of this filing, we no
longer maintained control of the activities of ACL and our
equity interest in ACL was cancelled when ACLs plan of
reorganization was confirmed on December 30, 2004 and it
emerged from bankruptcy on January 11, 2005. Our
investments in these entities are presented using the equity
method effective as of the beginning of 2003 and were no longer
consolidated. Equity in net loss from unconsolidated investments
above consists of our equity in the net loss of ACL, Global
Materials Services, LLC (GMS) and Vessel Leasing,
LLC (Vessel Leasing) in 2003. |
|
(4) |
|
In 2002, we purchased 100% of ACL, 5.4% of GMS and 50% of Vessel
Leasing. |
41
|
|
|
(5) |
|
Basic and diluted earnings per share, the average shares used in
the calculation of basic and diluted earnings per share, book
value per share of common stock and shares of common stock
outstanding for all periods have been adjusted retroactively to
reflect the bonus element contained in the rights offering
issued on May 18, 2004 and for the ARC Holdings rights
offering completed on June 24, 2005. Book value per share
of common stock is calculated by dividing stockholders
equity by the number of shares of common stock outstanding. |
|
|
Item 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
OVERVIEW
Covanta Holding Corporation is organized as a holding company
which conducts all of its operations through subsidiaries which
are engaged in the businesses of waste and energy services, and
insurance services. Covanta Holding Corporations
predominant business is the waste and energy services business,
however its historical consolidated operations were conducted in
the insurance industry prior to the acquisition of Covanta
Energy Corporation in March 2004 and the acquisition of Covanta
ARC Holdings, Inc. in June 2005.
The terms we, our, ours,
us and Company refer to Covanta Holding
Corporation and its subsidiaries; the term Covanta
Energy refers to our subsidiary Covanta Energy Corporation
and its subsidiaries; the term ARC Holdings refers
to our subsidiary Covanta ARC Holdings, Inc. and its
subsidiaries; the term TransRiver refers to our
subsidiary TransRiver Marketing Company, L.P.; the term
CPIH refers to our subsidiary Covanta Power
International Holdings, Inc.; and the term NAICC
refers to our subsidiary National American Insurance Company of
California and its subsidiaries.
We are a leading developer, owner and operator of infrastructure
for the conversion of energy-from-waste, waste disposal and
renewable energy production businesses in the United States. We
also engage in the independent power production business outside
the United States. We own or operate 51 energy generation
facilities, 41 of which are in the United States and 10 of which
are located outside the United States. Our energy generation
facilities use a variety of fuels, including municipal solid
waste, water (hydroelectric), natural gas, coal, wood waste,
landfill gas and heavy fuel-oil. We also own or operate several
businesses that are associated with our energy-from-waste
business, including a waste procurement business, two landfills,
and several waste transfer stations. We also operate one
domestic water treatment facility.
We believe our business offers solutions to public sector
leaders around the world in two related elements of critical
infrastructure: post-recycling waste disposal, and energy
generation. We believe the environmental benefits of
energy-from-waste, as an alternative to landfilling, are clear
and compelling: utilizing energy-from-waste reduces greenhouse
gas emissions, lowers the risk of groundwater contamination, and
conserves land. At the same time, energy-from-waste generates
clean reliable energy from a renewable fuel source, thus
reducing dependence on fossil fuels. As public planners address
their needs for more environmentally sensitive waste disposal
and energy generation in the years ahead, we believe
energy-from-waste will be an increasingly attractive alternative.
We are focused on:
|
|
|
|
|
providing customers with superior service by operating our
existing businesses to historic high standards;
|
|
|
|
generating sufficient cash to meet our liquidity needs;
|
|
|
|
paying down Covanta Energys debt, as well as project debt;
|
|
|
|
investing in and growing our business in order to create
additional value for stockholders; and
|
|
|
|
seeking acquisition opportunities to expand our operations in
the United States and abroad.
|
Maintaining historic facility production levels while
effectively managing operating and maintenance expense is
important to optimize Covanta Energys long-term cash
generation. We do not expect to make any cash contributions to
Covanta Energy except in conjunction with certain acquisitions
and investments permitted under Covanta Energys new credit
facilities as described below. Covanta Energy may make limited
cash distributions to us under the new credit facilities.
42
On January 19, 2007, we announced a comprehensive
recapitalization plan utilizing a series of equity and debt
financings. Subsequent to this announcement, we completed the
following transactions:
|
|
|
|
|
the refinancing of Covanta Energys debt facilities with
new Covanta Energy debt facilities, comprised of a
$300 million revolving credit facility, a $320 million
funded letter of credit facility, and a $650 million term
loan (collectively referred to as the New Credit
Facilities);
|
|
|
|
an underwritten public offering of 6.118 million shares of
our common stock, in which we received proceeds of approximately
$136.6 million, net of underwriting discounts and
commissions;
|
|
|
|
an underwritten public offering of approximately
$373.75 million aggregate principal amount of convertible
debentures (the Debentures) issued by us, from which
we received proceeds of approximately $364.4 million, net
of underwriting discounts and commissions; and
|
|
|
|
the repayment, by means of a tender offer, of approximately
$604.4 million in aggregate principal amount of outstanding
notes previously issued by Covanta Energys intermediate
subsidiaries.
|
We completed our public offerings of equity and debt, including
over-allotment options exercised by underwriters, on
January 31, 2007 and February 6, 2007, and we closed
on the New Credit Facilities on February 9, 2007. We
completed our tender offer for approximately $604.4 million
in aggregate principal amount of outstanding notes on
February 22, 2007. Additional information, including
material terms and financial statement impacts related to our
recapitalization plan, is contained in Liquidity and Capital
Resources below. Under the New Credit Facilities, we will
have substantially greater, but not unrestricted, ability to
make investments in our business and to take advantage of
opportunities to grow our business through investments and
acquisitions, both domestically and internationally.
Our liquidity is enhanced by the existence of net operating loss
carryforwards (NOLs), which predominantly arose from
our predecessor insurance entities (Mission Insurance
Entities, formerly named Mission Insurance Group, Inc.),
which have been in state insolvency proceedings in California
and Missouri since the late 1980s. As described below, certain
grantor trusts associated with these predecessor insurance
entities (and the taxable income and loss they generate)
continue to be included in our consolidated tax group.
Our ability to utilize the NOLs to offset taxable income
generated by operations in our Waste and Energy Services segment
could have a material effect on our consolidated financial
condition and results of operations. We had NOLs estimated to be
$410 million for federal income tax purposes as of
December 31, 2006. The NOLs will expire in various amounts
from December 31, 2007 through December 31, 2025, if
not used. The amount of NOLs available to us will be reduced by
any taxable income generated by current members of our
consolidated tax group, which include the grantor trusts
described above. During or at the conclusion of the
administration of these grantor trusts by state insurance
regulatory agencies, taxable income could result, which could
utilize a portion of our NOLs and in turn could accelerate the
date on which we may be otherwise obligated to pay incremental
cash taxes. While we cannot predict with certainty what amounts,
if any, may be includable in our taxable income as a result of
the final administration of the trusts, we believe that any such
taxable income will not result in a material reduction in
available NOLs.
For additional detail relating to our NOLs and risks attendant
thereto, see Note 21. Income Taxes of the Notes to the
Consolidated Financial Statements (Notes) and
Item 1A. Risk Factors We cannot be certain
that our NOLs will continue to be available to offset tax
liability.
Our
Business Segments
Given the significance of the Covanta Energy and ARC Holdings
acquisitions to our results of operations and financial
condition, we decided, during the third quarter of 2005, to
combine the previously separate business segments of Insurance
Services and Parent-Only operations into one reportable segment
called Other Services. Therefore, we have two reportable
business segments Waste and Energy Services and
Other Services.
43
Waste and
Energy Services
The Waste and Energy Services segment includes our domestic and
international businesses.
For all energy-from-waste projects, we receive revenue from two
primary sources: fees charged for operating projects or
processing waste received and payments for electricity and steam
sales. We also operate, and in some cases have ownership
interests in, transfer stations and landfills which generate
revenue from waste disposal fees or operating fees. In addition,
we own and in some cases operate, other renewable energy
projects in the United States which generate electricity from
wood waste, landfill gas, and hydroelectric resources. The
electricity from these projects is sold to utilities. For these
projects, we receive revenue from electricity sales, and in some
cases cash from equity distributions.
We also have ownership interests in,
and/or
operate, independent power production facilities in the
Philippines, China, Bangladesh, India, and Costa Rica, and one
energy-from-waste facility in Italy. The Costa Rica facilities
generate electricity from hydroelectric resources, while the
other independent power production facilities generate
electricity and steam by combusting coal, natural gas, or heavy
fuel-oil. For these projects, we receive revenue from operating
fees, electricity and steam sales, and in some cases cash from
equity distributions.
Contract
Structures
We have 23 energy-from-waste projects where we charge a fixed
fee (which escalates over time pursuant to contractual indices
we believe are appropriate to reflect price inflation) for
operation and maintenance services. We refer to these projects
as having a Service Fee structure. Our contracts at
Service Fee projects provide revenue that does not materially
vary based on the amount of waste processed or energy generated
and as such is relatively stable for the contract term. In
addition, at most of our Service Fee projects, the operating
subsidiary retains only a fraction of the energy revenues
generated, with the balance used to provide a credit to the
municipal client against its disposal costs. Therefore, in these
projects, the municipal client derives most of the benefit and
risk of energy production and changing energy prices.
We also have 8 energy-from-waste projects where we receive a
per-ton fee under contracts for processing waste. We refer to
these projects as having a Tip Fee structure. At Tip
Fee projects, we generally enter into long-term waste disposal
contracts for a substantial portion of project disposal capacity
and retain all of the energy revenue generated. The waste
disposal and energy revenue from these projects is more
dependent upon operating performance and, as such, is subject to
greater revenue fluctuation to the extent performance levels
fluctuate.
Under both structures, our returns are expected to be stable if
we do not incur material unexpected operation and maintenance
costs or other expenses. In addition, most of our
energy-from-waste project contracts are structured so that
contract counterparties generally bear, or share in, the costs
associated with events or circumstances not within our control,
such as uninsured force majeure events and changes in legal
requirements. The stability of our domestic revenues and returns
could be affected by our ability to continue to enforce these
obligations. Also, at some of our energy-from-waste facilities,
commodity price risk is mitigated by passing through commodity
costs to contract counterparties. With respect to domestic and
international independent power projects, such structural
features generally do not exist because either we operate and
maintain such facilities for our own account or we do so on a
cost-plus basis rather than a fixed-fee basis.
At some of our domestic and international independent power
projects, our operating subsidiaries purchase fuel in the open
markets which exposes us to fuel price risk. At other plants,
fuel costs are contractually included in our electricity
revenues, or fuel is provided by our customers. In some of our
international projects, the project entity (which in some cases
is not our subsidiary) has entered into long-term fuel purchase
contracts that protect the project from changes in fuel prices,
provided counterparties to such contracts perform their
commitments.
Seasonal
Effects
Our quarterly operating income from domestic and international
operations within the same fiscal year typically differs
substantially due to seasonal factors, primarily as a result of
the timing of scheduled plant maintenance.
44
We typically conduct scheduled maintenance periodically each
year, which requires that individual boiler units temporarily
cease operations. During these scheduled maintenance periods, we
incur material repair and maintenance expenses and receive less
revenue, until the boiler units resume operations. This
scheduled maintenance typically occurs during periods of
off-peak electric demand in the spring and fall. The spring
scheduled maintenance period is typically more extensive than
scheduled maintenance conducted during the fall. As a result, we
typically incur the highest maintenance expense in the first
half of the year. Given these factors, we typically experience
lower operating income from our projects during the first six
months of each year, and higher operating income during the
second six months of each year.
Contract
Duration
We operate domestic energy-from-waste projects under long-term
agreements. For those projects we own, our contract to sell the
projects energy output (either electricity or steam)
generally expires at or after the date when the initial term of
our contract to operate or receive waste also expires.
Expiration of these contracts will subject us to greater market
risk in maintaining and enhancing revenues as we enter into new
contracts. We intend to enter into replacement or additional
contracts for waste supplies and will sell our energy output
either into the regional electricity grid or pursuant to new
contracts. Because project debt on these facilities will be paid
off at such time, we believe we will be able to offer disposal
services at rates that will attract sufficient quantities of
waste and provide acceptable revenues. For those projects we
operate but do not own, prior to the expiration of the initial
term of our operating contract, we will seek to enter into
renewal or replacement contracts to continue operating such
projects. We will seek to bid competitively in the market for
additional contracts to operate other facilities as similar
contracts of other vendors expire. There can be no assurance
that we will be able to enter into such renewals, replacement or
additional contracts, or that the terms available in the market
at the time will be favorable. For additional information
regarding contract expiration dates, see Item 1.
Business.
Energy-from-Waste
Project Ownership
We operate many publicly-owned energy-from-waste facilities and
own and operate many other facilities. In addition, as a result
of acquisitions of additional projects originally owned or
operated by other vendors, we operate several projects under a
lease structure where a third party lessor owns the project.
Regardless of ownership structure, we provide the same service
to our municipal clients and customers.
Under any of these ownership structures, the municipalities
typically borrow funds to pay for the facility construction by
issuing bonds. In a private ownership structure, the municipal
entity loans the bond proceeds to the project subsidiary, the
facility is recorded as an asset, and the project debt is
recorded as a liability, on our consolidated balance sheet. In a
public ownership structure, the municipality would fund the
construction costs without loaning the bond proceeds to us.
At all projects where a Service Fee structure exists (regardless
of ownership structure), our municipal clients are generally
responsible contractually for paying the project debt after
construction is complete. At the 11 publicly-owned Service Fee
projects we operate, the municipality pays periodic debt service
directly to a trustee under an indenture. We own 12 projects
where a Service Fee structure exists, and at these projects the
municipal client pays debt service as a component of a monthly
service fee payment to us. The debt service payment is retained
by a trustee, and is not held or available to us for general
use. At these projects, we record revenue on our consolidated
financial statements with respect to debt service (both
principal and interest) on project debt, and interest expense on
project debt. For projects that are owned, all cash held by
trustees is recorded as restricted funds held in trust on our
consolidated balance sheet.
We own or lease 8 projects where a Tip Fee structure exists and
neither debt service nor lease rent is expressly included in the
fee paid to us. Accordingly, we do not record revenue reflecting
principal on this project debt or on lease rent. In most cases,
our operating subsidiaries for these projects make equal monthly
deposits with their respective project trustees in amounts
sufficient for the trustees to pay principal and interest, or
lease rent, when due.
The term of our operating contracts with municipal clients
generally coincides with the term of the bonds issued to pay for
the project construction. Therefore, another important
difference between public and private ownership of our
energy-from-waste projects is project ownership after these
contracts expire. In many cases, the municipality has
45
contractual rights (not obligations) to extend the contract. If
a contract is not extended on a publicly-owned project, our
role, and our revenue, with respect to that project would cease.
If a contract is not extended on a project that we own, we would
be free to enter into new revenue generating contracts for waste
supply (with the municipality, other municipalities, or private
waste haulers) and for electricity or steam sales. We would, in
such cases, have no remaining project debt to repay from project
revenue, and would be entitled to retain 100% of energy sales
revenue.
Other
Factors Affecting Performance
We have historically performed our operating obligations without
experiencing material unexpected service interruptions or
incurring material increases in costs. In addition, with respect
to many of our contracts at domestic projects, we generally have
limited our exposure for risks not within our control. With
respect to projects acquired in the ARC Holdings acquisition, we
have assumed contracts where there is less contractual
protection against such risks and more exposure to market
influences. For additional information about such risks and
damages that we may owe for unexcused operating performance
failures, see Item 1A. Risk Factors. In monitoring
and assessing the ongoing operating and financial performance of
our businesses, we focus on certain key factors: tons of waste
processed, electricity and steam sold, and boiler availability.
Our ability to meet or exceed historical levels of performance
at projects, and our general financial performance, is affected
by the following:
|
|
|
|
|
Seasonal or long-term changes in market prices for waste,
energy, or ferrous and non-ferrous metals, for projects where we
sell into those markets;
|
|
|
|
Seasonal, geographic and other variations in the heat content of
waste processed, and thereby the amount of waste that can be
processed by a energy-from-waste facility;
|
|
|
|
Our ability to avoid unexpected increases in operating and
maintenance costs while ensuring that adequate facility
maintenance is conducted so that historic levels of operating
performance can be sustained;
|
|
|
|
Contract counterparties ability to fulfill their
obligations, including the ability of our various municipal
customers to supply waste in contractually committed amounts,
and the availability of alternate or additional sources of waste
if excess processing capacity exists at our facilities; and
|
|
|
|
The availability and adequacy of insurance to cover losses from
business interruption in the event of casualty or other insured
events.
|
General financial performance at our international projects is
affected by the following:
|
|
|
|
|
Changes in fuel price for projects in which such costs are not
completely passed through to the electricity purchaser through
revenue adjustments, or delays in the effectiveness of revenue
adjustments;
|
|
|
|
The amounts of electricity actually requested by purchasers of
electricity, and whether or when such requests are made, our
facilities are then available to deliver such electricity;
|
|
|
|
Our ability to avoid unexpected increases in operating and
maintenance costs while ensuring that adequate facility
maintenance is conducted so that historic levels of operating
performance can be sustained;
|
|
|
|
The financial condition and creditworthiness of purchasers of
power and services provided by us;
|
|
|
|
Fluctuations in the value of the domestic currency against the
value of the U.S. dollar for projects in which we are paid
in whole or in part in the domestic currency of the host
country; and
|
|
|
|
Political risks inherent to the international business which
could affect both the ability to operate the project in
conformance with existing agreements and the repatriation of
dividends from the host country.
|
Business
Development
In our domestic business development efforts, we encounter
competition from other companies in pursuing opportunities in
the waste disposal and energy markets. With the New Credit
Facilities, we will have greater flexibility to pursue such
opportunities by investing in the business, and making
acquisitions.
46
Our business is capital intensive because it is based upon
building and operating municipal solid waste processing and
energy generating projects. In order to provide meaningful
growth through development, we must be able to invest our funds,
obtain equity
and/or debt
financing, and provide support to our operating subsidiaries.
Our domestic project development has recently concentrated on
working with our client communities to expand existing
energy-from-waste project capacities and, as a result, we have
two expansion projects under construction. We are pursuing
additional project expansion opportunities, contract extension
opportunities, acquisition opportunities, and opportunities in
businesses ancillary to our existing business, such as
additional waste transfer, transportation, processing and
landfill businesses.
As with our domestic business, the New Credit Facilities afford
greater flexibility to invest in and grow our international
business. We are pursuing international waste
and/or
energy business opportunities, particularly in markets where the
market demand, regulatory environment or other factors encourage
technologies such as energy-from-waste in order to reduce
dependence on landfilling, such as in Italy, the United Kingdom,
China or island nations where landfilling is a less desirable
disposal option.
Other
Services
Our Other Services segment is comprised of the holding company
and insurance subsidiaries operations. Holding company
operations prior to the acquisition of Covanta Energy on
March 10, 2004, primarily included general and
administrative expense related to officer salaries, legal and
other professional fees and insurance. Subsequent to the
acquisition of Covanta Energy, these expenses have been
reimbursed by Covanta Energy under a corporate services
agreement. The holding company operations also include income
earned on its investments.
The operations of our principal insurance subsidiary, NAICC, and
its subsidiaries, are primarily property and casualty insurance.
Based upon the profitability of its insurance lines, NAICC has
responded to expand, contract or cease issuing certain of its
insurance policies. For example, effective July 2003, the
decision was made to focus exclusively on the California
non-standard personal automobile insurance market. In contrast,
in November 2004, NAICC ended a self-imposed moratorium and
commenced writing a new non-standard automobile program under a
new rate and class plan. NAICC, from time to time, has also
entered into a quota share reinsurance agreement based upon its
view of underwriting risk, its reserves and internal cost
structure, in order to reduce its potential exposure to
outstanding policies.
As a result of declining net premium production, NAICCs
investment base has steadily declined, its reserve adjustments
on discontinued lines have disproportionately impacted current
operating ratios and it continues to lose operating leverage. As
a result of positive results in the non-standard automobile
program in 2005 despite soft market conditions, NAICC cancelled
the reinsurance programs effective January 1, 2006 in an
attempt to retain more gross premium.
RESULTS
OF OPERATIONS
As discussed above, we combined the previously separate business
segments of our insurance operations and our holding company
operations into one reportable segment referred to as
Other Services during the third quarter of 2005.
Therefore, we currently have two reportable business
segments Waste and Energy Services and Other
Services. Certain prior period amounts, such as holding company
investment income, have been reclassified in the consolidated
financial statements to conform to the current period
presentation.
The results of operations for the years ended December 31,
2004 and 2005 are not representative of our ongoing results
since we only included Covanta Energys and ARC
Holdings results of operations in our consolidated results
of operations from March 11, 2004 and June 25, 2005
forward, respectively. Therefore, given the significance of the
Covanta Energy and ARC Holdings acquisitions to our current and
future results of operations and financial condition, we believe
that an understanding of our reported results, trends and
ongoing performance is enhanced by presenting results on a pro
forma basis for the years ended December 31, 2004 and 2005
at both the consolidated and Waste and Energy segment levels.
Our consolidated and segment results of operations, as reported
and where applicable, on a pro forma basis, are summarized in
the tables and discussions below. However, the pro forma results
are equivalent to reported results for the year ended
December 31, 2006 as there are no pro forma adjustments for
this period. The pro forma based presentation assumes that the
acquisitions
47
of Covanta Energy and ARC Holdings both occurred on
January 1, 2004. The pro forma financial information is
presented for information purposes only and is not indicative of
the results of operations that would have been achieved if the
acquisitions had taken place at the beginning of each period or
that may result in the future. In addition, the pro forma
information provided has not been adjusted to reflect any
operating efficiencies that have been realized as a result of
the ARC Holdings acquisition. The pro forma adjustments are
described starting on page 64.
The comparability of the information provided below with respect
to our revenue, expense and certain other items for periods
during each of the years presented was affected materially by
several factors in addition to the Covanta Energy and ARC
Holdings acquisitions. These factors principally include:
|
|
|
|
|
The exclusion of revenue and expense after May 2004 relating to
the operations of the Philippines Magellan Project (MCI
facility), which commenced a reorganization proceeding
under Philippine law on May 31, 2004, and is no longer
included as a consolidated subsidiary after such date;
|
|
|
|
The reduction of revenue and expense after August 2004 relating
to the Philippines Edison Bataan facility, which ceased
operations due to the expiration and termination of energy
contracts;
|
|
|
|
The emergence of the Covanta Energys subsidiaries owning
and operating the Lake County, Florida and Warren County, New
Jersey energy-from-waste facilities (the Remaining
Debtors) from bankruptcy on December 14, 2004 and
December 15, 2005, respectively, and their inclusion as
consolidated subsidiaries since their respective emergence
dates; and
|
|
|
|
The reduction of revenue and expense after May 2006 relating to
the China Huantai facility, which was sold in the second quarter
of 2006.
|
The factors noted above must be taken into account in developing
meaningful comparisons between the periods compared below.
48
RESULTS
OF OPERATIONS Year Ended December 31, 2006 vs.
Year Ended December 31, 2005
Our consolidated results of operations are presented on both a
reported and pro forma basis in the table below (in thousands of
dollars, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
Reported
|
|
|
Pro Forma
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
CONSOLIDATED RESULTS OF OPERATIONS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
$
|
1,268,536
|
|
|
$
|
978,763
|
|
|
$
|
1,268,536
|
|
|
$
|
1,209,075
|
|
Total operating expenses
|
|
|
1,041,776
|
|
|
|
832,547
|
|
|
|
1,041,776
|
|
|
|
1,016,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
226,760
|
|
|
|
146,216
|
|
|
|
226,760
|
|
|
|
192,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
11,770
|
|
|
|
6,129
|
|
|
|
11,770
|
|
|
|
7,354
|
|
Interest expense
|
|
|
(113,960
|
)
|
|
|
(89,973
|
)
|
|
|
(113,960
|
)
|
|
|
(119,244
|
)
|
Loss on extinguishment of debt
|
|
|
(2,342
|
)
|
|
|
|
|
|
|
(2,342
|
)
|
|
|
|
|
Gain on derivative instruments, ACL
warrants
|
|
|
|
|
|
|
15,193
|
|
|
|
|
|
|
|
15,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
(104,532
|
)
|
|
|
(68,651
|
)
|
|
|
(104,532
|
)
|
|
|
(96,697
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes,
minority interests and equity in net income from unconsolidated
investments
|
|
|
122,228
|
|
|
|
77,565
|
|
|
|
122,228
|
|
|
|
95,947
|
|
Income tax expense
|
|
|
(38,465
|
)
|
|
|
(34,651
|
)
|
|
|
(38,465
|
)
|
|
|
(43,176
|
)
|
Minority interests
|
|
|
(6,610
|
)
|
|
|
(9,197
|
)
|
|
|
(6,610
|
)
|
|
|
(9,253
|
)
|
Equity in net income from
unconsolidated investments
|
|
|
28,636
|
|
|
|
25,609
|
|
|
|
28,636
|
|
|
|
25,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
105,789
|
|
|
$
|
59,326
|
|
|
$
|
105,789
|
|
|
$
|
69,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.73
|
|
|
$
|
0.49
|
|
|
$
|
0.73
|
|
|
$
|
0.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.72
|
|
|
$
|
0.46
|
|
|
$
|
0.72
|
|
|
$
|
0.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share and the weighted average
shares used for the calculation of basic and diluted earnings
per share have been adjusted retroactively to reflect the bonus
element contained in the rights offering conducted in June 2005.
The following general discussions should be read in conjunction
with the above table, the consolidated financial statements and
the Notes thereto and other financial information appearing and
referred to elsewhere in this report. Additional detail on
comparable revenues, costs and expenses, and operating income is
provided in the reported and pro forma Waste and Energy Services
segment discussion and reported Other Services segment
discussion below.
Consolidated
Results of
Operations
Comparison of Reported Results for the Year Ended
December 31, 2006 vs. Reported Results for the Year Ended
December 31, 2005
Our operating revenues increased by $289.8 million
primarily from increases in waste and service revenues of
$179.1 million and increases in electricity and steam sales
of $111.1 million. Our operating income increased by
$80.5 million resulting primarily from impacts of the
businesses acquired as part of the ARC Holdings acquisition in
the second quarter of 2005, combined with increased operating
revenues, cost reduction initiatives in 2006 in the Waste and
Energy Services segment and reduced operating expenses due to
the absence of an aggregate of $17.1 million of expenses in
2005 related to the California Grantor Trust Settlement,
acquisition-related charges and restructuring charges. For
additional information, see Note 3. Acquisitions and
Dispositions and Note 21. Income Taxes of the Notes.
Our total investment income increased by $5.6 million
primarily due to higher invested cash balances. Interest expense
increased by $24.0 million primarily due to Covanta
Energys financing arrangements put into place as part
49
of the ARC Holdings acquisition in June 2005. As a result of
amendments to Covanta Energys financing arrangements in
May 2006, a loss on extinguishment of debt of $2.3 million
was recognized for the year ended December 31, 2006. For
the year ended December 31, 2005, we realized a pre-tax
gain on derivative instruments of $15.2 million related to
an investment in American Commercial Lines LLC (ACL)
warrants which was liquidated in October 2005 as discussed in
Note 18. Financial Instruments of the Notes.
Equity in net income from unconsolidated investments increased
by $3.0 million primarily due to $1.5 million related
to earnings from domestic investments combined with
$1.5 million related to the effects of the following
factors relating to Quezon Power, Inc. in the Philippines
(Quezon):
|
|
|
|
|
the absence during 2006 of a major scheduled turbine-generator
maintenance project that occurred during 2005 that is generally
scheduled twice in a seven-year cycle combined with lower
project debt interest expense;
|
|
|
|
a $7.0 million cumulative deferred income tax benefit
recorded in the second quarter of 2006 related to unrealized
foreign exchange losses that are expected to be tax deductible
for Philippine tax purposes in future years, offset by a
$2.1 million adjustment to this deferred tax asset as a
result of strengthening of the Philippine peso versus the
U.S. dollar in the last six months of 2006;
|
|
|
|
a $2.3 million write-off of a deferred income tax asset due
to a change in the deductibility of the amortization of deferred
financing costs; and
|
|
|
|
an increase in tax expense of approximately $4.1 million
related to the conclusion of a six-year income tax holiday in
May 2006.
|
Income tax expense increased by $3.8 million due to higher
taxable income primarily from impacts of the businesses acquired
as part of the ARC Holdings acquisition offset by a one-time tax
benefit of $10 million recorded during 2006 associated with
the adoption of the permanent reinvestment exception under
Accounting Principles Board (APB) Opinion
No. 23, Accounting for Income Taxes
Special Areas (APB 23) as discussed in
Note 21. Income Taxes of the Notes.
Net income and diluted earnings per share increased by
$46.5 million and $0.26, respectively, as a result of the
combined effects of the factors in this section as discussed
above.
Consolidated
Results of
Operations
Comparison of Reported Results for the Year Ended
December 31, 2006 vs. Pro Forma Results for the Year Ended
December 31, 2005
Our operating revenues increased by $59.5 million primarily
from increases in waste and service revenues of
$28.5 million and increases in electricity and steam sales
of $31.4 million due to contract fee escalations and higher
energy and ferrous and non-ferrous metal prices. Our operating
income increased by $34.1 million primarily due to higher
operating revenues, cost reduction initiatives in the Waste and
Energy Services segment and reduced operating expenses due to
the absence of $10.3 million of expenses in 2005 related to
the California Grantor Trust Settlement. For additional
information, see Note 21. Income Taxes of the Notes.
Our total investment income increased by $4.4 million
primarily due to higher invested cash balances. Interest expense
decreased by $5.3 million primarily due lower outstanding
debt balances and lower interest rates relating to amendments to
Covanta Energys financing arrangements in May 2006. As a
result of these 2006 amendments, a loss on extinguishment of
debt of $2.3 million was recognized for the year ended
December 31, 2006. For the year ended December 31,
2005, we realized a pre-tax gain on derivative instruments of
$15.2 million related to an investment in ACL warrants
which was liquidated in October 2005 as discussed in
Note 18. Financial Instruments of the Notes.
50
Equity in net income from unconsolidated investments increased
by $3.0 million primarily due to $1.5 million related
to earnings from domestic investments combined with
$1.5 million related to the effects of the following
factors relating to the Quezon facility:
|
|
|
|
|
the absence during 2006 of a major scheduled turbine-generator
maintenance project that occurred during 2005 that is generally
scheduled twice in a seven-year cycle combined with lower
project debt interest expense;
|
|
|
|
a $7.0 million cumulative deferred income tax benefit
recorded in the second quarter of 2006 related to unrealized
foreign exchange losses that are expected to be tax deductible
for Philippine tax purposes in future years, offset by a
$2.1 million adjustment to this deferred tax asset as a
result of strengthening of the Philippine peso versus the
U.S. dollar in the last six months of 2006;
|
|
|
|
a $2.3 million write-off of a deferred income tax asset due
to a change in the deductibility of the amortization of deferred
financing costs; and
|
|
|
|
an increase in tax expense of approximately $4.1 million
related to the conclusion of a six-year income tax holiday in
May 2006.
|
Income tax expense decreased by $4.7 million primarily due
to a one-time tax benefit of $10 million recorded during
the three months ended June 30, 2006 associated with the
adoption of the permanent reinvestment exception under
APB 23. For additional detail, see Note 21. Income
Taxes of the Notes.
Net income and diluted earnings per share increased by
$36.7 million and $0.25, respectively, as a result of the
combined effects of the factors in this section as discussed
above.
Waste
and Energy Services Results of
Operations
Comparison of Reported Results for the Year Ended
December 31, 2006 vs. Pro Forma Results for the Year Ended
December 31, 2005
Waste and Energy Services results of operations are presented on
both a reported and pro forma basis in the table below (in
thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
Reported
|
|
|
Pro Forma
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Waste and service revenues
|
|
$
|
817,633
|
|
|
$
|
638,503
|
|
|
$
|
817,633
|
|
|
$
|
789,155
|
|
Electricity and steam sales
|
|
|
433,834
|
|
|
|
322,770
|
|
|
|
433,834
|
|
|
|
402,430
|
|
Other operating revenues
|
|
|
3,328
|
|
|
|
2,693
|
|
|
|
3,328
|
|
|
|
2,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
1,254,795
|
|
|
|
963,966
|
|
|
|
1,254,795
|
|
|
|
1,194,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plant operating expenses
|
|
|
712,156
|
|
|
|
559,638
|
|
|
|
712,156
|
|
|
|
666,391
|
|
Depreciation and amortization
expense
|
|
|
193,114
|
|
|
|
124,814
|
|
|
|
193,114
|
|
|
|
183,341
|
|
Net interest expense on project
debt
|
|
|
60,210
|
|
|
|
52,431
|
|
|
|
60,210
|
|
|
|
67,497
|
|
Other operating income
|
|
|
(7,840
|
)
|
|
|
(887
|
)
|
|
|
(7,840
|
)
|
|
|
(368
|
)
|
General and administrative expenses
|
|
|
70,833
|
|
|
|
64,216
|
|
|
|
70,833
|
|
|
|
73,950
|
|
California Grantor
Trust Settlement
|
|
|
|
|
|
|
10,342
|
|
|
|
|
|
|
|
10,342
|
|
Restructuring charges
|
|
|
|
|
|
|
2,765
|
|
|
|
|
|
|
|
|
|
Acquisition-related charges
|
|
|
|
|
|
|
3,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,028,473
|
|
|
|
817,269
|
|
|
|
1,028,473
|
|
|
|
1,001,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
226,322
|
|
|
$
|
146,697
|
|
|
$
|
226,322
|
|
|
$
|
193,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following Waste and Energy Services segment discussion is
presented on a pro forma basis for the year ended
December 31, 2005. The results of operations for the year
ended December 31, 2005 are not representative of our
ongoing results since ARC Holdings results of operations
were included in Covanta Energys consolidated
51
results of operations from June 25, 2005 forward.
Therefore, given the significance of the ARC Holdings
acquisition to our current and future results of operations and
financial condition, we believe that an understanding of our
reported results, trends and ongoing performance is enhanced by
discussing results on a pro forma basis at the Waste and Energy
Services segment level for the year ended December 31,
2005. The following general discussion should be read in
conjunction with the above table, the consolidated financial
statements and the Notes. Additional detail on comparable
revenues, costs and expenses, and operating income, within the
Waste and Energy Services segment is provided in the pro forma
domestic and international business discussion below.
Operating income increased by $33.2 million primarily due
to the effects of:
|
|
|
|
|
increases in operating revenues of $60.5 million primarily
due to contract fee escalations and higher energy prices in 2006
in the domestic business, and
|
|
|
|
increases in operating expenses of $27.3 million primarily
due to higher plant operating expenses, partially offset by
lower general and administrative expenses resulting from cost
reduction initiatives, higher other operating income due to
final distributions and settlements of disputed matters relating
to Covanta Energys reorganization, and insurance
recoveries and the absence of $10.3 million of allocated
expenses in 2005 relating to the California Grantor
Trust Settlement.
|
Waste
and Energy Domestic Business Results of
Operations
Comparison of Reported Results for the Year Ended
December 31, 2006 vs. Pro Forma Results for the Year Ended
December 31, 2005
The domestic business results of operations are presented on
both a reported and pro forma basis in the table below (in
thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
Reported
|
|
|
Pro Forma
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Waste and service revenues
|
|
$
|
813,260
|
|
|
$
|
634,268
|
|
|
$
|
813,260
|
|
|
$
|
784,920
|
|
Electricity and steam sales
|
|
|
301,339
|
|
|
|
194,057
|
|
|
|
301,339
|
|
|
|
273,717
|
|
Other operating revenues
|
|
|
3,328
|
|
|
|
2,693
|
|
|
|
3,328
|
|
|
|
2,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
1,117,927
|
|
|
|
831,018
|
|
|
|
1,117,927
|
|
|
|
1,061,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plant operating expenses
|
|
|
612,202
|
|
|
|
471,641
|
|
|
|
612,202
|
|
|
|
578,394
|
|
Depreciation and amortization
expense
|
|
|
184,921
|
|
|
|
116,083
|
|
|
|
184,921
|
|
|
|
174,610
|
|
Net interest expense on project
debt
|
|
|
53,270
|
|
|
|
44,762
|
|
|
|
53,270
|
|
|
|
59,828
|
|
Other operating income
|
|
|
(5,388
|
)
|
|
|
(3,651
|
)
|
|
|
(5,388
|
)
|
|
|
(3,132
|
)
|
General and administrative expenses
|
|
|
66,439
|
|
|
|
59,249
|
|
|
|
66,439
|
|
|
|
68,983
|
|
California Grantor
Trust Settlement
|
|
|
|
|
|
|
10,342
|
|
|
|
|
|
|
|
10,342
|
|
Acquisition-related charges
|
|
|
|
|
|
|
3,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
911,444
|
|
|
|
702,376
|
|
|
|
911,444
|
|
|
|
889,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
206,483
|
|
|
$
|
128,642
|
|
|
$
|
206,483
|
|
|
$
|
172,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total domestic revenues increased by $56.6 million
primarily due to contract fee escalations and higher energy and
ferrous and non-ferrous metal prices as described below.
Waste and service revenues increased by $28.3 million or
3.6% resulting from the impacts of the following factors:
|
|
|
|
|
Revenue from energy-from-waste projects structured with Service
Fee arrangements increased by $9.1 million. Such revenues
increased by $13.5 million primarily due to contractual
escalations and higher additional waste service fees offset by a
reduction of $4.4 million related to lower revenues earned
explicitly to service debt;
|
52
|
|
|
|
|
Revenue from energy-from-waste projects structured with Tip Fee
arrangements increased by $13.4 million. Such revenues
increased by $5.2 million primarily driven by higher
volumes of waste handled and favorable pricing and
$8.2 million primarily due to the emergence of a subsidiary
from bankruptcy in December 2005, and its subsequent inclusion
in our consolidated results of operations; and
|
|
|
|
Other waste and service fee revenues increased by
$5.8 million primarily due to higher pricing for ferrous
and non-ferrous metal.
|
Electricity and steam revenue increased by $27.6 million or
10.1%, comprised of an increase of $18.3 million due to
higher energy rates and increased production, and an increase of
$5.2 million due to the emergence of a subsidiary from
bankruptcy in December 2005, and its subsequent inclusion in our
consolidated results of operations. Also contributing to the
favorable variance was a $4.8 million gain relating to the
settlement of a dispute regarding the 2005 power rate at one of
our facilities. These gains were partially offset by
$0.7 million due to the termination of activities at two
landfill gas facilities.
Plant operating expenses increased by $33.8 million
primarily due to the scope of scheduled plant maintenance,
normal cost escalations such as wages, and the emergence of a
subsidiary from bankruptcy in December 2005, and its subsequent
inclusion in our consolidated results of operations, partially
offset by cost reduction initiatives.
Depreciation and amortization expense increased by
$10.3 million primarily due to additions to property, plant
and equipment and the emergence of a subsidiary from bankruptcy
in December 2005, and its subsequent inclusion in our
consolidated results of operations.
Net interest expense on project debt decreased by
$6.6 million primarily as a result of lower project debt
balances.
Other operating income increased by $2.3 million primarily
due to final distributions and settlements of disputed matters
relating to Covanta Energys reorganization, and insurance
recoveries.
General and administrative expenses decreased by
$2.5 million primarily due synergies from the ARC Holdings
acquisition partially offset by wage escalations and increased
development spending.
During the fourth quarter of 2005, we incurred
$10.3 million of allocated expenses relating to the
California Grantor Trust Settlement. For additional
information, see Note 21. Income Taxes of the Notes.
53
Waste
and Energy International Business Results of
Operations
Comparison of Reported Results for the Year Ended
December 31, 2006 vs. Pro Forma Results for the Year Ended
December 31, 2005
The international business results of operations are presented
on both a reported and pro forma basis in the table below (in
thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
Reported
|
|
|
Pro Forma
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Waste and service revenues
|
|
$
|
4,373
|
|
|
$
|
4,235
|
|
|
$
|
4,373
|
|
|
$
|
4,235
|
|
Electricity and steam sales
|
|
|
132,495
|
|
|
|
128,713
|
|
|
|
132,495
|
|
|
|
128,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
136,868
|
|
|
|
132,948
|
|
|
|
136,868
|
|
|
|
132,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plant operating expenses
|
|
|
99,954
|
|
|
|
87,997
|
|
|
|
99,954
|
|
|
|
87,997
|
|
Depreciation and amortization
expense
|
|
|
8,193
|
|
|
|
8,731
|
|
|
|
8,193
|
|
|
|
8,731
|
|
Net interest expense on project
debt
|
|
|
6,940
|
|
|
|
7,669
|
|
|
|
6,940
|
|
|
|
7,669
|
|
Other operating (income) expenses
|
|
|
(2,452
|
)
|
|
|
2,764
|
|
|
|
(2,452
|
)
|
|
|
2,764
|
|
General and administrative expenses
|
|
|
4,394
|
|
|
|
4,967
|
|
|
|
4,394
|
|
|
|
4,967
|
|
Restructuring charges
|
|
|
|
|
|
|
2,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
117,029
|
|
|
|
114,893
|
|
|
|
117,029
|
|
|
|
112,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
19,839
|
|
|
$
|
18,055
|
|
|
$
|
19,839
|
|
|
$
|
20,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues for the international business increased by
$3.9 million primarily due to the effects of the following
factors:
|
|
|
|
|
a $16.6 million increase in revenues under energy contracts
at both Indian facilities resulting from higher fuel costs
passed through to the off-taker;
|
|
|
|
a $1.1 million decrease in the debt service component of
revenue as a result of the repayment of project debt;
|
|
|
|
a $1.4 million provision related to a dispute with the
off-taker;
|
|
|
|
a $9 million decrease in revenues from the Huantai facility
in China due primarily to the sale of the facility during the
second quarter of 2006; and
|
|
|
|
a $1.3 million decrease in revenues due to lower net sales
at our other two facilities in China.
|
Plant operating expenses increased by $12.0 million
primarily due to the effects of the following factors:
|
|
|
|
|
an $18.9 million increase due to higher fuel costs at both
Indian facilities;
|
|
|
|
a $1.1 million increase in bad debt expense for prior
period amounts related to interest on the working capital
provision;
|
|
|
|
a $7.4 million decrease in expenses at the Huantai facility
in China due primarily to the sale of the facility during the
second quarter of 2006; and
|
|
|
|
a $0.7 million decrease in net operating costs at our other
two facilities in China.
|
Depreciation and amortization expense decreased by
$0.5 million primarily due to the sale of the Huantai
facility in China during the second quarter of 2006.
Net interest expense on project debt decreased by
$0.7 million primarily due to the scheduled quarterly
payment of project debt at both Indian facilities, partially
offset by an increase in the amortization of deferred financing
costs at both projects.
54
Other operating income increased by $5.2 million primarily
due to the effects of the following factors:
|
|
|
|
|
a $1.7 million write-off of the remaining assets of the
Bataan facility in the Philippines during the year ended
December 31, 2005;
|
|
|
|
a $1.2 million gain on the sale of the Huantai facility in
China during the second quarter of 2006; and
|
|
|
|
a $0.4 million gain on the sale of inventory at the Bataan
facility in the Philippines during the second quarter of 2006.
|
General and administrative expenses decreased by
$0.6 million primarily due to lower personnel costs.
|
|
|
Other
Services Results of
Operations
Comparison of Reported Results for the Year Ended
December 31, 2006 vs. Reported Results for the Year Ended
December 31, 2005
|
Other Services reported results of operations are presented in
the table below (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
OPERATING REVENUES:
|
|
|
|
|
|
|
|
|
Net earned premiums
|
|
$
|
11,888
|
|
|
$
|
12,685
|
|
Net investment income
|
|
|
1,635
|
|
|
|
1,999
|
|
Net realized investment gains
(losses)
|
|
|
218
|
|
|
|
(71
|
)
|
Other income
|
|
|
|
|
|
|
184
|
|
|
|
|
|
|
|
|
|
|
Total other operating revenues
|
|
|
13,741
|
|
|
|
14,797
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses
|
|
|
10,434
|
|
|
|
11,902
|
|
Depreciation and amortization
expense
|
|
|
103
|
|
|
|
111
|
|
General and administrative expenses
|
|
|
2,766
|
|
|
|
3,265
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
13,303
|
|
|
|
15,278
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
438
|
|
|
$
|
(481
|
)
|
|
|
|
|
|
|
|
|
|
Net earned premiums decreased by $0.8 million primarily due
to the change in net written premiums which were significantly
impacted by softer insurance market conditions. Net investment
income decreased by $0.4 million primarily due to a
decrease in the fixed income portfolio base. Other operating
expenses consist of net loss and loss adjustment expenses
(LAE) and policy acquisition costs and decreased by
$1.5 million, as described below. General and
administrative expenses decreased by $0.5 million due
primarily to reductions in administrative personnel in the
insurance business.
Generally, quota share reinsurance agreements exclude expected
costs of in-house claims handling cost often referred as
unallocated LAE or ULAE, and in return, provide ceding
commissions in excess of the direct acquisition costs.
Consequently with the cancellation of the quota share
reinsurance program on the private passenger automobile program
in the beginning of 2006, the loss and LAE and the policy
acquisition cost ratios were inversely impacted. The loss and
LAE ratios were 66.3% and 78.3% and the policy acquisition cost
ratios were 21.5% and 15.5% for the years ended
December 31, 2006 and 2005, respectively. The loss and LAE
ratio for the year ended December 31, 2006 improved largely
resulting from lower loss reserve developments of approximately
2.5% in 2006 versus 14.0% in 2005. The policy acquisition cost
ratio was adversely impacted by the cancellation of the
reinsurance agreements which eliminated both provisional and
profit ceding commissions.
55
RESULTS
OF OPERATIONS Year Ended December 31, 2005 vs.
Year Ended December 31, 2004
Our consolidated results of operations on both a reported and
pro forma basis are presented in the table below (in thousands
of dollars, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
Reported
|
|
|
Pro Forma
|
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
CONSOLIDATED RESULTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
$
|
978,763
|
|
|
$
|
576,196
|
|
|
$
|
1,209,075
|
|
|
$
|
1,204,481
|
|
Total operating expenses
|
|
|
832,547
|
|
|
|
499,326
|
|
|
|
1,016,431
|
|
|
|
1,010,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
146,216
|
|
|
|
76,870
|
|
|
|
192,644
|
|
|
|
194,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
6,129
|
|
|
|
2,343
|
|
|
|
7,354
|
|
|
|
4,867
|
|
Interest expense
|
|
|
(89,973
|
)
|
|
|
(43,739
|
)
|
|
|
(119,244
|
)
|
|
|
(120,295
|
)
|
Gain on derivative instruments, ACL
warrants
|
|
|
15,193
|
|
|
|
|
|
|
|
15,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
(68,651
|
)
|
|
|
(41,396
|
)
|
|
|
(96,697
|
)
|
|
|
(115,428
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes,
minority interests and equity in net income from unconsolidated
investments
|
|
|
77,565
|
|
|
|
35,474
|
|
|
|
95,947
|
|
|
|
78,785
|
|
Income tax expense
|
|
|
(34,651
|
)
|
|
|
(11,535
|
)
|
|
|
(43,176
|
)
|
|
|
(36,240
|
)
|
Minority interests
|
|
|
(9,197
|
)
|
|
|
(6,869
|
)
|
|
|
(9,253
|
)
|
|
|
(9,674
|
)
|
Equity in net income from
unconsolidated investments
|
|
|
25,609
|
|
|
|
17,024
|
|
|
|
25,609
|
|
|
|
21,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
59,326
|
|
|
$
|
34,094
|
|
|
$
|
69,127
|
|
|
$
|
54,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE OF COMMON STOCK:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.49
|
|
|
$
|
0.39
|
|
|
$
|
0.49
|
|
|
$
|
0.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.46
|
|
|
$
|
0.37
|
|
|
$
|
0.47
|
|
|
$
|
0.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share and the weighted average
shares used in the calculation of basic and diluted earnings per
share have been adjusted retroactively to reflect the bonus
element contained in the rights offerings conducted in May 2004
and June 2005.
The following general discussions should be read in conjunction
with the above table, the consolidated financial statements and
the Notes thereto and other financial information appearing and
referred to elsewhere in this report. Additional detail on
comparable revenues, costs and expenses, and operating income is
provided in the reported and pro forma Waste and Energy Services
segment discussion and reported Other Services segment
discussion below.
Consolidated
Results of
Operations
Comparison of Reported Results for the Year Ended
December 31, 2005 vs. Reported Results for the Year Ended
December 31, 2004
Our operating revenues increased by $402.6 million
primarily from increases in waste and service revenues of
$265.8 million and increases in electricity and steam sales
of $141.7 million. Operating income for the Waste and
Energy Services segment increased by $66.5 million
primarily from the impacts of the businesses acquired as part of
the Covanta Energy and ARC Holdings acquisitions. Operating
expenses include $10.3 million of allocated expenses
related to the California Grantor Trust Settlement. For
additional information, see Note 21. Income Taxes of the
Notes. The year ended December 31, 2005 includes the
write-off of deferred financing charges of $7.0 million on
Covanta Energys prior domestic and international debt, as
well as $6.7 million of restructuring and
acquisition-related charges. Operating loss for the Other
Services segment decreased by $2.8 million primarily due to
reduced general and administrative expenses.
Total investment income increased by $3.8 million primarily
due to higher invested cash balances. Interest expense increased
by $46.2 million primarily due to the financing
arrangements put into place as part of the ARC
56
Holdings acquisition in June 2005 and the write-off of deferred
financing costs related to the debt incurred with the
acquisition of Covanta Energy in 2004, which debt was refinanced
in connection with the June 2005 financing arrangements. Equity
in net income from unconsolidated investments increased by
$8.6 million primarily due to the acquisition of Covanta
Energy, revenue adjustments which occurred in 2004, in addition
to lower operating costs in 2005 at a project in the Philippines
and lower project debt interest expense at projects in the
Philippines and Bangladesh in 2005 as a result of project debt
payments. As discussed in Note 18. Financial Instruments of
the Notes, we recorded a pre-tax gain on derivative instruments
of $15.2 million for the year ended December 31, 2005
related to an investment in ACL warrants.
Income tax expense increased by $23.1 million due to higher
taxable income primarily from impacts of the businesses acquired
as part of the Covanta Energy and ARC Holdings acquisitions.
Net income and diluted earnings per share increased by
$25.2 million and $0.09, respectively, as a result of the
combined effects of the factors in this section as discussed
above.
Consolidated
Results of
Operations
Comparison of Pro Forma Results for the Year Ended
December 31, 2005 vs. Pro Forma Results for the Year Ended
December 31, 2004
Our operating revenues increased by $4.6 million primarily
from increases in waste and service revenues of
$5.9 million. Operating income for the Waste and Energy
Services segment decreased by $4.4 million primarily due to
higher operating revenues offset by $10.3 million of
allocated expenses related to the California Grantor
Trust Settlement. For additional information, see
Note 21. Income Taxes of the Notes. Operating loss for the
Other Services segment decreased by $2.8 million primarily
due to reduced general and administrative expenses.
Total investment income increased by $2.5 million primarily
due to higher invested cash balances. Interest expense decreased
$1.1 million. Equity in net income from unconsolidated
investments increased by $3.7 million primarily due to
revenue adjustments which occurred in 2004 in addition to lower
operating costs in 2005 at a project in the Philippines and
lower project debt interest expense at projects in the
Philippines and Bangladesh in 2005 as a result of project debt
payments. As discussed in Note 18. Financial Instruments of
the Notes, we recorded a pre-tax gain on derivative instruments
of $15.2 million for the year ended December 31, 2005
related to an investment in ACL warrants.
Income tax expense increased by $6.9 million due to higher
taxable income.
Net income and diluted earnings per share increased by
$14.3 million and $0.09, respectively, as a result of the
combined effects of the factors in this section as discussed
above.
57
Waste
and Energy Services Results of
Operations
Comparison of Pro Forma Results for the Year Ended
December 31, 2005 vs. Pro Forma Results for the Year Ended
December 31, 2004
Waste and Energy Services results of operations on both a
reported and pro forma basis are presented in the table below
(in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
Reported
|
|
|
Pro Forma
|
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Waste and service revenues
|
|
$
|
638,503
|
|
|
$
|
372,748
|
|
|
$
|
789,155
|
|
|
$
|
783,252
|
|
Electricity and steam sales
|
|
|
322,770
|
|
|
|
181,074
|
|
|
|
402,430
|
|
|
|
398,797
|
|
Other operating revenues
|
|
|
2,693
|
|
|
|
1,506
|
|
|
|
2,693
|
|
|
|
1,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
963,966
|
|
|
|
555,328
|
|
|
|
1,194,278
|
|
|
|
1,183,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plant operating expenses
|
|
|
559,638
|
|
|
|
349,502
|
|
|
|
666,391
|
|
|
|
658,254
|
|
Depreciation and amortization
expense
|
|
|
124,814
|
|
|
|
53,131
|
|
|
|
183,341
|
|
|
|
183,598
|
|
Net interest expense on project
debt
|
|
|
52,431
|
|
|
|
32,586
|
|
|
|
67,497
|
|
|
|
76,465
|
|
Other operating income
|
|
|
(887
|
)
|
|
|
(721
|
)
|
|
|
(368
|
)
|
|
|
(732
|
)
|
General and administrative expenses
|
|
|
64,216
|
|
|
|
40,632
|
|
|
|
73,950
|
|
|
|
68,487
|
|
California Grantor
Trust Settlement
|
|
|
10,342
|
|
|
|
|
|
|
|
10,342
|
|
|
|
|
|
Restructuring charges
|
|
|
2,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition-related charges
|
|
|
3,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
817,269
|
|
|
|
475,130
|
|
|
|
1,001,153
|
|
|
|
986,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
146,697
|
|
|
$
|
80,198
|
|
|
$
|
193,125
|
|
|
$
|
197,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following Waste and Energy Services segment discussion is
presented on a pro forma basis only. We believe that due to the
significance of the Covanta Energy and ARC Holdings acquisitions
to our current and future results of operations and financial
condition that an understanding of our reported results, trends
and ongoing performance is enhanced by a discussion of the Waste
and Energy Services Segment on a pro forma basis. The following
general discussions should be read in conjunction with the above
table, the consolidated financial statements and the Notes
thereto. Additional detail on comparable revenues, costs and
expenses, and operating income, within the Waste and Energy
Services segment is provided in the pro forma domestic and
international business discussions below.
Operating income remained relatively unchanged primarily due
increased revenues offset by allocated expenses related to the
California Grantor Trust Settlement. Revenues increased
$10.7 million primarily from increases in waste and service
revenues. Total operating expenses increased by
$15.1 million as a result of higher plant operating
expenses and lower project debt interest expense in both the
domestic and international operations offset by an increase in
domestic general and administrative expenses and the California
Grantor Trust Settlement.
58
Waste
and Energy Domestic Business Results of
Operations
Comparison of Pro Forma Results for the Year Ended
December 31, 2005 vs. Pro Forma Results for the Year Ended
December 31, 2004
The domestic business results of operations on both a reported
and pro forma basis are presented in the table below (in
thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
Reported
|
|
|
Pro Forma
|
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Waste and service revenues
|
|
$
|
634,268
|
|
|
$
|
369,583
|
|
|
$
|
784,920
|
|
|
$
|
778,917
|
|
Electricity and steam sales
|
|
|
194,057
|
|
|
|
81,894
|
|
|
|
273,717
|
|
|
|
265,252
|
|
Other operating revenues
|
|
|
2,693
|
|
|
|
1,506
|
|
|
|
2,693
|
|
|
|
1,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
831,018
|
|
|
|
452,983
|
|
|
|
1,061,330
|
|
|
|
1,045,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plant operating expenses
|
|
|
471,641
|
|
|
|
281,342
|
|
|
|
578,394
|
|
|
|
564,858
|
|
Depreciation and amortization
expense
|
|
|
116,083
|
|
|
|
46,537
|
|
|
|
174,610
|
|
|
|
174,528
|
|
Net interest expense on project
debt
|
|
|
44,762
|
|
|
|
23,786
|
|
|
|
59,828
|
|
|
|
64,575
|
|
Other operating (income) expenses
|
|
|
(3,651
|
)
|
|
|
618
|
|
|
|
(3,132
|
)
|
|
|
314
|
|
General and administrative expenses
|
|
|
59,249
|
|
|
|
35,699
|
|
|
|
68,983
|
|
|
|
63,135
|
|
California Grantor
Trust Settlement
|
|
|
10,342
|
|
|
|
|
|
|
|
10,342
|
|
|
|
|
|
Acquisition-related charges
|
|
|
3,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
702,376
|
|
|
|
387,982
|
|
|
|
889,025
|
|
|
|
867,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
128,642
|
|
|
$
|
65,001
|
|
|
$
|
172,305
|
|
|
$
|
178,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total domestic revenue increased by $15.6 million primarily
due to contract fee service escalation and higher energy prices
as further described below.
Waste and service revenues increased by $6.0 million as
primarily due to:
|
|
|
|
|
Revenue from energy-from-waste projects structured with Service
Fee agreements increased by $7.4 million;
|
|
|
|
|
|
Revenues increased $4.1 million primarily due to
contractual escalations of $10.6 million offset by a
reduction of $3.9 million related to lower revenues earned
explicitly to service debt and a reduction of $2.6 million
in additional waste service fees; and
|
|
|
|
Revenues increased by $3.3 million due to one-time events
including the impact of the emergence of a subsidiary from
bankruptcy which was partially offset by the termination or sale
of certain non-core operations primarily in the fourth quarter
of 2004 and a reduction of service fees at one facility due to a
contract amendment in exchange for reduced letter of credit
obligations;
|
|
|
|
|
|
Revenue from energy-from-waste projects structured with Tip Fee
agreements increased by $1.6 million. Revenues for waste
handled increased $4.5 million primarily driven by waste
pricing offset by a reduction of $2.9 million related to
intermittent low margin brokered waste; and
|
|
|
|
Other waste and service fee revenues decreased by
$3.0 million primarily due to lower selling price for
recovered ferrous and non-ferrous metal.
|
Electricity and steam sales increased $8.5 million.
Revenues increased $9.9 million primarily driven by higher
energy rates partially offset by a biogas project that was shut
down in the fourth quarter of 2004.
Plant operating expenses increased by $13.5 million
primarily due to the normal escalation of costs such as wages
and benefits, as well as additional scheduled maintenance and a
subsidiary emerging from bankruptcy partially offset by a
reduction in disposal costs related to brokered waste and the
impact of the termination or sale of certain of our non-core
operations.
59
Depreciation and amortization expense for the year ended
December 31, 2005 was comparable to the year ended
December 31, 2004.
Net interest expense on project debt decreased $4.7 million
primarily as a result of lower project debt balances.
Other operating income increased by $3.4 million primarily
due to a gain at a facility related to a debt refinancing in
April 2005 and due to third quarter insurance recoveries.
General and administrative expenses increased $5.8 million
primarily due to wage escalations, additional professional and
consulting fees and an increase in non-cash stock compensation
expense resulting from additional grants in 2005.
During the fourth quarter of 2005, we incurred
$10.3 million of allocated expenses relating to the
California Grantor Trust Settlement. For additional
information, see Note 21. Income Taxes of the Notes.
Waste
and Energy International Business Results of
Operations
Comparison of Pro Forma Results for the Year Ended
December 31, 2005 vs. Pro Forma Results for the Year Ended
December 31, 2004
The international business results of operations on both a
reported and pro forma basis are presented in the table below
(in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
Reported
|
|
|
Pro Forma
|
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Waste and service revenues
|
|
$
|
4,235
|
|
|
$
|
3,165
|
|
|
$
|
4,235
|
|
|
$
|
4,335
|
|
Electricity and steam sales
|
|
|
128,713
|
|
|
|
99,180
|
|
|
|
128,713
|
|
|
|
133,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
132,948
|
|
|
|
102,345
|
|
|
|
132,948
|
|
|
|
137,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plant operating expenses
|
|
|
87,997
|
|
|
|
68,160
|
|
|
|
87,997
|
|
|
|
93,396
|
|
Depreciation and amortization
expense
|
|
|
8,731
|
|
|
|
6,594
|
|
|
|
8,731
|
|
|
|
9,070
|
|
Net interest expense on project
debt
|
|
|
7,669
|
|
|
|
8,800
|
|
|
|
7,669
|
|
|
|
11,890
|
|
Other operating expenses (income)
|
|
|
2,764
|
|
|
|
(1,339
|
)
|
|
|
2,764
|
|
|
|
(1,046
|
)
|
General and administrative expenses
|
|
|
4,967
|
|
|
|
4,933
|
|
|
|
4,967
|
|
|
|
5,352
|
|
Restructuring charges
|
|
|
2,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
114,893
|
|
|
|
87,148
|
|
|
|
112,128
|
|
|
|
118,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
18,055
|
|
|
$
|
15,197
|
|
|
$
|
20,820
|
|
|
$
|
19,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues for the international business for 2005 decreased
$4.9 million primarily due to elimination of revenue from
marginal businesses in 2004, offset by an increase in revenues
due to higher fuel prices as described below. This decrease was
primarily due to a $7.5 million decrease from the 2004
expiration of an energy contract in the Philippines, a
$4.1 million decrease from the deconsolidation of the MCI
facility in May 2004, as well as a $2.4 million decrease
due to lower demand at the Huantai facility in China. These
decreases were partially offset by an $8.1 million increase
primarily due to an increase in revenues under energy contracts
at both Indian facilities in 2005 resulting from higher fuel
costs passed through to the off-taker; as well as a
$0.8 million increase in steam revenues from the Yanjiang
facility in China.
Plant operating expenses were lower by $5.4 million
primarily as a result of a $4.9 million decrease in costs
from the expiration of an energy contract in the Philippines, a
$4.6 million reduction in costs due to the deconsolidation
of the MCI facility in the Philippines in May 2004, as well as a
$2.3 million decrease due to lower generation at the
Huantai facility in China. These decreases were partially offset
by a $6.1 million increase in plant operating costs due
primarily to higher fuel prices at two facilities in India.
Depreciation and amortization expense for the year ended
December 31, 2005 was comparable to the year ended
December 31, 2004.
60
Net interest expense on project debt decreased $4.2 million
primarily due to lower expenses at two Indian facilities
resulting from the October 2004 refinancing and scheduled
quarterly pay down of project debt, as well as the
deconsolidation of the MCI facility in May 2004.
Other operating expenses increased by $3.8 million
primarily due to the $1.7 million write-off of the
remaining assets at the Edison Bataan facility in the
Philippines, and a 2005 foreign currency exchange loss of
$1.0 million, compared to a $0.2 million gain recorded
in 2004 on a euro-denominated note receivable from the Trezzo
project in Italy and U.S. dollar-denominated debt in India.
Other
Services Results of
Operations
Comparison of Reported Results for the Year Ended
December 31, 2005 vs. Reported Results for the Year Ended
December 31, 2004
Other Services reported results of operations are presented in
the table below (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
OPERATING REVENUES:
|
|
|
|
|
|
|
|
|
Net earned premiums
|
|
$
|
12,685
|
|
|
$
|
17,998
|
|
Net investment income
|
|
|
1,999
|
|
|
|
2,405
|
|
Net realized investment (losses)
gains
|
|
|
(71
|
)
|
|
|
201
|
|
Other income
|
|
|
184
|
|
|
|
264
|
|
|
|
|
|
|
|
|
|
|
Total other operating revenues
|
|
|
14,797
|
|
|
|
20,868
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses
|
|
|
11,902
|
|
|
|
17,281
|
|
Depreciation and amortization
expense
|
|
|
111
|
|
|
|
151
|
|
General and administrative expenses
|
|
|
3,265
|
|
|
|
6,764
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
15,278
|
|
|
|
24,196
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
$
|
(481
|
)
|
|
$
|
(3,328
|
)
|
|
|
|
|
|
|
|
|
|
Net written premiums decreased by $2.7 million primarily
due to the insurance business entering into quota share
arrangements as described in the Managements Discussion
and Analysis of Financial Condition and Results of
Operations Overview Other Services
section above.
Net earned premiums decreased by $5.3 million. The change
in net earned premiums was directly related to the change in net
written premiums and the run-off of the commercial automobile
program.
Other operating expenses decreased by $5.4 million. Other
operating expenses consist of net loss and LAE, and policy
acquisition costs as described below.
Net loss and LAE decreased by $2.9 million. The loss and
LAE ratio worsened due to the underwriting performance of the
new program which was not as profitable as the renewal book. The
resulting loss and LAE ratios were 78.3% and 71.5% for the years
ended December 31, 2005 and 2004, respectively. For both
2005 and 2004, adverse reserve development accounted for
approximately 14.0% of the net loss and LAE ratio.
Policy acquisition costs decreased by $2.5 million. As a
percentage of net earned premiums, policy acquisition costs were
15.5% and 24.6% for the years ended December 31, 2005 and
2004, respectively. Policy acquisition costs decreased due to
reduced profit commissions incurred related to non-standard
personal automobile and from ceding commissions earned under
reinsurance agreements during 2005.
General and administrative expenses decreased by
$3.5 million primarily due to reductions in administrative
personnel and rent in the insurance business. Decreases in
holding company expenses were primarily the result of the
corporate services agreement, entered into between us and
Covanta Energy on March 10, 2004, pursuant to which we
provided to Covanta Energy, at Covanta Energys expense,
certain administrative and professional services.
61
Pro Forma
Reconciliations
The following tables provide reconciliations from the as
reported results to the pro forma results presented above for
the consolidated and Waste and Energy Services segment where
applicable (in thousands of dollars, except per share amounts).
Notes to the pro forma reconciliations begin directly after the
tables.
CONSOLIDATED
PRO FORMA RECONCILIATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
Year Ended December 31, 2004
|
|
|
|
|
|
|
Acquisition
|
|
|
Pro forma
|
|
|
|
|
|
|
|
|
Acquisition
|
|
|
Pro Forma
|
|
|
|
|
|
|
As Reported
|
|
|
Activity
|
|
|
Adjust.
|
|
|
Pro Forma
|
|
|
As Reported
|
|
|
Activity
|
|
|
Adjust.
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Waste and service revenues
|
|
$
|
638,503
|
|
|
$
|
148,792
|
|
|
$
|
1,860
|
|
|
$
|
789,155
|
|
|
$
|
372,748
|
|
|
$
|
411,263
|
|
|
$
|
(759
|
)
|
|
$
|
783,252
|
|
Electricity and steam sales
|
|
|
322,770
|
|
|
|
79,660
|
|
|
|
|
|
|
|
402,430
|
|
|
|
181,074
|
|
|
|
218,258
|
|
|
|
(535
|
)
|
|
|
398,797
|
|
Other operating revenues
|
|
|
17,490
|
|
|
|
|
|
|
|
|
|
|
|
17,490
|
|
|
|
22,374
|
|
|
|
58
|
|
|
|
|
|
|
|
22,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
978,763
|
|
|
|
228,452
|
|
|
|
1,860
|
|
|
|
1,209,075
|
|
|
|
576,196
|
|
|
|
629,579
|
|
|
|
(1,294
|
)
|
|
|
1,204,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plant operating expenses
|
|
|
559,638
|
|
|
|
103,617
|
|
|
|
3,136
|
|
|
|
666,391
|
|
|
|
349,502
|
|
|
|
306,025
|
|
|
|
2,727
|
|
|
|
658,254
|
|
Depreciation and amortization
expense
|
|
|
124,925
|
|
|
|
57,032
|
|
|
|
1,495
|
|
|
|
183,452
|
|
|
|
53,282
|
|
|
|
133,973
|
|
|
|
(3,506
|
)
|
|
|
183,749
|
|
Net interest expense on project debt
|
|
|
52,431
|
|
|
|
13,964
|
|
|
|
1,102
|
|
|
|
67,497
|
|
|
|
32,586
|
|
|
|
41,786
|
|
|
|
2,093
|
|
|
|
76,465
|
|
Other operating expenses (income)
|
|
|
11,015
|
|
|
|
519
|
|
|
|
|
|
|
|
11,534
|
|
|
|
16,560
|
|
|
|
(127
|
)
|
|
|
116
|
|
|
|
16,549
|
|
General and administrative expenses
|
|
|
67,481
|
|
|
|
52,133
|
|
|
|
(42,399
|
)
|
|
|
77,215
|
|
|
|
47,396
|
|
|
|
34,210
|
|
|
|
(6,355
|
)
|
|
|
75,251
|
|
California Grantor
Trust Settlement
|
|
|
10,342
|
|
|
|
|
|
|
|
|
|
|
|
10,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
2,765
|
|
|
|
|
|
|
|
(2,765
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition-related charges
|
|
|
3,950
|
|
|
|
|
|
|
|
(3,950
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reorganization items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(58,282
|
)
|
|
|
58,282
|
|
|
|
|
|
Fresh start adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(399,063
|
)
|
|
|
399,063
|
|
|
|
|
|
Gain on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
510,680
|
|
|
|
(510,680
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
832,547
|
|
|
|
227,265
|
|
|
|
(43,381
|
)
|
|
|
1,016,431
|
|
|
|
499,326
|
|
|
|
569,202
|
|
|
|
(58,260
|
)
|
|
|
1,010,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
146,216
|
|
|
|
1,187
|
|
|
|
45,241
|
|
|
|
192,644
|
|
|
|
76,870
|
|
|
|
60,377
|
|
|
|
56,966
|
|
|
|
194,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income
(expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
6,129
|
|
|
|
1,225
|
|
|
|
|
|
|
|
7,354
|
|
|
|
2,343
|
|
|
|
2,524
|
|
|
|
|
|
|
|
4,867
|
|
Interest expense
|
|
|
(89,973
|
)
|
|
|
(26,368
|
)
|
|
|
(2,903
|
)
|
|
|
(119,244
|
)
|
|
|
(43,739
|
)
|
|
|
(66,208
|
)
|
|
|
(10,348
|
)
|
|
|
(120,295
|
)
|
Gain on derivative instruments, ACL
warrants
|
|
|
15,193
|
|
|
|
|
|
|
|
|
|
|
|
15,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
(68,651
|
)
|
|
|
(25,143
|
)
|
|
|
(2,903
|
)
|
|
|
(96,697
|
)
|
|
|
(41,396
|
)
|
|
|
(63,684
|
)
|
|
|
(10,348
|
)
|
|
|
(115,428
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
(expense) benefit, minority interest and equity in net income
from unconsolidated investments
|
|
|
77,565
|
|
|
|
(23,956
|
)
|
|
|
42,338
|
|
|
|
95,947
|
|
|
|
35,474
|
|
|
|
(3,307
|
)
|
|
|
46,618
|
|
|
|
78,785
|
|
Income tax (expense) benefit
|
|
|
(34,651
|
)
|
|
|
6,033
|
|
|
|
(14,558
|
)
|
|
|
(43,176
|
)
|
|
|
(11,535
|
)
|
|
|
(48,058
|
)
|
|
|
23,353
|
|
|
|
(36,240
|
)
|
Minority interest
|
|
|
(9,197
|
)
|
|
|
(56
|
)
|
|
|
|
|
|
|
(9,253
|
)
|
|
|
(6,869
|
)
|
|
|
(3,422
|
)
|
|
|
617
|
|
|
|
(9,674
|
)
|
Equity in net income of
unconsolidated investments
|
|
|
25,609
|
|
|
|
|
|
|
|
|
|
|
|
25,609
|
|
|
|
17,024
|
|
|
|
3,924
|
|
|
|
970
|
|
|
|
21,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
59,326
|
|
|
$
|
(17,979
|
)
|
|
$
|
27,780
|
|
|
$
|
69,127
|
|
|
$
|
34,094
|
|
|
$
|
(50,863
|
)
|
|
$
|
71,558
|
|
|
$
|
54,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.49
|
|
|
|
|
|
|
|
|
|
|
$
|
0.49
|
|
|
$
|
0.39
|
|
|
|
|
|
|
|
|
|
|
$
|
0.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.46
|
|
|
|
|
|
|
|
|
|
|
$
|
0.47
|
|
|
$
|
0.37
|
|
|
|
|
|
|
|
|
|
|
$
|
0.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
WASTE AND
ENERGY SERVICES PRO FORMA RECONCILIATIONS
Domestic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
Year Ended December 31, 2004
|
|
|
|
|
|
|
Acquisition
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
Acquisition
|
|
|
Pro Forma
|
|
|
|
|
|
|
As Reported
|
|
|
Activity
|
|
|
Adjust.
|
|
|
Pro Forma
|
|
|
As Reported
|
|
|
Activity
|
|
|
Adjust.
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Waste and service revenues
|
|
$
|
634,268
|
|
|
$
|
148,792
|
|
|
$
|
1,860
|
|
|
$
|
784,920
|
|
|
$
|
369,583
|
|
|
$
|
410,093
|
|
|
$
|
(759
|
)
|
|
$
|
778,917
|
|
Electricity and steam sales
|
|
|
194,057
|
|
|
|
79,660
|
|
|
|
|
|
|
|
273,717
|
|
|
|
81,894
|
|
|
|
183,893
|
|
|
|
(535
|
)
|
|
|
265,252
|
|
Other operating revenues
|
|
|
2,693
|
|
|
|
|
|
|
|
|
|
|
|
2,693
|
|
|
|
1,506
|
|
|
|
58
|
|
|
|
|
|
|
|
1,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
831,018
|
|
|
|
228,452
|
|
|
|
1,860
|
|
|
|
1,061,330
|
|
|
|
452,983
|
|
|
|
594,044
|
|
|
|
(1,294
|
)
|
|
|
1,045,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plant operating expenses
|
|
|
471,641
|
|
|
|
103,617
|
|
|
|
3,136
|
|
|
|
578,394
|
|
|
|
281,342
|
|
|
|
280,789
|
|
|
|
2,727
|
|
|
|
564,858
|
|
Depreciation and amortization
expense
|
|
|
116,083
|
|
|
|
57,032
|
|
|
|
1,495
|
|
|
|
174,610
|
|
|
|
46,537
|
|
|
|
130,606
|
|
|
|
(2,615
|
)
|
|
|
174,528
|
|
Net interest expense on project debt
|
|
|
44,762
|
|
|
|
13,964
|
|
|
|
1,102
|
|
|
|
59,828
|
|
|
|
23,786
|
|
|
|
38,696
|
|
|
|
2,093
|
|
|
|
64,575
|
|
Other operating (income) expenses
|
|
|
(3,651
|
)
|
|
|
519
|
|
|
|
|
|
|
|
(3,132
|
)
|
|
|
618
|
|
|
|
(420
|
)
|
|
|
116
|
|
|
|
314
|
|
General and administrative expenses
|
|
|
59,249
|
|
|
|
52,133
|
|
|
|
(42,399
|
)
|
|
|
68,983
|
|
|
|
35,699
|
|
|
|
33,791
|
|
|
|
(6,355
|
)
|
|
|
63,135
|
|
California Grantor
Trust Settlement
|
|
|
10,342
|
|
|
|
|
|
|
|
|
|
|
|
10,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition-related charges
|
|
|
3,950
|
|
|
|
|
|
|
|
(3,950
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reorganization items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(58,282
|
)
|
|
|
58,282
|
|
|
|
|
|
Fresh start adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(282,924
|
)
|
|
|
282,924
|
|
|
|
|
|
Gain on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
510,680
|
|
|
|
(510,680
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
702,376
|
|
|
|
227,265
|
|
|
|
(40,616
|
)
|
|
|
889,025
|
|
|
|
387,982
|
|
|
|
652,936
|
|
|
|
(173,508
|
)
|
|
|
867,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
128,642
|
|
|
$
|
1,187
|
|
|
$
|
42,476
|
|
|
$
|
172,305
|
|
|
$
|
65,001
|
|
|
$
|
(58,892
|
)
|
|
$
|
172,214
|
|
|
$
|
178,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
Year Ended December 31, 2004
|
|
|
|
|
|
|
Acquisition
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
Acquisition
|
|
|
Pro forma
|
|
|
|
|
|
|
As Reported
|
|
|
Activity
|
|
|
Adjust.
|
|
|
Pro Forma
|
|
|
As Reported
|
|
|
Activity
|
|
|
Adjust.
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Waste and service revenues
|
|
$
|
4,235
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,235
|
|
|
$
|
3,165
|
|
|
$
|
1,170
|
|
|
$
|
|
|
|
$
|
4,335
|
|
Electricity and steam sales
|
|
|
128,713
|
|
|
|
|
|
|
|
|
|
|
|
128,713
|
|
|
|
99,180
|
|
|
|
34,365
|
|
|
|
|
|
|
|
133,545
|
|
Other operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
132,948
|
|
|
|
|
|
|
|
|
|
|
|
132,948
|
|
|
|
102,345
|
|
|
|
35,535
|
|
|
|
|
|
|
|
137,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plant operating expenses
|
|
|
87,997
|
|
|
|
|
|
|
|
|
|
|
|
87,997
|
|
|
|
68,160
|
|
|
|
25,236
|
|
|
|
|
|
|
|
93,396
|
|
Depreciation and amortization
expense
|
|
|
8,731
|
|
|
|
|
|
|
|
|
|
|
|
8,731
|
|
|
|
6,594
|
|
|
|
3,367
|
|
|
|
(891
|
)
|
|
|
9,070
|
|
Net interest expense on project debt
|
|
|
7,669
|
|
|
|
|
|
|
|
|
|
|
|
7,669
|
|
|
|
8,800
|
|
|
|
3,090
|
|
|
|
|
|
|
|
11,890
|
|
Other operating expenses (income)
|
|
|
2,764
|
|
|
|
|
|
|
|
|
|
|
|
2,764
|
|
|
|
(1,339
|
)
|
|
|
293
|
|
|
|
|
|
|
|
(1,046
|
)
|
General and administrative expenses
|
|
|
4,967
|
|
|
|
|
|
|
|
|
|
|
|
4,967
|
|
|
|
4,933
|
|
|
|
419
|
|
|
|
|
|
|
|
5,352
|
|
Restructuring charges
|
|
|
2,765
|
|
|
|
|
|
|
|
(2,765
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fresh start adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(116,139
|
)
|
|
|
116,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
114,893
|
|
|
|
|
|
|
|
(2,765
|
)
|
|
|
112,128
|
|
|
|
87,148
|
|
|
|
(83,734
|
)
|
|
|
115,248
|
|
|
|
118,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
18,055
|
|
|
$
|
|
|
|
$
|
2,765
|
|
|
$
|
20,820
|
|
|
$
|
15,197
|
|
|
$
|
119,269
|
|
|
$
|
(115,248
|
)
|
|
$
|
19,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes To
Pro Forma Reconciliations
Pro
Forma Assumptions
The unaudited pro forma combined consolidated financial
statements reflect the following assumptions:
Covanta
Energy Transactions:
|
|
|
|
|
We acquired Covanta Energy on January 1, 2004, on the same
terms described in Acquisitions Covanta
Energy in Note 3. Acquisitions and Dispositions of
the Notes.
|
|
|
|
The debt structure of Covanta Energy and CPIH that was in place
upon Covanta Energys emergence from bankruptcy on
March 10, 2004, was assumed to be refinanced, prior to the
amendment to the credit facilities on May 26, 2006, in
connection with the acquisition of ARC Holdings as of
January 1, 2004 as more fully described in Note 3.
Acquisitions and Dispositions of the Notes.
|
ARC
Holdings Transactions:
|
|
|
|
|
We, through Covanta Energy, acquired 100% of the issued and
outstanding shares of ARC Holdings capital stock on
January 1, 2004 on the same terms described in
Acquisitions ARC Holdings
in Note 3. Acquisitions and Dispositions of the Notes.
|
|
|
|
On April 30, 2004, as a result of series of transactions
that ARC Holdings then owners entered into, ARC Holdings
gained effective control of Covanta Ref-Fuel LLC (the
Ownership Change), and began consolidating its
balance sheet and results of operations thereafter. It is
assumed that these transactions occurred as of January 1,
2004.
|
64
Acquisition
Activity:
|
|
|
|
|
Represents Covanta Energys results of operations prior to
March 11, 2004 for the pro forma year ended
December 31, 2004.
|
|
|
|
Represents ARC Holdings results of operations prior to
June 25, 2005 for the pro forma years ended
December 31, 2005 and 2004 including the period
January 1, to April 30, 2004 as a result of the
Ownership Change.
|
Pro
Forma Adjustments
The following are a summary of the pro forma adjustments made:
|
|
|
|
|
To exclude the operating results of the Waste and Energy
Services domestic business comprising the Remaining Debtors for
the period January 1 through March 10, 2004
(predecessor period).
|
|
|
|
Waste and service revenues: To record
additional revenues prior to June 25, 2005, as a result of
conforming debt service revenue recognition at ARC Holdings
subsidiaries to Covanta Energys debt service revenue
recognition policy, which policy has been implemented by ARC
Holdings since its acquisition.
|
|
|
|
Plant operating expenses: To record as rent
expense the net impact of the change in the fair value of a
lease owned by an operating subsidiary of ARC Holdings as of
January 1, 2004.
|
|
|
|
Depreciation and amortization expense: To
reverse historical depreciation and amortization expense and to
record pro forma depreciation and amortization expense based on
fair values assigned to Covanta Energys and ARC
Holdings property, plant and equipment and amortizable
intangible assets prior to their respective acquisition dates of
March 10, 2004 and June 24, 2005.
|
|
|
|
Net interest expense on project debt: To
reverse Covanta Energys project debt prior bond issue cost
amortization and to reverse ARC Holdings project debt
prior bond issuance cost amortization and to record the impact
of fair value adjustments to Covanta Energys and ARC
Holdings project debt prior to their respective
acquisition dates.
|
|
|
|
General and administrative expenses: To
reverse ARC Holdings executive compensation of
approximately $30 million and related expenses of
approximately $12 million in the periods prior to the
acquisition date.
|
|
|
|
Restructuring charges: To reverse severance
and incentive payments to CPIH executives as a result of
overhead reductions made possible by the elimination of
CPIHs separate capital structure and debt repayments in
connection with the refinancing of Covanta Energys and
CPIHs debt.
|
|
|
|
Acquisition-related charges: To reverse
employee bonuses and integration expenses as a result of the
acquisition of ARC Holdings.
|
|
|
|
Reorganization items, fresh-start adjustments and gain on
cancellation of pre-petition debt: To reverse the
historical items resulting from Covanta Energys bankruptcy
proceedings. Since the pro forma results of operations has been
prepared on the basis that Covanta Energys emergence from
bankruptcy and the business combination with us both occurred on
January 1, 2004, these items have been removed, as these
transactions to effect Covanta Energys reorganization
would have been completed and these items would have been
recorded prior to January 1, 2004.
|
|
|
|
Interest expense: To reverse Covanta
Energys predecessor period and ARC Holdings
pre-acquisition period amortization of deferred financing costs;
to record the impact of the fair value adjustment to the
intermediate debt of ARC Holdings; to record the effect of the
fair value adjustment associated with terminating an obligation
to one of ARC Holdings prior owners; and to record the net
adjustment to interest expense as a result of the new capital
structure of Covanta Energy, prior to the amendment to the
credit facilities on May 26, 2006, described in
Liquidity and Capital Resources below. Additionally, to
adjust for changes in valuation estimates of ARC Holdings debt
premiums in the quarter ended December 31, 2005.
|
65
|
|
|
|
|
Income tax (expense) benefit: To record the
adjustment for the estimated income tax effects associated with
the pro forma adjustments to pre-tax income and arrive at a
blended assumed effective tax rate of 46% for the combined
company for the year ended December 31, 2004 and 45% for
the year ended December 31, 2005. We used an effective tax
rate rather than the combined federal and statutory rate based
upon the nature of the permanent difference related to the pro
forma adjustments.
|
|
|
|
Earnings per share and weighted average shares
outstanding: Basic and diluted earnings per share
and the average shares outstanding used in the calculation of
basic and diluted earnings per share of common stock and shares
of common stock outstanding for the pro forma years ended
December 31, 2004 and 2005 have been adjusted, as
necessary, to reflect the following equity transactions, as if
they occurred on January 1, 2004, the issuance of:
(1) 5.1 million shares to the bridge lenders relating
to the Covanta Energy acquisition; (2) 27.4 million
shares pursuant to a pro rata rights offering to all of our
stockholders on May 18, 2004 following the Covanta Energy
acquisition; (3) 8.75 million shares pursuant to the
conversion of notes issued in connection with the bridge
financing related to the Covanta Energy acquisition; and
(4) 66.7 million shares pursuant to a pro rata rights
offering to all of our stockholders on June 24, 2005 in
connection with the ARC Holdings acquisition. In addition,
diluted earnings per share and the weighted average shares used
in the calculation of diluted earnings per share of common stock
and shares of common stock outstanding for the pro forma year
ended December 31, 2004 and the year ended
December 31, 2005 have been adjusted, as necessary, to
reflect the offering of 5.7 million shares of our common
stock in a rights offering as if it occurred on January 1,
2004.
|
LIQUIDITY
AND CAPITAL RESOURCES
On January 19, 2007, we announced a comprehensive
recapitalization plan utilizing a series of equity and debt
financings. We completed public offerings of equity and debt,
including over-allotment options exercised by underwriters, on
January 31, 2007 and February 6, 2007, and we closed
on the new credit facilities on February 9, 2007. We
completed the tender offer of Covanta Energys intermediate
debt for approximately $604.4 million in aggregate
principal amount of outstanding notes on February 22, 2007.
Under the New Credit Facilities, we will have substantially
greater, but not unrestricted, ability to make investments in
our business and to take advantage of opportunities to grow our
business through investments and acquisitions, both domestically
and internationally. Given the significance and timing of this
recapitalization, the following discussion includes 2006 cash
flow and financing arrangements and information related to the
2007 recapitalization plan. Additional information, including
material terms related to our recapitalization plan, is
contained below under 2007 Recapitalization Plan.
Generating sufficient cash to meet our liquidity needs, pay down
debt and to invest in our business remains an important
objective of management. Maintaining historic facility
production levels while effectively managing operating and
maintenance expenses is important to optimize long-term cash
generation. We do not expect to make any cash contributions to
Covanta Energy, except in connection with certain acquisitions
and investments permitted under Covanta Energys New Credit
Facilities (described below under 2007 Recapitalization
Plan). Covanta Energy may make limited cash distributions to
us under the New Credit Facilities.
Covanta Energy derives its cash flows principally from its
domestic and international project operations and businesses.
The frequency and predictability of Covanta Energys
receipt of cash from projects differs, depending upon various
factors, including whether restrictions on distributions exist
in applicable project debt arrangements, whether a project is
domestic or international, and whether a project has been able
to operate at historical levels of production.
Covanta Energys receipt of cash from its international
projects is also subject to satisfaction of financial tests and
other covenants contained in applicable project debt
arrangements. A material portion of cash from Covanta
Energys international projects are received semi-annually,
during the second and fourth quarters.
As of December 31, 2006, Covanta Energy was in compliance
with covenants under the credit facilities. We believe that when
combined with its other sources of liquidity, including the
revolving loan facility that is a component of the New Credit
Facilities, Covanta Energys operations will generate
sufficient cash over at least the next twelve months to meet
operational needs, make capital expenditures, invest in the
business and service debt due prior to maturity.
66
Capital
Resources and Commitments
The following chart summarizes our various debt facilities and
cash resources as of December 31, 2006 (in millions of
dollars):
67
The 2007 recapitalization plan discussed below greatly
simplifies our capital structure. The following chart summarizes
our pro forma capital structure as if the 2007 recapitalization
plan was in effect as of December 31, 2006 (in millions of
dollars):
New
Capital Structure (Pro Forma)
68
2006
Liquidity and Financing Arrangements
The information set forth below regarding liquidity and capital
resources as of December 31, 2006 is presented according to
our consolidated operations and our current business segments of
Waste and Energy Services and Other Services.
2006
Cash Flow
Our sources of funds are our investments and financing
activities (including offerings of equity
and/or debt
securities), as well as dividends, if any, and other payments
received from Covanta Energy and NAICC. Under the financing
arrangements existing during 2006 and prior to the New Credit
Facilities, Covanta Energys ability to pay dividends to us
was limited, except in certain circumstances. Under the New
Credit Facilities, Covanta Energy has greater flexibility to
distribute cash to us. Various state insurance requirements
restrict the amounts that may be transferred to us in the form
of dividends or loans from our insurance subsidiaries without
prior regulatory approval. Currently, NAICC cannot pay dividends
or make loans to us.
Summarized cash flow information for our current business
segments reconciled to the consolidated statements of cash flows
is as follows (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2006
|
|
|
|
Waste and Energy
|
|
|
Other
|
|
|
Eliminations
|
|
|
Total
|
|
|
Net cash provided by (used in)
operating activities
|
|
$
|
314,414
|
|
|
$
|
(5,167
|
)
|
|
$
|
|
|
|
$
|
309,247
|
|
Net cash (used in) provided by
investing activities(1)
|
|
|
(76,200
|
)
|
|
|
9,296
|
|
|
|
|
|
|
|
(66,904
|
)
|
Net cash (used in) provided by
financing activities
|
|
|
(159,126
|
)
|
|
|
21,448
|
|
|
|
|
|
|
|
(137,678
|
)
|
Effect of exchange rate changes on
cash and cash equivalents
|
|
|
221
|
|
|
|
|
|
|
|
|
|
|
|
221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents
|
|
$
|
79,309
|
|
|
$
|
25,577
|
|
|
$
|
|
|
|
$
|
104,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2005
|
|
|
|
Waste and Energy
|
|
|
Other
|
|
|
Eliminations
|
|
|
Total
|
|
|
Net cash provided by (used in)
operating activities
|
|
$
|
230,184
|
|
|
$
|
(21,925
|
)
|
|
$
|
|
|
|
$
|
208,259
|
|
Net cash (used in) investing
activities(2)
|
|
|
(707,472
|
)
|
|
|
(354,361
|
)
|
|
|
384,954
|
|
|
|
(676,879
|
)
|
Net cash provided by financing
activities
|
|
|
493,948
|
|
|
|
392,255
|
|
|
|
(384,954
|
)
|
|
|
501,249
|
|
Effect of exchange rate changes on
cash and cash equivalents
|
|
|
(221
|
)
|
|
|
|
|
|
|
|
|
|
|
(221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents
|
|
$
|
16,439
|
|
|
$
|
15,969
|
|
|
$
|
|
|
|
$
|
32,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2004
|
|
|
|
Waste and Energy
|
|
|
Other
|
|
|
Eliminations
|
|
|
Total
|
|
|
Net cash provided by (used in)
operating activities
|
|
$
|
134,116
|
|
|
$
|
(25,763
|
)
|
|
$
|
|
|
|
$
|
108,353
|
|
Net cash (used in) provided by
investing activities(3)
|
|
|
(12,103
|
)
|
|
|
68,094
|
|
|
|
|
|
|
|
55,991
|
|
Net cash (used in) provided by
financing activities
|
|
|
(101,583
|
)
|
|
|
15,547
|
|
|
|
|
|
|
|
(86,036
|
)
|
Effect of exchange rate changes on
cash and cash equivalents
|
|
|
(112
|
)
|
|
|
|
|
|
|
|
|
|
|
(112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents
|
|
$
|
20,318
|
|
|
$
|
57,878
|
|
|
$
|
|
|
|
$
|
78,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Waste and Energy Services is net of proceeds of
$3.6 million from the sale of a facility in China. |
|
(2) |
|
Waste and Energy Services is net of cash acquired from ARC
Holdings of $62,358. |
|
(3) |
|
Other is net of cash acquired from Covanta Energy, at the
holding company-level of $57,795. |
Waste
and Energy Services Segment
Cash provided by operating activities was $314.4 million
and $230.2 million for the years ended December 31,
2006 and 2005, respectively. The increase in cash flow from
operating activities was primarily due to operations acquired in
the ARC Holdings acquisition. Net cash used in investing
activities was $76.2 million in the year ended
December 31, 2006 and was primarily due to
$54.3 million in purchases of property, plant and equipment
and the acquisition of the limited partnership interests Covanta
Onondaga Limited Partnership for $27.5 million in December
2006. Net cash used in financing activities was
$159.1 million for the year ended December 31, 2006
and was primarily driven by the payment of project and long-term
debt partially offset by the proceeds from borrowings of
long-term debt and a decrease in restricted funds held in trust.
Cash provided by operating activities was $230.2 million
and $134.1 million for the years ended December 31,
2005 and 2004, respectively. The increase in cash flow from
operating activities was primarily due to the ARC Holdings
acquisition. Net cash used in investing activities was
$707.5 million for the year ended December 31, 2005
and was primarily due to the purchase of ARC Holdings, net of
cash acquired. Net cash provided by financing activities was
$493.9 million for the year ended December 31, 2005
and was primarily driven by the our capital contribution, the
net impact of the refinancing of the prior long-term debt and
for the acquisition of ARC Holdings offset partially by the
payment and future funding of project debt.
Restricted funds held in trust were $407.9 million as of
December 31, 2006. Restricted funds held in trust are
primarily amounts received and held by third party trustees
relating to projects owned by Covanta Energy, and which may be
used only for specified purposes. These payments are made
directly to the trustee primarily for related project debt and
are held by it until paid to project debt holders. We do not
have access to these funds. In addition, as of December 31,
2006, we had $19.6 million in cash held in restricted
accounts to pay for certain taxes which may be due relating to
the period prior to Covanta Energys bankruptcy and that
are estimated to be paid in the future. Cash held in such
reserve accounts is not available for general corporate purposes.
Other
Services Segment
Net cash used in operating activities was $5.2 million for
the year ended December 31, 2006 primarily due to executed
agreements in January 2006 with the California Commissioner
regarding the final administration and conclusion of grantor
trusts associated with predecessor insurance entities. See
Note 21. Income Taxes of the Notes for additional
information. During 2005, we received net proceeds from the ARC
Holdings rights offering of $395.9 million and contributed
approximately $385 million to Covanta Energy to fund a
portion of the $740 million cash purchase price for the
outstanding shares in ARC Holdings.
70
For the year ended December 31, 2006, the holding company
held cash and investments of approximately $62.6 million,
an increase of $23.3 million from December 31, 2005.
This increase was primarily due to proceeds received on
February 24, 2006 from the 9.25% Offering in which
5,696,911 shares were issued for $20.8 million in
gross proceeds as described in Note 24. Stockholders
Equity of the Notes. Of the $62.6 million held in cash and
investments, $56.0 million was available to pay general
corporate expenses and for general working capital purposes.
Net cash used by operating activities from the insurance
business was $6.9 million and $14.2 million for the
years ended December 31, 2006 and 2005, respectively. The
ongoing use of cash in operations was due to the insurance
business continuing to make payments related to discontinued
lines and territories in excess of premium receipts from
existing lines. This negative cash flow restricted the insurance
business from fully re-investing bond maturity proceeds and in
some circumstances required the sale of bonds in order to meet
obligations as they arose. Cash provided from investing
activities was $9.2 million for the year ended
December 31, 2005 compared with $13.6 million for the
comparable period in 2004. The $4.4 million decrease in
cash provided by investing activities in 2006 was due to a
reduction in reinvestment activity in conjunction with reduced
cash used in operations. During 2005, one of our subsidiaries
liquidated its interest in ACL warrants as described in
Note 18. Financial Instruments of the Notes. A portion of
the warrant proceeds were paid to NAICC to redeem an approximate
14% interest held by NAICC in such subsidiary. NAICC received
net proceeds of approximately $1.5 million. There were no
financing activities in either twelve-month period ended
December 31, 2006 and 2005.
The insurance business, which comprises a portion of our Other
Services segment, requires both readily liquid assets and
adequate capital to meet ongoing obligations to policyholders
and claimants, as well as to pay ordinary operating expenses.
The insurance business meets both its short-term and long-term
liquidity requirements through operating cash flows that include
premium receipts, investment income and reinsurance recoveries.
To the extent operating cash flows do not provide sufficient
cash flow, the insurance business relies on the sale of invested
assets. Its investment policy guidelines require that all loss
and LAE liabilities be matched by a comparable amount of
investment grade assets. We believe that the insurance business
has both adequate capital resources and sufficient reinsurance
to meet its current operating requirements.
The National Association of Insurance Commissioners provides
minimum solvency standards in the form of risk based capital
requirements (RBC). The RBC model for property and
casualty insurance companies requires that carriers report their
RBC ratios based on their statutory annual statements as filed
with the regulatory authorities. We believe our insurance
business has projected its RBC requirement as of
December 31, 2006 under the RBC model and believes that it
is above the level which would trigger increased oversight by
regulators.
We estimate our insurance business reserves for unpaid
losses and LAE based on reported losses and historical
experience, including losses reported by other insurance
companies for reinsurance assumed, and estimates of expenses for
investigating and adjusting all incurred and unadjusted claims.
Key assumptions used in the estimation process could have
significant effects on the reserve balances. Our insurance
business regularly evaluates its estimates and assumptions based
on historical experience adjusted for current economic
conditions and trends. Changes in the unpaid losses and LAE can
materially affect the statement of operations.
California and Montana insurance laws and regulations regulate
the amount and type of NAICCs investments. NAICCs
investment portfolio is comprised primarily of fixed maturities
and is weighted heavily toward investment grade short and medium
term securities. See Note 1. Organization and Summary of
Significant Accounting Policies of the Notes for information
regarding significant accounting policies affecting these
investments.
71
NAICCs investment portfolio as of December 31, 2006
was as follows (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Investments by investment by grade:
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
U.S. Government/Agency
|
|
$
|
17,595
|
|
|
$
|
17,238
|
|
Mortgage-backed
|
|
|
8,456
|
|
|
|
8,099
|
|
Corporate (AAA to A)
|
|
|
8,763
|
|
|
|
8,653
|
|
Corporate (BBB)
|
|
|
1,018
|
|
|
|
1,017
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
35,832
|
|
|
|
35,007
|
|
Equity securities
|
|
|
1,289
|
|
|
|
1,549
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
37,121
|
|
|
$
|
36,556
|
|
|
|
|
|
|
|
|
|
|
2006
Financing Arrangements
As of December 31, 2006, we did not have any outstanding
debt for borrowed money. Covanta Energy and several of its
subsidiaries had outstanding debt obligations, which are
described below. We guaranteed Covanta Energys debt
obligations described below.
Covanta
Energy Long-Term Debt
Long-term debt was comprised of credit facilities and
intermediate debt as follows (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Covanta Energy Senior Secured
Credit Facilities
|
|
|
|
|
|
|
|
|
First Lien Term Loan Facility
|
|
$
|
368,389
|
|
|
$
|
229,312
|
|
Second Lien Term Loan Facility
|
|
|
260,000
|
|
|
|
400,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
628,389
|
|
|
|
629,312
|
|
|
|
|
|
|
|
|
|
|
Intermediate Subsidiary
Debt
|
|
|
|
|
|
|
|
|
6.26% Senior Notes due 2015
|
|
|
192,000
|
|
|
|
234,000
|
|
8.50% Senior Secured Notes
due 2010
|
|
|
195,785
|
|
|
|
195,785
|
|
7.375% Senior Secured Notes
due 2010
|
|
|
224,100
|
|
|
|
224,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
611,885
|
|
|
|
653,885
|
|
Unamortized debt premium
|
|
|
19,748
|
|
|
|
24,726
|
|
|
|
|
|
|
|
|
|
|
Total intermediate subsidiary debt
|
|
|
631,633
|
|
|
|
678,611
|
|
|
|
|
|
|
|
|
|
|
Other long-term debt
|
|
|
101
|
|
|
|
196
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
1,260,123
|
|
|
|
1,308,119
|
|
Less: current portion (includes
$4,732 and $4,807 of unamortized premium)
|
|
|
(36,434
|
)
|
|
|
(47,549
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
1,223,689
|
|
|
$
|
1,260,570
|
|
|
|
|
|
|
|
|
|
|
On May 26, 2006, Covanta Energy entered into agreements
which amended its existing credit agreements. All material terms
of Covanta Energys first priority secured term loan
facility (First Lien Term Loan Facility) and
priority secured term loan facility (Second Lien Term
Loan Facility) remained unchanged except for the
following:
|
|
|
|
|
Interest rates applicable to the existing First Lien Term
Loan Facility and to credit linked deposits applicable to
its first priority secured funded letter of credit facility
(Funded Letter of Credit Facility) were reduced
|
72
|
|
|
|
|
from a reserve adjusted British Bankers Association Interest
Settlement Rate, commonly referred to as LIBOR, plus
3.00% to LIBOR plus 2.25%.
|
|
|
|
|
|
The amount available for the issuance of letters of credit under
the existing $100 million Revolving Credit Facility was
increased from $75 million to $90 million.
|
|
|
|
New term loan commitments were provided which allowed Covanta
Energy to increase the principal amount outstanding under its
First Lien Term Loan Facility by up to $140 million, and
use the proceeds to prepay up to $140 million under the
existing Second Lien Term Loan Facility.
|
|
|
|
Certain covenants restricting Covanta Energys ability to
invest available cash and enter into limited recourse borrowings
have been modified to provide additional flexibility in the
context of permitted acquisitions.
|
On June 30, 2006, Covanta Energy utilized the additional
term loan commitment of $140 million on its First Lien Term
Loan Facility to prepay $140 million under the Second
Lien Term Loan Facility. Covanta Energy incurred a call
premium of $2.8 million which was paid on June 30,
2006. Covanta Energy recognized a loss on extinguishment of debt
of $2.3 million, which was classified as other expense on
the consolidated statement of operations, and a write-off to
interest expense of a portion of the Second Lien Term Loan
Facility deferred financing costs of $4.5 million in the
three months ended June 30, 2006 related to the
$140 million prepayment under the Second Lien Term
Loan Facility.
Covanta
Energy Short-Term Liquidity
As of December 31, 2006, Covanta Energy had available
credit for liquidity as follows (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
|
|
|
|
Total
|
|
|
|
|
|
As of
|
|
|
|
Available
|
|
|
|
|
|
December 31,
|
|
|
|
Under Facility
|
|
|
Maturing
|
|
|
2006
|
|
|
Revolving Credit Facility(1)
|
|
$
|
100,000
|
|
|
|
2011
|
|
|
$
|
99,000
|
|
Funded Letter of Credit Facility
|
|
$
|
320,000
|
|
|
|
2012
|
|
|
$
|
549
|
|
|
|
|
(1) |
|
Up to $90 million of which may be utilized for letters of
credit. |
As of December 31, 2006, Covanta Energy had not drawn on
the first priority secured revolving credit facility
(Revolving Credit Facility) and issued
$1 million of letters of credit under the Revolving Credit
Facility. On March 21, 2006, Covanta Energys
availability under the Funded Letter of Credit Facility was
voluntarily reduced to $320 million from $340 million.
As of December 31, 2006, Covanta Energy had approximately
$319.5 million outstanding letters of credit under the
Funded Letter of Credit Facility.
Intermediate
Subsidiary Debt
Three ARC Holdings subsidiaries identified below had outstanding
non-project debt facilities as of December 31, 2006 which
are described below. Under the 2007 recapitalization plan, on
February 22, 2007, we repaid, by means of a tender offer,
approximately $604.4 million in aggregate principal amounts
of these outstanding notes.
As of December 31, 2006, MSW Energy Holdings LLC,
collectively with MSW Energy Finance Co., Inc., referred to
herein after as (MSW I), had outstanding debt
financing consisting of $196 million in aggregate principal
amount of 8.50% senior secured notes due 2010 (MSW I
Notes).
As of December 31, 2006, MSW Energy Holdings II LLC,
collectively with MSW Energy Finance Co. II, Inc., referred
to herein after as MSW II, had outstanding debt
financing consisting of $224 million in aggregate principal
amount of 7.375% senior secured notes due 2010
(MSW II Notes).
As of December 31, 2006, Covanta ARC LLC (ARC
LLC) had outstanding debt financing consisting of
$192 million in aggregate principal amount of 6.26% senior
notes due 2015 (ARC Notes).
73
Covanta
Energy Project Debt
Domestic
Project Debt
Financing for Covanta Energys energy-from-waste projects
is generally accomplished through tax-exempt and taxable
municipal revenue bonds issued by or on behalf of the municipal
client. For such facilities that are owned by Covanta
Energys subsidiary, the issuers of the bond loans the bond
proceeds to Covanta Energys subsidiary to pay for facility
construction. For such facilities, project-related debt is
included as Project debt (short- and long-term) in
our consolidated financial statements. Generally, such project
debt is secured by the revenues generated by the project and
other project assets including the related facility. Such
project debt of Covanta Energys subsidiaries is described
in the chart below under Capital Requirements as
non-recourse project debt. The only potential recourse to
Covanta Energy with respect to project debt arises under the
operating performance guarantees described below under Other
Commitments.
Certain subsidiaries had recourse liability for project debt
which is recourse to ARC LLC, but is non-recourse to Covanta
Energy and as of December 31, 2006 was as follows (in
thousands of dollars):
|
|
|
|
|
Covanta Niagara, L.P.
Series 2001 Bonds
|
|
$
|
165,010
|
|
Covanta Southeastern Connecticut
Company Corporate Credit Bonds
|
|
$
|
43,500
|
|
Covanta Hempstead Company
Corporate Credit Bonds
|
|
$
|
42,670
|
|
International
Project Debt
Financing for projects in which we have an ownership or
operating interest is generally accomplished through commercial
loans from local lenders or financing arranged through
international banks, bonds issued to institutional investors and
from multilateral lending institutions based in the United
States. Such debt is generally secured by the revenues generated
by the project and other project assets and is without recourse
to CPIH or Covanta Energy. Project debt relating to two CPIH
projects in India is included as Project debt (short- and
long-term) in our consolidated financial statements. In
most projects, the instruments defining the rights of debt
holders generally provide that the project subsidiary may not
make distributions to its parent until periodic debt service
obligations are satisfied and other financial covenants are
complied with.
2007
Recapitalization Plan
On January 19, 2007, we announced a comprehensive
recapitalization plan utilizing a series of equity and debt
financings. Subsequent to this announcement, we completed the
following transactions:
|
|
|
|
|
the refinancing of Covanta Energys debt facilities with
new Covanta Energy debt facilities, comprised of a
$300 million revolving credit facility, a $320 million
funded letter of credit facility, and a $650 million term
loan (collectively referred to as the New Credit
Facilities);
|
|
|
|
an underwritten public offering of 6.118 million shares of
our common stock, in which we received proceeds of approximately
$136.6 million, net of underwriting discounts and
commissions;
|
|
|
|
an underwritten public offering of approximately
$373.75 million aggregate principal amount of convertible
debentures (the Debentures) issued by us, from which
we received proceeds of approximately $364.4 million, net
of underwriting discounts and commissions; and
|
|
|
|
the repayment, by means of a tender offer, of approximately
$604.4 million in aggregate principal amount of outstanding
notes previously issued by Covanta Energys intermediate
subsidiaries.
|
We completed our public offerings of equity and debt, including
over-allotment options exercised by underwriters, on
January 31, 2007 and February 6, 2007, and we closed
on the New Credit Facilities on February 9, 2007. The
combination of the proceeds noted above and approximately
$130 million in cash and restricted cash (available for use
as a result of the recapitalization plan) were utilized for the
repayment, by means of a tender offer, of approximately
$604.4 million in aggregate principal amount of outstanding
notes previously issued by Covanta Energy intermediate
subsidiaries. The repayment was completed on February 22,
2007. As a result of the recapitalization plan, we expect to
record in the first quarter of 2007 an aggregate charge of
74
approximately $30 million, pre-tax, which is comprised of
the write-down of deferred financing costs, tender premiums paid
for the MSW I Notes, MSW II Notes and ARC Notes, a
call premium paid for the Second Lien Term Loan Facility,
partially offset by the write-down of unamortized premiums
relating to the MSW I Notes, MSW II Notes and ARC
Notes and a gain associated with the settlement of our interest
rate swap agreements. Components of this charge will be
classified in our statement of operations as part of either loss
on extinguishment of debt or interest expense. We are currently
completing our analysis based upon the relevant authoritative
accounting literature. The following discussion details the
material terms of each of these transactions.
Material
Terms of the New Credit Facilities
The New Credit Facilities include the following:
|
|
|
|
|
a $300 million revolving loan facility due 2013, which
includes a $200 million
sub-facility
for the issuance of letters of credit (the Revolving
Loan Facility);
|
|
|
|
a $320 million funded letter of credit facility, due 2014
(the Funded L/C Facility); and
|
|
|
|
a $650 million term loan facility, due 2014 (the Term
Loan Facility).
|
Amortization
Terms
The New Credit Facilities include mandatory annual amortization
of the Term Loan Facility to be paid in quarterly
installments beginning June 30, 2007, through the date of
maturity as follows (in thousands of dollars):
|
|
|
|
|
|
|
Annual
|
|
|
|
Remaining
|
|
|
|
Amortization
|
|
|
2007
|
|
$
|
4,875
|
|
2008
|
|
|
6,500
|
|
2009
|
|
|
6,500
|
|
2010
|
|
|
6,500
|
|
2011
|
|
|
6,500
|
|
2012
|
|
|
6,500
|
|
2013
|
|
|
6,500
|
|
2014
|
|
|
606,125
|
|
|
|
|
|
|
Total
|
|
$
|
650,000
|
|
|
|
|
|
|
Under the New Credit Facilities, Covanta Energy is obligated to
apply a portion of excess cash from operations on an annual
basis (calculated pursuant to the credit agreement), as well as
specified other sources, to repay borrowings under the Term
Loan Facility. The portion of excess cash to be used for
this purpose is 50%, 25%, or 0%, based on measurement of the
leverage ratio described below.
Interest
and Fee Terms
Loans under the New Credit Facilities are designated, at our
election, as eurodollar rate loans or base rate loans.
Eurodollar loans bear interest at LIBOR for deposits in dollars
plus a borrowing margin as described below. Interest on
eurodollar rate loans is payable at the end of the applicable
interest period of one, two, three or six months (and at the end
of every three months in the case of six month eurodollar
loans). Base rate loans bear interest at (a) a rate per
annum equal to the greater of (1) the prime
rate designated in the relevant facility or (2) the
federal funds rate plus 0.5% per annum, plus (b) a
borrowing margin as described below.
Letters of credit that may be issued in the future under the
Revolving Loan Facility will accrue fees at the then
effective borrowing margins on eurodollar rate loans (described
below), plus a fee on each issued letter of credit payable to
the issuing bank. Letter of credit availability under the Funded
L/C Facility accrues fees (whether or not letters of credit are
issued thereunder) at the then-effective borrowing margin for
Eurodollar rate loans times the total availability under letters
of credit (whether or not then utilized), plus a fee on each
issued letter of credit
75
payable to the issuing bank. In addition, Covanta Energy has
agreed to pay to the participants under the Funded L/C Facility
a fee equal to 0.10% times the average daily amount of the
credit linked deposit paid by such participants for their
participation under the Funded L/C Facility.
The borrowing margins referred to above for the Revolving
Loan Facility, the Term Loan Facility and the Funded
L/C Facility are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowing Margin
|
|
|
Borrowing Margin
|
|
|
|
|
|
|
|
|
|
for Term Loans,
|
|
|
for Term Loans,
|
|
|
|
|
|
|
|
|
|
Funded Letters of
|
|
|
Funded Letters of
|
|
|
|
|
|
|
|
|
|
Credit and
|
|
|
Credit and
|
|
|
|
Borrowing Margin
|
|
|
Borrowing Margin
|
|
|
Credit-Linked
|
|
|
Credit-Linked
|
|
|
|
for Revolving Loans
|
|
|
for Revolving Loans
|
|
|
Deposits
|
|
|
Deposits
|
|
Leverage Ratio
|
|
(Eurodollar Loans)
|
|
|
(Base Rate Loans)
|
|
|
(Eurodollar Loans)
|
|
|
(Base Rate Loans)
|
|
|
³
4.00:1.00
|
|
|
2.00
|
%
|
|
|
1.00
|
%
|
|
|
1.75
|
%
|
|
|
0.75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
< 4.00:1.00
³ 3.25:1.00
|
|
|
1.75
|
%
|
|
|
0.75
|
%
|
|
|
1.50
|
%
|
|
|
0.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
< 3.25:1.00
³ 2.75:1.00
|
|
|
1.50
|
%
|
|
|
0.50
|
%
|
|
|
1.50
|
%
|
|
|
0.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
< 2.75:1.00
|
|
|
1.25
|
%
|
|
|
0.25
|
%
|
|
|
1.50
|
%
|
|
|
0.50
|
%
|
Guarantees
and Securitization
The New Credit Facilities are guaranteed by us and by certain
Covanta Energy subsidiaries. Covanta Energy and certain of its
subsidiaries that are party to the New Credit Facilities agreed
to secure all of Covanta Energys obligations under the New
Credit Facilities by granting, for the benefit of secured
parties, a first priority lien on substantially all of their
assets, to the extent permitted by existing contractual
obligations, a pledge of substantially all of the capital stock
of each of Covanta Energys domestic subsidiaries owned by
it and 65% of substantially all the capital stock of each of
Covanta Energys foreign subsidiaries directly owned by it,
in each case to the extent not otherwise pledged.
Debt
Covenants and Defaults
The loan documentation under the New Credit Facilities contains
customary affirmative and negative covenants and financial
covenants. During the term of the New Credit Facilities, we
expect that the negative covenants will place limitations on
Covanta Energy, but be materially less restrictive than the
restrictions in effect during 2006 and prior to February 9,
2007.
The affirmative covenants of the New Credit Facilities include
covenants relating to the following:
|
|
|
|
|
financial statements and other reports;
|
|
|
continued existence;
|
|
|
payment of taxes and claims;
|
|
|
maintenance of properties;
|
|
|
insurance coverage;
|
|
|
inspections by lenders (subject to frequency and cost
reimbursement limitations);
|
|
|
lenders meetings;
|
|
|
compliance with laws;
|
|
|
environmental matters;
|
|
|
additional material real estate assets;
|
|
|
designation of subsidiaries; and
|
|
|
post-closing matters.
|
The negative covenants of the New Credit Facilities include
limitations on the following:
|
|
|
|
|
indebtedness (including guarantee obligations);
|
|
|
liens;
|
|
|
negative pledge clauses;
|
76
|
|
|
|
|
restricted junior payments;
|
|
|
clauses restricting subsidiary distributions;
|
|
|
investments;
|
|
|
fundamental changes;
|
|
|
disposition of assets;
|
|
|
acquisitions;
|
|
|
conduct of business;
|
|
|
amendments or waivers of certain agreements;
|
|
|
changes in fiscal year; and
|
|
|
hedge agreements.
|
The financial covenants of the New Credit Facilities include the
following:
|
|
|
|
|
maximum Covanta Energy leverage ratio, which measures Covanta
Energys principal amount of consolidated debt less certain
restricted funds dedicated to repayment of project debt
principal and construction costs (Consolidated Adjusted
Debt) to its adjusted earnings before interest, taxes,
depreciation and amortization, as calculated under the New
Credit Facilities (Adjusted EBITDA);
|
|
|
maximum Covanta Energy capital expenditures; and
|
|
|
minimum Covanta Energy interest coverage ratio, which measures
Covanta Energys Adjusted EBITDA to its consolidated
interest expense plus certain interest expense of ours, to the
extent paid by Covanta Energy.
|
Defaults under the New Credit Facilities include:
|
|
|
|
|
non-payment of principal when due;
|
|
|
non-payment of any amount payable to an issuing bank in
reimbursement of any drawing under a letter of credit when due;
|
|
|
non-payment of interest, fees or other amounts after a grace
period of five days;
|
|
|
cross-default to material indebtedness;
|
|
|
violation of a covenant (subject, in the case of certain
affirmative covenants, to a grace period of thirty days);
|
|
|
material inaccuracy of a representation or warranty when made;
|
|
|
bankruptcy events with respect to us, Covanta Energy or any
material subsidiary or group of subsidiaries of Covanta Energy;
|
|
|
material judgments;
|
|
|
certain material ERISA events;
|
|
|
change of control (subject to exceptions for certain of our
existing owners);
|
|
|
failure of subordination; and
|
|
|
actual or asserted invalidity of any guarantee or security
document.
|
Material
Terms of the Equity Offering
On January 31, 2007, we completed an offering of
5.32 million shares of our common stock in an underwritten
public offering. The shares were sold to the public at a price
of $23.50 per share. We granted the underwriters an option
to purchase up to an additional 798,000 shares of common
stock at $22.325 per share for a period of 30 days
beginning on and including the date of original issuance of the
shares in connection with this offering, solely to cover
over-allotments. The option was exercised and such additional
shares were sold on February 6, 2007. Proceeds received in
these offerings were approximately $136.6 million, net of
underwriting discounts and commissions.
Material
Terms of the Debentures
On January 31, 2007, we also completed an underwritten
public offering of approximately $373.75 million aggregate
principal amount of 1.00% Senior Convertible Debentures due
2027, issued by us, from which we received proceeds of
approximately $364.4 million, net of underwriting discounts
and commissions. This offering included Debentures sold pursuant
to an over-allotment option which was exercised by the
underwriters. The Debentures constitute our general unsecured
senior obligations and will rank equally in right of payment
with any future senior unsecured indebtedness. The Debentures
are effectively junior to our existing and future secured
77
indebtedness, including the New Credit Facilities, to the extent
of the value of the assets securing such indebtedness. The
Debentures are not guaranteed by any of our subsidiaries and are
effectively subordinated to all existing and future indebtedness
and liabilities (including trade payables) of our subsidiaries.
The Debentures bear interest at a rate of 1.00% per year,
payable semi-annually in arrears, on February 1 and
August 1 of each year, commencing on August 1, 2007
and will mature on February 1, 2027. Beginning with the
six-month interest period commencing February 1, 2012, we
will pay contingent interest on the Debentures during any
six-month interest period in which the trading price of the
Debentures measured over a specified number of trading days is
120% or more of the principal amount of the Debentures. When
applicable, the contingent interest payable per $1,000 principal
amount of Debentures will equal 0.25% of the average trading
price of $1,000 principal amount of Debentures during the five
trading days ending on the second trading day immediately
preceding the first day of the applicable six-month interest
period.
Under limited circumstances, the Debentures are convertible by
the holders thereof, at any time, into cash and shares of our
common stock, if any, initially based on a conversion rate of
35.4610 shares of our common stock per $1,000 principal
amount of Debentures, (which represents an initial conversion
price of approximately $28.20 per share), subject to
adjustment. In the event of certain types of fundamental
changes, such as an acquisition of us by a third party, we will
increase the conversion rate by a number of additional shares
or, in lieu thereof and if applicable, an acquirer may elect to
adjust the conversion obligation and conversion rate so that the
Debentures are convertible based on the shares of the acquired
or surviving company.
At our option, the Debentures are subject to redemption at any
time on or after February 1, 2012, in whole or in part, at
a redemption price equal to 100% of the principal amount of the
Debentures being redeemed, plus accrued and unpaid interest
(including contingent interest, if any). In addition, holders
may require us to repurchase their Debentures on
February 1, 2012, February 1, 2017 and
February 1, 2022, in whole or in part, for cash at a
repurchase price equal to 100% of the principal amount of the
Debentures being repurchased, plus accrued and unpaid interest
(including contingent interest, if any). The Debentures are also
subject to repurchase by us, at the holders option, if a
fundamental change occurs, for cash at a repurchase
price equal to 100% of the principal amount of the Debentures,
plus accrued and unpaid interest (including contingent interest,
if any).
Intermediate
Subsidiary Debt Tender Offer
On January 23, 2007, we commenced cash tender offers for
(a) any and all of the outstanding MSW I Notes (b) any
and all of the outstanding MSW II Notes and (c) any
and all of the outstanding ARC Notes.
In connection with each of the tender offers, we solicited the
consents of the holders of each of the MSW I Notes, MSW II
Notes, and ARC Notes to certain proposed amendments to the
indentures governing such notes. The primary purpose of the
solicitations and the proposed amendments was to eliminate from
the indentures substantially all of the restrictive covenants,
certain events of default provisions contained therein and to
remove the requirements to file periodic reports with the SEC
for MSW I and MSW II.
Under the terms of the tender offer for the MSW I Notes and
MSW II Notes, we offered to purchase the outstanding MSW I
Notes and MSW II Notes for total consideration, for each
$1,000 principal amount of MSW I Notes and MSW II Notes
validly tendered and accepted for payment, equal to $1,096.46
and $1,079.92, respectively, which included a consent fee of $30
for each $1,000 principal amount of MSW I Notes and MSW II
Notes validly tendered and accepted for payment.
Under the terms of the tender offer for the ARC Notes, we
offered to purchase the outstanding ARC Notes for total
consideration, for each $1,000 original principal amount of ARC
Notes validly tendered and accepted for payment, equal to
$729.82, which included a consent fee of $30 for each $1,000
principal amount of ARC Notes validly tendered and accepted for
payment.
The solicitations for the MSW I Notes, MSW II Notes and ARC
Notes expired on February 5, 2007. At that time, we had
received consents from the requisite number of holders of each
of the outstanding MSW I Notes, MSW II Notes and ARC Notes,
to amend the applicable indentures governing each of the notes
to eliminate substantially all of the restrictive covenants and
certain events of default provisions. Each of the issuers
entered into a supplemental indenture with the respective
trustee for the applicable notes. The supplemental indentures
became operative on February 22, 2007, at which time we
repurchased $604.4 million aggregate principal amount of
outstanding notes. We intend to redeem all remaining notes in
accordance with applicable provisions of the respective
indentures.
78
Credit
Ratings
Moodys Investors Service (Moodys)
announced on January 22, 2007 that it had (1) assigned
the Debentures a B1 issue rating, (2) reassigned the
Corporate Family Rating to us from Covanta Energy Corporation,
while simultaneously raising this rating to Ba2, and
(3) assigned a Ba2 rating to the New Credit Facilities.
Moodys also reassigned to us from Covanta Energy and
affirmed its SGL-1 speculative grade liquidity rating. On
January 22, 2007, Standard & Poors Ratings
Services (S&P) announced that it had
(1) assigned the Debentures a B rating, (2) raised
Covanta Energys current corporate credit rating to BB- and
assigned to us a BB- corporate credit rating, and
(3) assigned a BB- rating to the New Credit Facilities,
with a 2 recovery rating. Both Moodys and
S&P indicated their outlook for us remains
stable. A security rating is not a recommendation to
buy, sell or hold securities and may be subject to revision or
withdrawal at any time by the assigning rating organization.
Each rating should be evaluated independently of any other
rating.
Capital
Requirements
The following table summarizes our gross contractual obligations
including project debt, leases and other contractual obligations
as of December 31, 2006. The Debenture offerings and the
New Credit Facilities (as described above under the 2007
Recapitalization Plan) closed in January and February 2007,
respectively. Therefore, long-term debt and estimated interest
payments are based on these recent obligations. (Amounts
expressed in thousands of dollars. Note references are to the
Notes):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
|
|
2008 and
|
|
|
2010 and
|
|
|
2012 and
|
|
|
|
Total
|
|
|
2007
|
|
|
2009
|
|
|
2011
|
|
|
Beyond
|
|
|
Domestic project debt
(Note 17)
|
|
$
|
1,314,674
|
|
|
$
|
147,608
|
|
|
$
|
311,549
|
|
|
$
|
276,445
|
|
|
$
|
579,072
|
|
International project debt
(Note 17)
|
|
|
76,150
|
|
|
|
27,978
|
|
|
|
29,115
|
|
|
|
19,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total project debt (Note 17)
|
|
|
1,390,824
|
|
|
|
175,586
|
|
|
|
340,664
|
|
|
|
295,502
|
|
|
|
579,072
|
|
Term Loan Facility
(Note 16 and Note 30)
|
|
|
650,000
|
|
|
|
4,875
|
|
|
|
13,000
|
|
|
|
13,000
|
|
|
|
619,125
|
|
Debentures(1)
|
|
|
373,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
373,750
|
|
Other long-term debt (Note 16)
|
|
|
101
|
|
|
|
86
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt obligations(2)
|
|
|
2,414,675
|
|
|
|
180,547
|
|
|
|
353,679
|
|
|
|
308,502
|
|
|
|
1,571,947
|
|
Less: Non-recourse debt(3)
|
|
|
1,390,925
|
|
|
|
175,672
|
|
|
|
340,679
|
|
|
|
295,502
|
|
|
|
579,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recourse debt
|
|
$
|
1,023,750
|
|
|
$
|
4,875
|
|
|
$
|
13,000
|
|
|
$
|
13,000
|
|
|
$
|
992,875
|
|
Operating leases
|
|
|
420,900
|
|
|
|
33,962
|
|
|
|
92,274
|
|
|
|
79,789
|
|
|
|
214,875
|
|
Less: Non-recourse rental payments
|
|
|
248,748
|
|
|
|
15,749
|
|
|
|
42,343
|
|
|
|
46,933
|
|
|
|
143,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recourse rental payments
|
|
$
|
172,152
|
|
|
$
|
18,213
|
|
|
$
|
49,931
|
|
|
$
|
32,856
|
|
|
$
|
71,152
|
|
Interest payments(4)
|
|
|
899,289
|
|
|
|
138,854
|
|
|
|
196,877
|
|
|
|
152,381
|
|
|
|
411,177
|
|
Less: Non-recourse interest
payments
|
|
|
536,224
|
|
|
|
90,693
|
|
|
|
145,146
|
|
|
|
101,282
|
|
|
|
199,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recourse interest payments
|
|
$
|
363,065
|
|
|
$
|
48,161
|
|
|
$
|
51,731
|
|
|
$
|
51,099
|
|
|
$
|
212,074
|
|
Retirement plan obligations(5)
|
|
$
|
29,400
|
|
|
$
|
3,100
|
|
|
$
|
10,320
|
|
|
$
|
10,410
|
|
|
$
|
5,570
|
|
Other long-term obligations
|
|
$
|
12,001
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
12,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
1,600,368
|
|
|
$
|
74,349
|
|
|
$
|
124,982
|
|
|
$
|
107,365
|
|
|
$
|
1,293,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Debentures bear interest at a rate of 1.00% per year,
payable semi-annually in arrears, on February 1 and
August 1 of each year, commencing on August 1, 2007
and will mature on February 1, 2027. In addition, beginning
with the six-month interest period commencing February 1,
2012, we will pay contingent interest on the Debentures,
calculated with reference to the trading price of the
Debentures. For purposes of this Capital |
79
|
|
|
|
|
Requirements chart, we have assumed no conversions or
redemptions of the Debentures and no contingent interest related
to the Debentures. For information detailing the contingent
interest, conversion or redemption features of the Debentures,
see Material Terms of the Debentures under 2007
Recapitalization Plan. |
|
|
|
(2) |
|
Excludes $45.1 million of Covanta Energys unamortized
debt premium. |
|
(3) |
|
Payment obligations for the project debt associated with
energy-from-waste facilities owned by Covanta Energy are limited
recourse to the operating subsidiary and non-recourse to Covanta
Energy, subject to operating performance guarantees and
commitments. |
|
(4) |
|
Interest payments and letter of credit fees are estimated based
on current rates. |
|
(5) |
|
Retirement plan obligations are based on actuarial estimates for
the pension plan obligations and post-retirement plan
obligations as of December 31, 2006. |
Other
Commitments
Other commitments as of December 31, 2006 were as follows
(in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments Expiring by Period
|
|
|
|
|
|
|
Less Than
|
|
|
More Than
|
|
|
|
Total
|
|
|
One Year
|
|
|
One Year
|
|
|
Letters of credit
|
|
$
|
325,032
|
|
|
$
|
4,401
|
|
|
$
|
320,631
|
|
Surety bonds
|
|
|
61,880
|
|
|
|
|
|
|
|
61,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other
commitments net
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|
$
|
386,912
|
|
|
$
|
4,401
|
|
|
$
|
382,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The letters of credit were issued pursuant to the Funded Letter
of Credit Facility (and for two international projects under
separate unsecured, letter of credit facilities) to secure
Covanta Energys performance under various contractual
undertakings related to its domestic and international projects,
or to secure obligations under its insurance program. Each
letter of credit relating to a project is required to be
maintained in effect for the period specified in related project
contracts, and generally may be drawn if it is not renewed prior
to expiration of that period.
As of December 31, 2006, Covanta Energy had approximately
$0.5 million in available capacity for additional letters
of credit under its Funded Letter of Credit Facility and
$89 million under its Revolving Credit Facility. Covanta
Energy believes that it will be able to fully perform its
contracts to which these existing letters of credit relate, and
that it is unlikely that letters of credit would be drawn
because of a default of its performance obligations. If any of
Covanta Energys letters of credit were to be drawn under
its current debt facilities, the amount drawn would be
immediately repayable to the issuing bank. If Covanta Energy
were unable to immediately repay such amounts drawn under
letters of credit, unreimbursed amounts would be treated as
additional term loans issued under the First Lien Facilities.
The surety bonds listed on the table above relate primarily to
performance obligations ($52.9 million) and support for
closure obligations of various energy projects when such
projects cease operating ($9 million). Were these bonds to
be drawn upon, Covanta Energy would have a contractual
obligation to indemnify the surety company.
The New Credit Facilities include a $300 million revolving
loan facility due 2013, which includes a $200 million
sub-facility
for the issuance of letters of credit, a $320 million
funded letter of credit facility, due 2014 and a
$650 million term loan facility, due 2014. For additional
information, see the 2007 Recapitalization Plan
discussion above.
We have certain contingent obligations related to the
Debentures. These are:
|
|
|
|
|
holders may require us to repurchase their Debentures on
February 1, 2012, February 1, 2017 and
February 1, 2022;
|
|
|
|
holders may require us to repurchase their Debentures if a
fundamental change occurs; and
|
80
|
|
|
|
|
holders may exercise their conversion rights which would require
us to pay the conversion settlement amount in cash
and/or in
our common stock.
|
See Liquidity and Capital Resources 2007
Recapitalization Plan Material Terms of the
Debentures for specific criteria related to contingent
interest, conversion or redemption features of the Debentures.
Covanta Energy and certain of its subsidiaries have issued or
are party to performance guarantees and related contractual
support obligations undertaken mainly pursuant to agreements to
construct and operate certain energy-from-waste facilities and a
water facility. With respect to its domestic businesses, Covanta
Energy and certain of its subsidiaries have issued guarantees to
municipal clients and other parties that Covanta Energys
subsidiaries will perform in accordance with contractual terms,
including, where required, the payment of damages or other
obligations. Such contractual damages or other obligations could
be material, and in circumstances where one or more
subsidiarys contract has been terminated for its default,
such damages could include amounts sufficient to repay project
debt. For facilities owned by municipal clients and operated by
Covanta Energy, Covanta Energys potential maximum
liability as of December 31, 2006 associated with the
repayment of the municipalities project debt on such
facilities was approximately $1 billion. This amount was
not recorded as a liability in Covanta Energys
consolidated balance sheet as of December 31, 2006 as
Covanta Energy believes that it had not incurred such liability
at the date of the financial statements. Additionally, damages
payable under such guarantees on Covanta Energy-owned
energy-from-waste facilities could expose Covanta Energy to
recourse liability on project debt. Covanta Energy also believes
that it has not incurred such liabilities at the date of the
financial statements. If Covanta Energy is asked to perform
under one or more of such guarantees, its liability for damages
upon contract termination would be reduced by funds held in
trust and proceeds from sales of the facilities securing the
project debt, which is presently not estimable.
With respect to its international businesses, Covanta Energy and
certain of its subsidiaries have issued guarantees on behalf of
our international operating subsidiaries with respect to
contractual obligations to operate certain international power
projects and one energy-from-waste project. The potential
damages owed under such arrangements for international projects
may be material. See Item 1A. Risk Factors
Covanta Energy and certain of its subsidiaries have provided
guarantees and support in connection with its subsidiaries
projects.
Depending upon the circumstances giving rise to such domestic
and international damages, the contractual terms of the
applicable contracts, and the contract counterpartys
choice of remedy at the time a claim against a guarantee is
made, the amounts owed pursuant to one or more of such
guarantees could be greater than Covanta Energys
then-available sources of funds. To date, Covanta Energy has not
incurred material liabilities under its guarantees, either on
domestic or international projects.
Insurance
Coverage
We have obtained insurance for our assets and operations that
provides coverage for what we believe are probable maximum
losses, subject to self-insured retentions, policy limits and
premium costs which we believe to be appropriate. However, the
insurance obtained does not cover us for all possible losses.
Off-Balance
Sheet Arrangements
Subsidiaries of Covanta Energy are parties to lease arrangements
with Covanta Energys municipal clients at its Union
County, New Jersey, its Alexandria, Virginia and its Delaware
County, Pennsylvania energy-from-waste facilities. At its Union
County facility, Covanta Energys operating subsidiary
leases the facility from the Union County Utilities Authority,
referred to as the UCUA, under a lease that expires
in 2023, which Covanta Energy may extend for an additional five
years. Covanta Energy guarantees a portion of the rent due under
the lease. Rent under the lease is sufficient to allow the UCUA
to repay tax exempt bonds issued by it to finance the facility
and which mature in 2023.
At its Alexandria facility, a Covanta Energy subsidiary is a
party to a lease which expires in 2025 related to certain
pollution control equipment that was required in connection with
the Clean Air Act amendments of 1990, and which was financed by
the City of Alexandria and by Arlington County, Virginia.
Covanta Energys subsidiary
81
owns this facility, and rent under this lease is sufficient to
pay debt service on tax exempt bonds issued to finance such
equipment and which mature in 2013.
At its Covanta Delaware Valley, L.P. (Delaware
Valley) facility, a Covanta Energy subsidiary is a party
to a lease for the facility that expires in 2019. Covanta
Energys operating subsidiary, referred to as the
Delaware Partnership, is obligated to pay a portion
of lease rent, designated as Basic Rent B, and could
be liable to pay certain related contractually-specified
amounts, referred to as Stipulated Loss, in the
event of a default in the payment of rent under the Delaware
Valley lease beyond the applicable grace period. The Stipulated
Loss is similar to lease termination liability and is generally
intended to provide the lessor with the economic value of the
lease, for the remaining lease term, had the default in rent
payment not occurred. The balance of rental and Stipulated Loss
obligations are payable by a trust formed and collateralized by
the projects former operator in connection with the
disposition of its interest in the Delaware Valley facility.
Pursuant to the terms of various guarantee agreements, ARC
Holdings has guaranteed the payments of Basic Rent B and
Stipulated Loss to the extent such payments are not made by the
Delaware Partnership. We do not believe, however, that such
payments constitute a material obligation of our subsidiary
since our subsidiary expects to continue to operate the Delaware
Valley facility in the ordinary course for the entire term of
the lease and will continue to pay rent throughout the term of
the lease. As of December 31, 2006, the estimated
Stipulated Loss would have been $153.2 million.
Covanta Energy is also a party to lease arrangements pursuant to
which it leases rolling stock in connection with its
energy-from-waste and independent power facilities, as well as
certain office equipment. Rent payable under these arrangements
is not material to our financial condition.
Covanta Energy generally uses operating lease treatment for all
of the foregoing arrangements. A summary of the operating lease
obligations is contained in Note 15. Leases of the Notes.
As described above under Other Commitments, Covanta
Energy and certain of its subsidiaries have issued or are party
to performance guarantees and related contractual obligations
undertaken mainly pursuant to agreements to construct and
operate certain energy and waste facilities. To date, Covanta
Energy has not incurred material liabilities under its
guarantees, either on domestic or international projects.
Covanta Energy has investments in several investees and joint
ventures which are accounted for under the equity and cost
methods and therefore we do not consolidate the financial
information of those companies. See Note 4. Equity in Net
Income from Unconsolidated Investments of the Notes for
additional information regarding these leases.
Discussion
of Critical Accounting Policies
In preparing our consolidated financial statements in accordance
with United States generally accepted accounting principles, we
are required to use judgment in making estimates and assumptions
that affect the amounts reported in our financial statements and
related notes. We base our estimates on historical experience
and on various other assumptions that are believed to be
reasonable under the circumstances. These estimates form the
basis for making judgments about the carrying value of assets
and liabilities that are not readily apparent from other
sources. Many of our critical accounting policies are subject to
significant judgments and uncertainties which could potentially
result in materially different results under different
conditions and assumptions. Future events rarely develop exactly
as forecast, and the best estimates routinely require adjustment.
Stock-Based
Compensation
Effective January 1, 2006, we adopted Statement of
Financial Accounting Standards (SFAS) No. 123
(revised 2004), Share-Based Payment
(SFAS 123R) using the modified prospective
transition method and therefore we have not restated results for
prior periods. Under this transition method, stock-based
compensation expense for the year ended December 31, 2006
included compensation expense for all stock-based compensation
awards granted prior to, but not yet vested as of
December 31, 2005, based on the grant date fair value
estimated in accordance with the original provisions of
SFAS No. 123, Accounting for Stock-Based
Compensation.
82
We calculate the fair value of our share-based option awards
using the Black-Scholes option pricing model which requires
estimates of the expected life of the award and stock price
volatility. We calculate the fair value of our share-based stock
awards based on the average of the high and low price on the day
prior to the grant date; however, we intend to use the closing
price on the date of the grant for any new awards granted
commencing in 2007 in order to align our valuation with the
SECs new disclosure requirements. In addition, we also
estimate expected forfeitures for our options and share-based
awards and the probability of achieving specific performance
factors affecting the vesting of our share-based awards. For our
current share-based awards, our estimate of a forfeiture rate
and determination of achieving stated performance vesting
factors will have the most significant impact on the
compensation cost we must recognize. We recognized compensation
expense based upon the number of stock options and restricted
stock awards expected to vest, which was determined based on
historical turnover experience of various Covanta Energy
employee populations from the Covanta Energy pension plan. We
review the forfeiture rate at least annually and revise
compensation expense, if necessary. We recognize compensation
costs using the graded vesting attribution method over the
requisite service period of the award, which is generally the
vesting term of three years.
Purchase
Accounting
We have applied purchase accounting in accordance with the
SFAS No. 141, Business Combinations, for
acquisitions consummated in 2006, 2005 and 2004. As described in
Note 3. Acquisitions and Dispositions of the Notes, we
valued the acquired assets and liabilities assumed at fair
value. The fair value estimates used reflect our best estimates
based on our work and the work of independent valuation
consultants based on relevant information available to us. These
estimates, and the assumptions used by us and by our valuation
consultants, are subject to inherent uncertainties and
contingencies beyond our control. For example, we used the
discounted cash flow method to estimate the value of many of our
assets. This entailed developing projections about future cash
flows and adopting an appropriate discount rate. We cannot
predict with certainty actual cash flows and the selection of a
discount rate is heavily dependent on judgment. If different
cash flow projections or discount rates were used, the fair
values of our assets and liabilities could be materially
increased or decreased. Accordingly, there can be no assurance
that such estimates and assumptions reflected in the valuations
will be realized, or that further adjustments will not occur.
The assumptions and estimates used by us substantially affect
our balance sheet. In addition, the valuations impact
depreciation and amortization expense and changes in such
assumptions and estimates may affect earnings in the future.
During the current year, some of our estimates have been refined
which resulted in changes to assets and liabilities recognized
on the balance sheet as of December 31, 2006.
Depreciation
and Amortization
We have estimated the useful lives over which we depreciate our
long-lived assets. Additionally, in accordance with
SFAS No. 143, Accounting for Asset Retirement
Obligations, we have capitalized the estimate of our legal
liabilities which includes closure and post-closure costs for
landfill cells and site restoration for certain
energy-from-waste and power producing sites.
Goodwill
and Intangible Assets
We have recognized goodwill and intangible assets relative to
our acquisition of ARC Holdings and Covanta Energys
emergence from bankruptcy in 2004. In accordance with
SFAS No. 142, Goodwill and Other Intangible
Assets, we evaluate our goodwill and indefinite lived
intangible assets for impairment at least annually or when
indications of impairment exist. There has been no impairment
recognized in the current year, however an impact of impairment
in the future could have a material impact on our financial
position and results of operations.
In accordance with SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, we
evaluate our long-term assets and amortizable intangible assets
for recoverability whenever events or changes in circumstances
indicate that its carrying amount may not be recoverable. No
events or change in circumstances occurred during the period to
warrant this testing. However, had an event or change in
circumstances occurred, the impact of recognizing an impairment
could have a material impact on our financial position and
results of operations.
83
Net
Operating Loss Carryforwards Deferred Tax
Assets
As described in Note 21. Income Taxes of the Notes, we have
recorded a deferred tax asset related to the NOLs. The amount
recorded was calculated based upon future taxable income arising
from (a) the reversal of temporary differences during the
period the NOLs are available and (b) future operating
income expected from our domestic and international businesses,
to the extent it is reasonably predictable.
We estimated that we have NOLs of approximately
$410 million for federal income tax purposes as of the end
of 2006. The NOLs will expire in various amounts beginning on
December 31, 2007 through December 31, 2025, if not
used. The amount of NOLs available to us will be reduced by any
taxable income generated by current members of our tax
consolidated group including certain grantor trusts relating to
the Mission Insurance Entities.
The Internal Revenue Service (IRS) has not audited
any of our tax returns for the years in which the losses giving
rise to the NOLs were reported, and the IRS could challenge any
past and future use of the NOLs.
Beginning in the second quarter of 2006, we adopted the
permanent reinvestment exception under APB 23, whereby we
will no longer provide deferred taxes on the undistributed
earnings of our international subsidiaries. We intend to
permanently reinvest our international earnings outside of the
United States in our existing international operations and in
any new international business we may develop or acquire.
Loss
Contingencies
As described in Note 20. Commitments and Contingencies of
the Notes, our subsidiaries are party to a number of claims,
lawsuits and pending actions, most of which are routine and all
of which are incidental to our business. We assess the
likelihood of potential losses with respect to these matters on
an ongoing basis and when losses are considered probable and
reasonably estimable, we record as a loss an estimate of the
ultimate outcome. If we can only estimate the range of a
possible loss, an amount representing the low end of the range
of possible outcomes is recorded and disclosure is made
regarding the possibility of additional losses. We review such
estimates on an ongoing basis as developments occur with respect
to such matters and may in the future increase or decrease such
estimates. There can be no assurance that our initial or
adjusted estimates of losses will reflect the ultimate loss we
may experience regarding such matters. Any inaccuracies could
potentially have a material adverse effect on our consolidated
financial condition.
Financial
Instruments
As described in Note 18. Financial Instruments of the
Notes, the estimated fair-value amounts have been determined
using available market information and appropriate valuation
methodologies. However, considerable judgment is necessarily
required in interpreting market data to develop estimates of
fair value. Accordingly, the estimates presented are not
necessarily indicative of the amounts that we would realize in a
current market exchange.
For cash and cash equivalents, restricted cash, and marketable
securities, the carrying value of these amounts is a reasonable
estimate of their fair value. The fair value of restricted funds
held in trust is based on quoted market prices of the
investments held by the trustee.
Fair values for debt were determined based on interest rates
that are currently available to us for issuance of debt with
similar terms and remaining maturities for debt issues that are
not traded on quoted market prices. The fair value of project
debt is estimated based on quoted market prices for the same or
similar issues.
The fair value of our interest rate swap agreements is the
estimated amount we would receive or pay to terminate the
agreement based on the net present value of the future cash
flows as defined in the agreement.
Revenue
Recognition
We earn fees to service project debt (principal and interest)
where such fees are expressly included as a component of the
service fee paid by the client community pursuant to applicable
energy-from-waste service agreements. Regardless of the timing
of amounts paid by client communities relating to project debt
principal, we record service revenue with respect to this
principal component on a levelized basis over the term of the
applicable
84
service agreement. Unbilled service receivables related to
energy-from-waste operations are discounted in recognizing the
present value for services performed currently in order to
service the principal component of the project debt. Such
unbilled receivables amounted to $129.9 million as of
December 31, 2006. Fees for waste disposal are recognized
in the period received. Revenue from electricity and steam sales
are recorded when delivered at rates specified in the contracts.
We also earn fees under fixed-price construction contracts, in
which case revenue is accounted for using the percentage of
completion of services rendered.
Pensions
Covanta Energy has defined benefit and defined contribution
retirement plans that cover its employees. Domestic employees
not participating in our retirement plans generally participate
in retirement plans offered by collective bargaining units of
which these employees are members. Of our international
employees, 99% participate in defined benefit or defined
contribution retirement plans as required or available in
accordance with local laws. We froze the Covanta Energy defined
benefit pension plan effective December 31, 2005. All
active employees who were eligible participants in the Covanta
Energy defined benefit pension plan as of December 31,
2005, were 100% vested and had a nonforfeitable right to this
benefit as of December 31, 2005. Beginning January 1,
2006, all eligible employees received a company contribution
into a new defined contribution retirement plan.
Covanta Energy recorded a pension plan liability equal to the
amount by which the present value of the projected benefit
obligations (using a discount rate of 5.75%) exceeded the fair
value of pension assets as of December 31, 2006.
Unpaid
Losses and Loss Adjustment Expenses
Our insurance subsidiaries establish loss and LAE reserves that
are estimates of amounts needed to pay claims and related
expenses in the future for insured events that have already
occurred. The process of estimating reserves involves a
considerable degree of judgment by management and, as of any
given date, is inherently uncertain.
Reserves are typically comprised of (1) case reserves for
claims reported and (2) reserves for losses that have
occurred but for which claims have not yet been reported,
referred to as incurred but not reported (IBNR)
reserves, which include a provision for expected future
development on case reserves. Case reserves are estimated based
on the experience and knowledge of claims staff regarding the
nature and potential cost of each claim and are adjusted as
additional information becomes known or payments are made. IBNR
reserves are derived by subtracting paid loss and LAE and case
reserves from estimates of ultimate loss and LAE. Actuaries
estimate ultimate loss and LAE using various generally accepted
actuarial methods applied to known losses and other relevant
information. Like case reserves, IBNR reserves are adjusted as
additional information becomes known or payments are made.
Ultimate loss and LAE are generally determined by extrapolation
of claim emergence and settlement patterns observed in the past
that can reasonably be expected to persist into the future. In
forecasting ultimate loss and LAE with respect to any line of
business, past experience with respect to that line of business
is the primary resource, but cannot be relied upon in isolation.
The insurance businesses own experience, particularly
claims development experience, such as trends in case reserves,
payments on and closings of claims, as well as changes in
business mix and coverage limits, are the most important
information for estimating reserves.
Uncertainties in estimating ultimate loss and LAE are magnified
by the time lag between when a claim actually occurs and when it
is reported and settled. This time lag is sometimes referred to
as the claim-tail. The claim-tail for most property
coverages is typically short (usually a few days up to a few
months). The claim-tail for automobile liability is relatively
short (usually one to two years) and liability/casualty
coverages, such as general liability, multiple peril coverage,
and workers compensation, can be especially long as claims are
often reported and ultimately paid or settled years, even
decades, after the related loss events occur. During the long
claims reporting and settlement period, additional facts
regarding coverages written in prior accident years, as well as
about actual claims and trends may become known and, as a
result, the insurance subsidiaries may adjust their reserves. If
we determine that an adjustment is appropriate, the adjustment
is booked in the accounting period in which such determination
is made in accordance with generally accepted accounting
principles in the United States. Accordingly, should reserves
need to be increased or decreased in the future from amounts
currently established, future results of operations would be
negatively or positively impacted, respectively.
85
Our insurance subsidiaries use independent actuaries which we
significantly rely on to form a conclusion on reserve estimates.
Those independent actuaries use several generally accepted
actuarial methods to evaluate the insurance business loss
reserves, each of which has its own strengths and weaknesses.
The independent actuaries place more or less reliance on a
particular method based on the facts and circumstances at the
time the reserve estimates are made and through discussions with
our insurance subsidiaries management.
Recent
Accounting Pronouncements
See Note 1. Organization and Summary of Significant
Accounting Policies and Note 2. New Accounting
Pronouncements of the Notes for a summary of additional
accounting policies and new accounting pronouncements.
Related-Party
Transactions
Employment
Arrangements
See the descriptions of our employment agreements with Anthony
Orlando, Mark A. Pytosh, John Klett and Timothy Simpson which
are incorporated by reference into Item 11. Executive
Compensation of this
Form 10-K.
Affiliate
Agreements
As part of our negotiations in 2003 with D. E. Shaw Laminar
Portfolios, L.L.C. (Laminar) and it becoming a 5%
stockholder, pursuant to a letter agreement dated
December 2, 2003, Laminar agreed to transfer restrictions
on the shares of common stock that Laminar acquired pursuant to
the note purchase agreement. Further, in accordance with the
transfer restrictions previously contained in Article Fifth
of our charter restricting the resale of our common stock by 5%
stockholders, we agreed with Laminar to provide it with limited
rights to resell the common stock that it holds. During 2006
Laminar sold a portion of its holdings pursuant to these in
accordance with this agreement. On November 16, 2006, our
stockholders approved an amendment to our restated certificate
of incorporation which removed the transfer restrictions
previously contained in Article Fifth.
As part of the Covanta Energy acquisition in March 2004, we
agreed to conduct a rights offering for up to 3.0 million
shares of our common stock to certain holders of
9.25% debentures issued by Covanta Energy prior to its
bankruptcy at a purchase price of $1.53 per share (the
9.25% Offering). The 9.25% Offering was made solely
to those holders of Covanta Energys 9.25% Debentures
(which had been issued prior to its bankruptcy) who had voted in
favor of Covanta Energys second reorganization plan on
January 12, 2004 or were otherwise authorized to
participate by the bankruptcy court. Laminar held a portion of
such debentures and was entitled to participate in the 9.25%
Offering. On January 31, 2005, we entered into a letter
agreement with Laminar pursuant to which we agreed that if the
9.25% Offering had not closed prior to the record date for the
ARC Holdings Rights Offering, then we would revise the 9.25%
Offering so that the holders that participated in the 9.25%
Offering would be offered additional shares of our common stock
at the same purchase price as in the ARC Holdings Rights
Offering and in an amount equal to the number of shares of
common stock that such holders would have been entitled to
purchase in the ARC Holdings Rights Offering if the 9.25%
Offering was consummated on or prior to the record date for the
ARC Holdings Rights Offering. Accordingly, we restructured our
offering to offer up to an additional 2.7 million
contingently issuable shares at $6.00 per share. The 9.25%
Offering was completed on February 24, 2006 and Laminar
exercised its rights to purchase a total of 633,380 shares.
Clayton Yeutter, a current director, is senior advisor to the
law firm of Hogan & Hartson LLP. Hogan &
Hartson has provided Covanta Energy with certain legal services
for many years including 2006. This relationship preceded our
acquisition of Covanta Energy and Mr. Yeutter did not
direct or have any direct or indirect involvement in the
procurement, provision, oversight or billing of such legal
services and does not directly or indirectly benefit from those
fees. The Board has determined that such relationship does not
interfere with Mr. Yeutters exercise of independent
judgment as a director.
As described in Note 4. Equity in Net Income from
Unconsolidated Investments of the Notes, Covanta Energy holds a
26% investment in Quezon. Covanta Energy and Quezon are both
party to an agreement in which Covanta Energy assumed
responsibility for the operation and maintenance of
Quezons coal-fired electricity generation
86
facility. For the fiscal years ended December 31, 2006,
2005 and 2004, Covanta Energy, subsequent to its acquisition by
us, collected $26.9 million, $29.5 million and
$34.7 million, respectively, for the operation and
maintenance of the facility. As of December 31, 2006, the
net amount due to Quezon was $2.2 million and as of
December 31, 2005, the net amount due from Quezon was
$0.1 million.
Item 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, our subsidiaries are party to
financial instruments that are subject to market risks arising
from changes in interest rates, foreign currency exchange rates,
and commodity prices. Our use of derivative instruments is very
limited and we do not enter into derivative instruments for
trading purposes. The following analysis provides quantitative
information regarding our exposure to financial instruments with
market risks. We use a sensitivity model to evaluate the fair
value or cash flows of financial instruments with exposure to
market risk that assumes instantaneous, parallel shifts in
exchange rates and interest rate yield curves. There are certain
limitations inherent in the sensitivity analysis presented,
primarily due to the assumption that exchange rates change in a
parallel manner and that interest rates change instantaneously.
In addition, the fair value estimates presented herein are based
on pertinent information available to us as of December 31,
2006. Further information is included in Note 18. Financial
Instruments of the Notes.
Waste and
Energy Services
Interest
Rate Risk
Covanta Energy
and/or its
subsidiaries have project debt outstanding bearing interest at
floating rates that could subject them to the risk of increased
interest expense due to rising market interest rates, or an
adverse change in fair value due to declining interest rates on
fixed rate debt. Of Covanta Energys project debt,
approximately $156.3 million was floating rate debt at
December 31, 2006. However, the entire interest rate risk
related to the floating rate project debt is borne by the client
communities because debt service is passed through to those
clients under the contractual structure of their waste services
agreements. Covanta Energy had only one interest rate swap
relating to project debt outstanding as of December 31,
2006 in the notional amount of $76.4 million related to
floating rate project debt. Gains and losses, however, on this
swap are for the account of the client community and are not
borne by Covanta Energy.
As described in Note 16. Long-Term Debt of the Notes,
Covanta Energy was required, under financing arrangements in
effect since June 24, 2005, to enter into hedging
arrangements with respect to a portion of its exposure to
interest rate changes with respect to its borrowing under the
financing arrangements. On July 8, 2005, Covanta Energy
entered into two pay-fixed, receive floating interest rate swap
agreements with a total notional amount of $300 million. On
March 21, 2006, we entered into one additional pay fixed,
receive floating interest rate swap agreement with a notional
amount of $37.5 million. On December 27, 2006, the
notional amount of the original swap agreements reduced to
$250 million from $300 million. These swaps were
designated as cash flow hedges in accordance with
SFAS No. 133, Accounting for Derivative and
Hedging Activities. Accordingly, unrealized gains or
losses will be deferred in other comprehensive income until the
hedged cash flows affect earnings. On February 9, 2007, the
swap arrangements described above were settled and unrealized
gains of $2.1 million, net of tax, related to the swap
arrangements were reflected in earnings. We have not entered
into interest rate swap arrangements related to the 2007
recapitalization plan and therefore increased our exposure to
fluctuations in interest rates. We do not believe these risks to
be material to our cash flows and results of operations.
For floating rate project debt, a 20 percent hypothetical
increase in the underlying December 31, 2006 market
interest rates would result in a potential loss to twelve month
future earnings of $1.2 million. For fixed rate project
debt, the potential reduction in fair value from a
20 percent hypothetical increase in the underlying
December 31, 2006 market interest rates would be
approximately $4.2 million. The fair value of Covanta
Energys fixed rate project debt (including
$1.234 billion in fixed rate debt related to revenue bonds
in which debt service is an explicit component of the service
fees billed to the client communities) was $1.209 billion
as of December 31, 2006, and was determined using average
market quotations of price and yields provided by investment
banks.
87
Foreign
Currency Exchange Rate Risk
We have investments in energy projects in various foreign
countries, including the Philippines, China, India and
Bangladesh, and to a much lesser degree, Italy and Costa Rica.
We do not enter into currency transactions to hedge our exposure
to fluctuations in currency exchange rates. Instead, we attempt
to mitigate our currency risks by structuring our project
contracts so that our revenues are adjusted in line with
corresponding changes in currency rates. Therefore, only working
capital and project debt denominated in other than a project
entitys functional currency are exposed to currency risks.
As of December 31, 2006, Covanta Energy had
$76.2 million of project debt related to two diesel engine
projects in India. For $66.1 million of the debt (related
to project entities whose functional currency is the Indian
rupee), exchange rate fluctuations were recorded as translation
adjustments in other comprehensive income within
stockholders equity in our consolidated balance sheets.
The remaining $10.1 million of debt was denominated in
U.S. dollars.
The potential loss in fair value for such financial instruments
from a 10% adverse change in December 31, 2006 quoted
foreign currency exchange rates would be approximately
$6.6 million.
As of December 31, 2006, we also had net investments in
foreign subsidiaries and projects. See Note 4. Equity in
Net Income from Unconsolidated Investments of the Notes for
further discussion.
Commodity
Price Risk and Contract Revenue Risk
We have not entered into futures, forward contracts, swaps or
options to hedge purchase and sale commitments, fuel
requirements, inventories or other commodities. Alternatively,
we attempt to mitigate the risk of energy and fuel market
fluctuations by structuring contracts related to our energy
projects in the manner described above under
Managements Discussion and Analysis of Financial
Condition and Results of Operation
Overview Contract Structures.
Generally, we are protected against fluctuations in the waste
disposal market, and thus our ability to charge acceptable fees
for our services, through long-term service agreements and
disposal contracts at our energy-from-waste facilities. At eight
of our energy-from-waste facilities, differing amounts of waste
disposal capacity are not subject to long-term contracts and,
therefore, we are partially exposed to the risk of market
fluctuations in the waste disposal fees we may charge. At our
energy-from-waste facilities, we sell recovered ferrous metals,
the price of which is subject to market influences. Our
long-term service agreements begin to expire in 2008, and energy
sales contracts at owned projects generally expire at or after
the date on which that projects long-term agreement
expires. Expiration of these contracts will subject us to
greater market risk in maintaining and enhancing our revenues.
As our agreements at municipally-owned projects expire, we will
seek to enter into renewal or replacement contracts to continue
operating such projects. As our agreements at facilities we own
begin to expire, we intend to seek replacement or additional
contracts for waste supplies, and because project debt on these
facilities will be paid off at such time, we expect to be able
to offer disposal services at rates that will attract sufficient
quantities of waste and provide acceptable revenues. We will
seek to bid competitively in the market for additional contracts
to operate other facilities as similar contracts of other
vendors expire. At facilities we own, the expiration of existing
energy sales contracts will require us to sell our output either
into the local electricity grid or pursuant to new contracts.
There can be no assurance that we will be able to enter into
such renewals, replacement or additional contracts, or that the
price and other terms available in the market at the time will
be favorable to us.
We have similar protection against energy market fluctuations at
most of our projects, which have long-term contracts for the
sale of energy output. We enter into shorter term arrangements
for energy sales, or have market-based pricing at four of our
projects and have some exposure to energy market fluctuations
with respect to these projects. In addition, we sell recovered
materials, principally ferrous metals, under short-term
arrangements from most of our energy-from-waste projects, and
have some exposure to market fluctuations with respect to such
sales. While the ferrous metals markets fluctuate, given the
amount of revenue we derive from such sales, we do not expect
any such fluctuations to have a material affect on our financial
results.
88
Other
Services
Risk
Related to the Investment Portfolio
NAICCs objectives in managing its investment portfolio are
to maximize investment income and investment returns while
minimizing overall market risk. Investment strategies are
developed based on many factors including duration of
liabilities, underwriting results, overall tax position,
regulatory requirements, and fluctuations in interest rates.
Investment decisions are made by management, in consultation
with an independent investment advisor, and approved by
NAICCs board of directors. Market risk represents the
potential for loss due to adverse changes in the fair value of
securities. The market risks related to NAICCs fixed
maturity portfolio are primarily credit risk, interest rate
risk, reinvestment risk and prepayment risk. The market risk
related to NAICCs equity portfolio is price risk.
Fixed
Maturities
Interest rate risk is the price sensitivity of fixed maturities
to changes in interest rate. We view these potential changes in
price within the overall context of asset and liability
matching. We estimate the payout patterns of NAICCs
liabilities, primarily loss reserves, to determine their
duration. Duration targets are set for the fixed income
portfolio after consideration of the duration of NAICCs
liabilities that we believe mitigates the overall interest rate
risk. NAICCs exposure to interest rate risk is mitigated
by the relative short-term nature of its insurance and other
liabilities. The effective duration of the portfolio as of
December 31, 2006 and 2005 was 1.6 years and
1.9 years, respectively. We believe the portfolio duration
is appropriate given the relative short-tail nature of the auto
programs and projected run-off of all other lines of business. A
hypothetical 100 basis point increase in market interest rates
would cause an approximate 1.9% decrease in the fair value of
the portfolio while a hypothetical 100 basis point decrease
would cause an approximate 1.8% increase in fair value. Credit
risk is the price sensitivity of fixed maturities to changes in
the credit quality of such investment. NAICCs exposure to
credit risk is mitigated by its investment in high quality fixed
income alternatives.
Fixed maturities of NAICC include Mortgage-Backed Securities and
Collateralized Mortgage Obligations, collectively
(MBS) representing 23.1% and 22.9% of total fixed
maturities at December 31, 2006 and 2005, respectively. All
MBS held by NAICC were issued by the Federal National Mortgage
Association (FNMA) or the Federal Home Loan Mortgage
Corporation (FHLMC), which are both rated AAA by
Moodys Investors Services. Both FNMA and FHLMC are
corporations that were created by Acts of Congress. FNMA and
FHLMC guarantee the principal balance of their securities. FNMA
guarantees timely payment of principal and interest.
One of the risks associated with MBS is the timing of principal
payments on the mortgages underlying the securities. NAICC
attempts to limit repayment risk by purchasing MBS whose cost is
below or does not significantly exceed par, and by primarily
purchasing structured securities with repayment protection which
provides more certain cash flow to the investor such as MBS with
sinking fund schedules known as Planned Amortization Classes
(PAC) and Targeted Amortization Classes
(TAC). The structures of PACs and TACs attempt to
increase the certainty of the timing of prepayment and thereby
minimize the prepayment and interest rate risk. In 2006, NAICC
recognized less than $0.01 million in loss on sales of
fixed maturities.
MBS, as well as callable bonds, have a greater sensitivity to
market value declines in a rising interest rate environment than
to market value increases in a declining interest rate
environment. NAICC realized significant increases in its
prepayments of principal during 2004 and to a lesser extent in
2005 and 2006. The prepayments mitigated the need to sell
securities to meet operating cash requirements as noted
previously.
Equity
Securities
In the third and fourth quarter of 2004, NAICC began investing
in equity securities, generally limited to Fortune
500 companies with strong balance sheets, history of
dividend growth and price appreciation. As of December 31,
2006, equity securities represented 4.2% of the total NAICC
investment portfolio.
89
|
|
Item 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
|
|
|
|
|
|
|
Page
|
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91
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92
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93
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94
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95
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96
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96
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104
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104
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108
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110
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111
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112
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116
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117
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118
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119
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119
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120
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121
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122
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124
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126
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128
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130
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134
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136
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140
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142
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147
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148
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149
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150
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153
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153
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154
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|
Financial Statement Schedules:
|
|
|
|
|
|
|
|
161
|
|
|
|
|
164
|
|
90
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Covanta Holding
Corporation
We have audited the accompanying consolidated balance sheets of
Covanta Holding Corporation as of December 31, 2006 and
2005, and the related consolidated statements of operations,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2006. Our audits
also included the financial statement schedules listed in the
Index at Item 8. These financial statements and schedules
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Covanta Holding Corporation at
December 31, 2006 and 2005, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2006, in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedules, when
considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the
information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Covanta Holding Corporations internal
control over financial reporting as of December 31, 2006,
based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated February 25,
2007 expressed an unqualified opinion thereon.
MetroPark, New Jersey
February 25, 2007
91
COVANTA
HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share amounts)
|
|
|
OPERATING REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Waste and service revenues
|
|
$
|
817,633
|
|
|
$
|
638,503
|
|
|
$
|
372,748
|
|
Electricity and steam sales
|
|
|
433,834
|
|
|
|
322,770
|
|
|
|
181,074
|
|
Other operating revenues
|
|
|
17,069
|
|
|
|
17,490
|
|
|
|
22,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
1,268,536
|
|
|
|
978,763
|
|
|
|
576,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Plant operating expenses
|
|
|
712,156
|
|
|
|
559,638
|
|
|
|
349,502
|
|
Depreciation and amortization
expense
|
|
|
193,217
|
|
|
|
124,925
|
|
|
|
53,282
|
|
Net interest expense on project
debt
|
|
|
60,210
|
|
|
|
52,431
|
|
|
|
32,586
|
|
Other operating expenses
|
|
|
2,594
|
|
|
|
11,015
|
|
|
|
16,560
|
|
General and administrative expenses
|
|
|
73,599
|
|
|
|
67,481
|
|
|
|
47,396
|
|
California Grantor
Trust Settlement
|
|
|
|
|
|
|
10,342
|
|
|
|
|
|
Restructuring charges
|
|
|
|
|
|
|
2,765
|
|
|
|
|
|
Acquisition-related charges
|
|
|
|
|
|
|
3,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,041,776
|
|
|
|
832,547
|
|
|
|
499,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
226,760
|
|
|
|
146,216
|
|
|
|
76,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
11,770
|
|
|
|
6,129
|
|
|
|
2,343
|
|
Interest expense
|
|
|
(113,960
|
)
|
|
|
(89,973
|
)
|
|
|
(43,739
|
)
|
Loss on extinguishment of debt
|
|
|
(2,342
|
)
|
|
|
|
|
|
|
|
|
Gain on derivative instruments,
ACL warrants
|
|
|
|
|
|
|
15,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
(104,532
|
)
|
|
|
(68,651
|
)
|
|
|
(41,396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense,
minority interests and equity in net income from unconsolidated
investments
|
|
|
122,228
|
|
|
|
77,565
|
|
|
|
35,474
|
|
Income tax expense
|
|
|
(38,465
|
)
|
|
|
(34,651
|
)
|
|
|
(11,535
|
)
|
Minority interests
|
|
|
(6,610
|
)
|
|
|
(9,197
|
)
|
|
|
(6,869
|
)
|
Equity in net income from
unconsolidated investments
|
|
|
28,636
|
|
|
|
25,609
|
|
|
|
17,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
105,789
|
|
|
$
|
59,326
|
|
|
$
|
34,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME PER SHARE OF COMMON
STOCK BASIC
|
|
$
|
0.73
|
|
|
$
|
0.49
|
|
|
$
|
0.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME PER SHARE OF COMMON
STOCK DILUTED
|
|
$
|
0.72
|
|
|
$
|
0.46
|
|
|
$
|
0.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
92
COVANTA
HOLDING CORPORATION
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share amounts)
|
|
|
ASSETS
|
Current:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
233,442
|
|
|
$
|
128,556
|
|
Marketable securities available for
sale
|
|
|
7,080
|
|
|
|
7,400
|
|
Restricted funds held in trust
|
|
|
178,054
|
|
|
|
197,527
|
|
Receivables (less allowances of
$4,469 and $4,959)
|
|
|
209,306
|
|
|
|
202,893
|
|
Unbilled service receivables
|
|
|
56,868
|
|
|
|
57,588
|
|
Deferred income taxes
|
|
|
24,146
|
|
|
|
21,058
|
|
Prepaid expenses and other current
assets
|
|
|
94,690
|
|
|
|
79,378
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
803,586
|
|
|
|
694,400
|
|
Property, plant and equipment, net
|
|
|
2,637,923
|
|
|
|
2,724,843
|
|
Investments in fixed maturities at
market (cost: $35,833 and $44,824)
|
|
|
35,007
|
|
|
|
43,667
|
|
Restricted funds held in trust
|
|
|
229,867
|
|
|
|
249,905
|
|
Unbilled service receivables
|
|
|
73,067
|
|
|
|
86,830
|
|
Intangible assets, net
|
|
|
383,574
|
|
|
|
434,543
|
|
Goodwill
|
|
|
91,282
|
|
|
|
255,927
|
|
Investments in investees and joint
ventures
|
|
|
73,717
|
|
|
|
66,301
|
|
Deferred income taxes
|
|
|
|
|
|
|
26,236
|
|
Other assets
|
|
|
109,797
|
|
|
|
119,513
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
4,437,820
|
|
|
$
|
4,702,165
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
36,434
|
|
|
$
|
47,549
|
|
Current portion of project debt
|
|
|
190,242
|
|
|
|
174,114
|
|
Accounts payable
|
|
|
20,151
|
|
|
|
19,447
|
|
Deferred revenue
|
|
|
16,457
|
|
|
|
14,524
|
|
Accrued expenses and other current
liabilities
|
|
|
197,468
|
|
|
|
205,351
|
|
|
|
|
|
|
|
|
|
|
Total Current
Liabilities
|
|
|
460,752
|
|
|
|
460,985
|
|
Long-term debt
|
|
|
1,223,689
|
|
|
|
1,260,570
|
|
Project debt
|
|
|
1,245,705
|
|
|
|
1,424,170
|
|
Deferred income taxes
|
|
|
420,263
|
|
|
|
533,169
|
|
Other liabilities
|
|
|
305,578
|
|
|
|
343,402
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
3,655,987
|
|
|
|
4,022,296
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
(Note 20)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority Interests
|
|
|
42,681
|
|
|
|
80,628
|
|
|
|
|
|
|
|
|
|
|
Stockholders
Equity:
|
|
|
|
|
|
|
|
|
Preferred stock ($0.10 par
value; authorized 10,000 shares; none issued and
outstanding)
|
|
|
|
|
|
|
|
|
Common stock ($0.10 par value;
authorized 250,000 shares; issued 147,657 and
141,246 shares; outstanding 147,500 and 141,166 shares)
|
|
|
14,766
|
|
|
|
14,125
|
|
Additional paid-in capital
|
|
|
619,685
|
|
|
|
594,186
|
|
Unearned compensation
|
|
|
|
|
|
|
(4,583
|
)
|
Accumulated other comprehensive
income
|
|
|
3,942
|
|
|
|
535
|
|
Accumulated earnings (deficit)
|
|
|
100,775
|
|
|
|
(5,014
|
)
|
Treasury stock, at par
|
|
|
(16
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
Total Stockholders
Equity
|
|
|
739,152
|
|
|
|
599,241
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Stockholders Equity
|
|
$
|
4,437,820
|
|
|
$
|
4,702,165
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
93
COVANTA
HOLDING CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
105,789
|
|
|
$
|
59,326
|
|
|
$
|
34,094
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
expense
|
|
|
193,217
|
|
|
|
124,925
|
|
|
|
53,282
|
|
Revenue contract levelization
|
|
|
3,419
|
|
|
|
2,068
|
|
|
|
|
|
Amortization of long-term debt
deferred financing costs
|
|
|
8,311
|
|
|
|
10,785
|
|
|
|
7,045
|
|
Amortization of debt premium and
discount
|
|
|
(22,506
|
)
|
|
|
(18,058
|
)
|
|
|
(10,457
|
)
|
Accretion on principal of High
Yield Notes
|
|
|
|
|
|
|
872
|
|
|
|
2,736
|
|
Provision for doubtful accounts
|
|
|
2,251
|
|
|
|
2,008
|
|
|
|
733
|
|
Stock-based compensation expense
|
|
|
6,887
|
|
|
|
4,057
|
|
|
|
1,425
|
|
Equity in net income from
unconsolidated investments
|
|
|
(28,637
|
)
|
|
|
(25,609
|
)
|
|
|
(17,024
|
)
|
Dividends from unconsolidated
investments
|
|
|
19,375
|
|
|
|
19,287
|
|
|
|
16,926
|
|
Minority interests
|
|
|
6,610
|
|
|
|
9,197
|
|
|
|
6,869
|
|
Gain on derivative instruments, ACL
warrants
|
|
|
|
|
|
|
(15,193
|
)
|
|
|
|
|
Deferred income taxes
|
|
|
20,908
|
|
|
|
17,759
|
|
|
|
(2,916
|
)
|
Other, net
|
|
|
7,262
|
|
|
|
6,003
|
|
|
|
(172
|
)
|
Change in operating assets and
liabilities, net of effects of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted funds for emergence costs
|
|
|
|
|
|
|
13,201
|
|
|
|
65,681
|
|
Receivables
|
|
|
(8,577
|
)
|
|
|
2,701
|
|
|
|
13,084
|
|
Unbilled service receivables
|
|
|
17,294
|
|
|
|
11,949
|
|
|
|
11,221
|
|
Accounts payable and accrued
expenses
|
|
|
2,351
|
|
|
|
7,691
|
|
|
|
(19
|
)
|
Accrued emergence costs
|
|
|
|
|
|
|
(13,201
|
)
|
|
|
(65,681
|
)
|
Unpaid losses and loss adjustment
expenses
|
|
|
(8,848
|
)
|
|
|
(17,402
|
)
|
|
|
(19,110
|
)
|
Other, net
|
|
|
(15,859
|
)
|
|
|
5,893
|
|
|
|
10,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
309,247
|
|
|
|
208,259
|
|
|
|
108,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in restricted cash,
Covanta Energy escrow
|
|
|
|
|
|
|
|
|
|
|
37,026
|
|
Purchase of ARC Holdings and
Covanta Energy, respectively
|
|
|
|
|
|
|
(747,348
|
)
|
|
|
(36,400
|
)
|
Cash acquired from ARC Holdings and
Covanta Energy, respectively
|
|
|
|
|
|
|
62,358
|
|
|
|
57,795
|
|
Proceeds from the sale of
investment securities
|
|
|
10,615
|
|
|
|
30,827
|
|
|
|
27,307
|
|
Acquisition of non-controlling
interest in subsidiary
|
|
|
(27,500
|
)
|
|
|
|
|
|
|
|
|
Purchase of investment securities
|
|
|
(774
|
)
|
|
|
(3,458
|
)
|
|
|
(24,828
|
)
|
Purchase of property, plant and
equipment
|
|
|
(54,267
|
)
|
|
|
(23,527
|
)
|
|
|
(11,999
|
)
|
Other, net
|
|
|
5,022
|
|
|
|
4,269
|
|
|
|
7,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
investing activities
|
|
|
(66,904
|
)
|
|
|
(676,879
|
)
|
|
|
55,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from rights offerings, net
|
|
|
20,498
|
|
|
|
395,791
|
|
|
|
41,021
|
|
Proceeds from the exercise of
options for common stock
|
|
|
1,126
|
|
|
|
2,984
|
|
|
|
3,474
|
|
Proceeds from borrowings on
long-term debt
|
|
|
97,619
|
|
|
|
675,000
|
|
|
|
|
|
Proceeds from borrowings on project
debt
|
|
|
6,868
|
|
|
|
43,561
|
|
|
|
14,488
|
|
Principal payments on long-term debt
|
|
|
(140,638
|
)
|
|
|
(368,432
|
)
|
|
|
(19,673
|
)
|
Principal payments on project debt
|
|
|
(151,095
|
)
|
|
|
(188,975
|
)
|
|
|
(67,943
|
)
|
Payments of long-term debt deferred
financing costs
|
|
|
100
|
|
|
|
(35,485
|
)
|
|
|
(7,255
|
)
|
Prepaid financing costs new loan
agreement
|
|
|
(2,229
|
)
|
|
|
|
|
|
|
|
|
Repayment of bridge financing
|
|
|
|
|
|
|
|
|
|
|
(26,612
|
)
|
Increase in holding company
restricted funds
|
|
|
|
|
|
|
(6,471
|
)
|
|
|
|
|
Decrease (increase) in restricted
funds held in trust
|
|
|
39,373
|
|
|
|
(6,337
|
)
|
|
|
(13,839
|
)
|
Distributions to minority partners
|
|
|
(9,263
|
)
|
|
|
(12,249
|
)
|
|
|
(8,261
|
)
|
Other, net
|
|
|
(37
|
)
|
|
|
1,862
|
|
|
|
(1,436
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
financing activities
|
|
|
(137,678
|
)
|
|
|
501,249
|
|
|
|
(86,036
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash and cash equivalents
|
|
|
221
|
|
|
|
(221
|
)
|
|
|
(112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents
|
|
|
104,886
|
|
|
|
32,408
|
|
|
|
78,196
|
|
Cash and cash equivalents at
beginning of period
|
|
|
128,556
|
|
|
|
96,148
|
|
|
|
17,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
period
|
|
$
|
233,442
|
|
|
$
|
128,556
|
|
|
$
|
96,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Paid for Interest and Income
Taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
205,807
|
|
|
$
|
154,545
|
|
|
$
|
66,917
|
|
Income taxes
|
|
$
|
17,398
|
|
|
$
|
16,737
|
|
|
$
|
24,207
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
94
COVANTA
HOLDING CORPORATION
CONSOLIDATED
STATEMENT OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Unearned
|
|
|
Comprehensive
|
|
|
Earnings
|
|
|
Treasury Stock
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
(Loss) Income
|
|
|
(Deficit)
|
|
|
Shares
|
|
|
Amount
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance as of December 31, 2003
|
|
|
35,793
|
|
|
$
|
3,579
|
|
|
$
|
123,446
|
|
|
$
|
(289
|
)
|
|
$
|
(445
|
)
|
|
$
|
(98,434
|
)
|
|
|
11
|
|
|
$
|
(66
|
)
|
|
$
|
27,791
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
181
|
|
Amortization of unearned
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,345
|
|
Adjustment of unearned compensation
for terminated employees
|
|
|
(41
|
)
|
|
|
(4
|
)
|
|
|
(200
|
)
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(136
|
)
|
Shares issued in rights offering,
net of costs
|
|
|
27,438
|
|
|
|
2,744
|
|
|
|
38,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,021
|
|
Right cancelled for terminated
employees
|
|
|
(12
|
)
|
|
|
(1
|
)
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19
|
)
|
Exercise of options to purchase
common stock
|
|
|
966
|
|
|
|
96
|
|
|
|
5,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,616
|
|
Shares cancelled in exercise of
options
|
|
|
(89
|
)
|
|
|
(9
|
)
|
|
|
(785
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(794
|
)
|
Conversion of portion of bridge
financing
|
|
|
8,750
|
|
|
|
875
|
|
|
|
12,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,388
|
|
Share issued in restricted stock
award
|
|
|
636
|
|
|
|
64
|
|
|
|
4,549
|
|
|
|
(4,613
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock purchase rights issued to
creditors
|
|
|
|
|
|
|
|
|
|
|
11,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,300
|
|
Comprehensive income, net of income
taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,094
|
|
|
|
|
|
|
|
|
|
|
|
34,094
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
549
|
|
Minimum pension liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,225
|
|
Net unrealized loss on
available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(746
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(746
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,028
|
|
|
|
34,094
|
|
|
|
|
|
|
|
|
|
|
|
35,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2004
|
|
|
73,441
|
|
|
|
7,344
|
|
|
|
194,783
|
|
|
|
(3,489
|
)
|
|
|
583
|
|
|
|
(64,340
|
)
|
|
|
11
|
|
|
|
(66
|
)
|
|
|
134,815
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29
|
)
|
Amortization of unearned
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,086
|
|
Adjustment of unearned compensation
for terminated employees
|
|
|
(18
|
)
|
|
|
(2
|
)
|
|
|
(164
|
)
|
|
|
166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued in rights offering,
net of costs
|
|
|
66,673
|
|
|
|
6,667
|
|
|
|
389,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
395,791
|
|
Exercise of options to purchase
common stock
|
|
|
724
|
|
|
|
72
|
|
|
|
4,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,009
|
|
Shares cancelled in exercise of
options
|
|
|
(21
|
)
|
|
|
(1
|
)
|
|
|
(290
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
|
|
|
|
58
|
|
|
|
(233
|
)
|
Share issued in restricted stock
award
|
|
|
447
|
|
|
|
45
|
|
|
|
5,317
|
|
|
|
(5,346
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
ACL gift upon emergence from
bankruptcy
|
|
|
|
|
|
|
|
|
|
|
508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
508
|
|
Comprehensive income, net of income
taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59,326
|
|
|
|
|
|
|
|
|
|
|
|
59,326
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(675
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(675
|
)
|
Minimum pension liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(331
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(331
|
)
|
Net unrealized loss on
available-for-sale-securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,055
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,055
|
)
|
Net unrealized gain on derivative
instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48
|
)
|
|
|
59,326
|
|
|
|
|
|
|
|
|
|
|
|
59,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005
|
|
|
141,246
|
|
|
|
14,125
|
|
|
|
594,186
|
|
|
|
(4,583
|
)
|
|
|
535
|
|
|
|
(5,014
|
)
|
|
|
80
|
|
|
|
(8
|
)
|
|
|
599,241
|
|
Reclass of unearned compensation
upon adoption of SFAS 123R
|
|
|
|
|
|
|
|
|
|
|
(4,583
|
)
|
|
|
4,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued in rights offering
|
|
|
5,697
|
|
|
|
570
|
|
|
|
19,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,498
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
6,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,887
|
|
Tax benefit related to exercise of
stock options and vesting of restricted stock
|
|
|
|
|
|
|
|
|
|
|
2,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,242
|
|
Shares cancelled for terminated
employees
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
|
|
|
|
(7
|
)
|
|
|
|
|
Shares cancelled for non-vested
stock rights for terminated employee
|
|
|
|
|
|
|
|
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
(1
|
)
|
|
|
(38
|
)
|
Exercise of options to purchase
common stock
|
|
|
178
|
|
|
|
18
|
|
|
|
1,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,126
|
|
Shares issued in non-vested stock
award
|
|
|
536
|
|
|
|
53
|
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income, net of income
taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105,789
|
|
|
|
|
|
|
|
|
|
|
|
105,789
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
986
|
|
Minimum pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
|
Adjustment for unrecognized net
gain upon adoption of SFAS 158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,650
|
|
Net unrealized gain on
available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
559
|
|
Net unrealized gain on derivative
instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,407
|
|
|
|
105,789
|
|
|
|
|
|
|
|
|
|
|
|
109,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
|
147,657
|
|
|
$
|
14,766
|
|
|
$
|
619,685
|
|
|
$
|
|
|
|
$
|
3,942
|
|
|
$
|
100,775
|
|
|
|
157
|
|
|
$
|
(16
|
)
|
|
$
|
739,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
95
COVANTA
HOLDING CORPORATION
|
|
Note 1.
|
Organization
and Summary of Significant Accounting Policies
|
Organization
The financial statements in this report represent the
consolidation of Covanta Holding Corporation and its
wholly-owned and majority-owned subsidiaries. Covanta Holding
Corporation conducts all of its operations through subsidiaries
which are engaged in the businesses of waste and energy
services, and insurance services. Covanta Holding
Corporations predominant business is the waste and energy
services business.
The terms we, our, ours,
us and Company refer to Covanta Holding
Corporation and its subsidiaries; the term Covanta
Energy refers to our subsidiary Covanta Energy Corporation
and its subsidiaries; the term ARC Holdings refers
to our subsidiary Covanta ARC Holdings, Inc. and its
subsidiaries; the term TransRiver refers to our
subsidiary TransRiver Marketing Company, L.P.; the term
CPIH refers to our subsidiary Covanta Power
International Holdings, Inc.; and the term NAICC
refers to our subsidiary National American Insurance Company of
California and its subsidiaries.
We are a leading developer, owner and operator of infrastructure
for the conversion of energy-from-waste, waste disposal and
renewable energy production businesses in the United States. We
also engage in the independent power production business outside
the United States. We own or operate 51 energy generation
facilities, 41 of which are in the United States and 10 of which
are located outside the United States. Our energy generation
facilities use a variety of fuels, including municipal solid
waste, water (hydroelectric), natural gas, coal, wood waste,
landfill gas and heavy fuel-oil. We also own or operate several
businesses that are associated with our energy-from-waste
business, including a waste procurement business, two landfills,
and several waste transfer stations. We also operate one
domestic water treatment facility.
On January 19, 2007, we announced a comprehensive
recapitalization plan utilizing a series of equity and debt
financings. Subsequent to this announcement, we completed the
following transactions:
|
|
|
|
|
the refinancing of Covanta Energys debt facilities with
new Covanta Energy debt facilities, comprised of a
$300 million revolving credit facility, a $320 million
funded letter of credit facility, and a $650 million term
loan (collectively referred to as the New Credit
Facilities);
|
|
|
|
an underwritten public offering of 6.118 million shares of
our common stock, in which we received proceeds of approximately
$136.6 million, net of underwriting discounts and
commissions;
|
|
|
|
an underwritten public offering of approximately
$373.75 million aggregate principal amount of convertible
debentures (the Debentures) issued by us, from which
we received proceeds of approximately $364.4 million, net
of underwriting discounts and commissions; and
|
|
|
|
the repayment, by means of a tender offer, of approximately
$604.4 million in aggregate principal amount of outstanding
notes previously issued by Covanta Energys intermediate
subsidiaries.
|
We completed our public offerings of equity and debt, including
over-allotment options exercised by underwriters, on
January 31, 2007 and February 6, 2007, and we closed
on the New Credit Facilities on February 9, 2007. We
completed our tender offer for approximately $604.4 million
in aggregate principal amount of outstanding notes on
February 22, 2007. Additional information, including
material terms related to our recapitalization plan, is
contained in Note 30. Subsequent Events.
Our business segments are comprised of Waste and Energy
Services, which is comprised of Covanta Energys domestic
and international operations, and Other Services, which is
comprised of the holding company and insurance
subsidiaries operations.
Pursuant to the plan of reorganization (Reorganization
Plan), we acquired 100% of the equity in Covanta Energy
upon its emergence from bankruptcy on March 10, 2004 (the
Effective Date). Covanta Energys subsidiaries
owning and operating the Warren County, New Jersey and Lake
County, Florida energy-from-
96
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
waste facilities and which were engaged in the Tampa Bay,
Florida desalination project remained
debtors-in-possession
(the Remaining Debtors) after the Effective Date. As
a result, we recorded our investment in the Remaining Debtors
using the equity method as of March 10, 2004. Subsequent to
the Effective Date, all Remaining Debtors associated with the
Tampa Bay, Lake County, and Warren County projects emerged from
bankruptcy on August 6, 2004, December 14, 2004, and
December 15, 2005, respectively. We have included Lake
County and Warren County as consolidated subsidiaries in our
financial statements since their respective emergence dates.
Upon Tampa Bays emergence from Chapter 11, we did not
have any operating or ownership rights in this facility.
We also have investments in subsidiaries engaged in insurance
operations in California. We hold all of the voting stock of
Covanta Insurance Holding Corporation, which indirectly owns
100% of the common stock of NAICC, our principal operating
insurance subsidiary. The operations of NAICC are in property
and casualty insurance. NAICC writes non-standard private
automobile insurance policies in California.
During 2004, we also had an investment in American Commercial
Lines LLC (ACL), an integrated marine transportation
and service company, which throughout 2004 was in bankruptcy
proceedings under Chapter 11. ACL is no longer our
subsidiary. On December 30, 2004, ACL confirmed a plan of
reorganization and has since emerged from bankruptcy. As part of
ACLs plan of reorganization, our stock in ACL was
cancelled, and our ownership interest was terminated. We
received no distribution under the ACL plan of reorganization,
but received from ACLs creditors, in January 2005,
warrants to purchase three percent of ACL stock. During October
2005, we exercised such warrants and sold all of the resulting
shares in ACL. See Note 18. Financial Instruments for
additional information regarding the ACL warrants.
Summary
of Significant Accounting Policies
Principles
of Consolidation
The consolidated financial statements reflect the results of our
operations, cash flows and financial position and of our
majority-owned or controlled subsidiaries. All intercompany
accounts and transactions have been eliminated. Investments in
companies that are not majority-owned or controlled, but in
which we have significant influence are accounted for under the
equity method. Investments in companies that we do not have the
ability to exercise significant influence are carried at the
lower of cost or estimated realizable value. We monitor
investments for other than temporary declines in value and make
reductions when appropriate.
Equity
Method of Investments
Investments are accounted for using the equity method of
accounting if the investment gives us the ability to exercise
significant influence, but not control, over the investee.
Significant influence is generally deemed to exist if we have an
ownership interest in the voting stock of the investee of
between 20% and 50%, although other factors, such as
representation on the investees board of directors, are
considered in determining whether the equity method of
accounting is appropriate.
Cash and
Cash Equivalents
Cash and cash equivalents include all cash balances and highly
liquid investments having maturities of three months or less
from the date of purchase. These short-term investments are
stated at cost, which approximates market value.
Restricted
Funds for Emergence Costs
We had $19.6 million as of December 31, 2006 and 2005
in cash held in restricted accounts to pay for certain taxes
which may be due relating to Covanta Energys bankruptcy
and that are estimated to be paid in the future. Cash held in
such restricted accounts is not available for general corporate
purposes.
97
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Income
Taxes
Deferred income taxes are based on the difference between the
financial reporting and tax basis of assets and liabilities. The
deferred income tax provision represents the change during the
reporting period in the deferred tax assets and deferred tax
liabilities, net of the effect of acquisitions and dispositions.
Deferred tax assets include tax losses and credit carryforwards
and are reduced by a valuation allowance if, based on available
evidence, it is more likely than not that some portion or all of
the deferred tax assets will not be realized.
During the periods covered by the consolidated financial
statements, we filed a consolidated Federal income tax return,
which included all eligible United States subsidiary companies.
Foreign subsidiaries were taxed according to regulations
existing in the countries in which they do business. Our
subsidiary, Covanta Lake II, Inc. has not been a member of
any consolidated tax group since February 20, 2004.
Beginning in the second quarter of 2006, we adopted the
permanent reinvestment exception under Accounting Principles
Board (APB) Opinion No. 23, Accounting
for Income Taxes Special Areas
(APB 23) whereby we will no longer provide for
deferred taxes on the undistributed earnings of our
international subsidiaries. We intend to permanently reinvest
our international earnings outside of the United States in our
existing international operations and in any new international
business which may be developed or acquired. As a result of the
adoption of APB 23, we recognized a benefit of
$10 million associated with the reversal of deferred taxes
accrued on unremitted earnings of international affiliates in
prior periods. For additional information, see Note 21.
Income Taxes.
Stock-Based
Compensation
Effective January 1, 2006, we adopted Statement of
Financial Accounting Standards (SFAS) No. 123
(revised 2004), Share-Based Payments
(SFAS 123R), which replaces
SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123) and supersedes
APB Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25). SFAS 123R
focuses primarily on accounting for share-based awards to
employees in exchange for services, and it requires entities to
recognize compensation expense for these awards. The cost for
equity-based stock awards is expensed based on their grant date
fair value. The pro forma disclosure previously permitted under
SFAS 123 is no longer an alternative to financial statement
recognition.
Prior to January 1, 2006, we accounted for stock-based
awards under the intrinsic value method of APB 25. In
accordance with APB 25, we did not record compensation
expense related to our stock option awards because the strike
price was equal to the fair value of the underlying stock on the
grant date; however, we did record compensation expense over the
requisite service period for restricted stock awards.
SFAS 123R is applicable to all of our outstanding unvested
share-based payment awards as of January 1, 2006 and all
prospective awards using the modified prospective method.
Accordingly, the financial results for prior periods were not
retroactively adjusted to reflect the effects of SFAS 123R.
For additional information, see Note 23. Stock-Based Award
Plans.
Accumulated
Other Comprehensive Income
Accumulated other comprehensive income (AOCI), in
the statement of stockholders equity, includes unrealized
gains and losses excluded from the consolidated statements of
operations. These unrealized gains and losses consist of
adjustments to the minimum pension liability for our insurance
business, unrecognized gains or losses on our pension and other
postretirement benefit obligations, foreign currency translation
adjustments, unrealized losses on securities classified as
available-for-sale,
and net unrealized gains and losses on interest rate swaps.
98
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Waste and
Energy Services
Revenues
Waste and
Service Revenues
Revenue from waste and service agreements consist of the
following:
1) Fees earned under contract to operate and maintain
energy-from-waste, independent power and water facilities are
recognized as revenue when services are rendered, regardless of
the period they are billed;
2) Fees earned to service project debt (principal and
interest) where such fees are expressly included as a component
on the service fee paid by the client community pursuant to
applicable energy-from-waste service agreements. Regardless of
the timing of amounts paid by client communities relating to
project debt principal, we record service revenue with respect
to this principal component on a levelized basis over the term
of the service agreement. Unbilled service receivables related
to energy-from-waste operations are discounted in recognizing
the present value for services performed currently in order to
service the principal component of the Project debt. Unbilled
service receivables were $129.9 million and
$144.4 million as of December 31, 2006 and 2005,
respectively;
3) Fees earned for processing waste in excess of service
agreement requirements are recognized as revenue beginning in
the period when we process waste in excess of the contractually
stated requirements;
4) Tipping fees earned under waste disposal agreements are
recognized as revenue in the period the waste is
received; and
5) Other miscellaneous fees, such as revenue for ferrous
and non-ferrous metal recovered and sold, are generally
recognized as revenue when ferrous and non-ferrous metal is sold.
Electricity
and Steam Sales
Revenue from the sale of electricity and steam are earned and
recorded based upon output delivered and capacity provided at
rates specified under contract terms or prevailing market rates
net of amounts due to client communities under applicable
service agreements. We account for certain long-term power
contracts in accordance with Emerging Issues Task Force
(EITF)
No. 91-6,
Revenue Recognition of Long-Term Power Sales
Contracts and EITF
No. 96-17,
Revenue Recognition under Long-Term Power Sales Contracts
That Contain both Fixed and Variable Pricing Terms which
require that power revenues under these contracts be recognized
as the lesser of (a) amounts billable under the respective
contracts; or (b) an amount determinable by the kilowatt
hours made available during the period multiplied by the
estimated average revenue per kilowatt hour over the term of the
contract. The determination of the lesser amount is to be made
annually based on the cumulative amounts that would have been
recognized had each method been applied consistently from the
beginning of the contract. The difference between the amount
billed and the amount recognized is included in other long-term
liabilities.
Construction
Revenues
Revenues under fixed-price construction contracts are recognized
using the percentage of completion method, measured by the cost
to cost method. Under this method, total contract costs are
estimated, and the ratio of costs incurred to date to the
estimated total costs on the contract is used to determine the
percentage-of-completion.
This method is used because we consider the costs incurred to be
the best available measure of progress on these contracts.
Contracts to manage, supervise, or coordinate the construction
activity of others are recognized using the percentage of
completion method, measured by the efforts-expended method.
Under this method revenue is earned based on the ratio of hours
incurred to the total estimated hours required by the contract.
We consider measuring the work on labor hours to be the best
available measure of progress on these contracts.
99
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Pass
Through Costs
Pass through costs are costs for which we receive a direct
contractually committed reimbursement from the municipal client
which sponsors an energy-from-waste project. These costs
generally include utility charges, insurance premiums, ash
residue transportation and disposal, and certain chemical costs.
These costs are recorded net of municipal client reimbursements
in our consolidated financial statements. Total pass through
costs for the years ended December 31, 2006, 2005 and 2004
were $57.4 million, $61.6 million, and
$40.3 million, respectively.
Deferred
Financing Costs
As of December 31, 2006 and 2005, we had $23.5 million
and $28.9 million, respectively, of net deferred financing
costs recorded on the consolidated balance sheets. These costs
were incurred in connection with our various financing
arrangements. These costs are being amortized over the expected
period that the related financing was to be outstanding using
the effective interest rate method. See Note 30. Subsequent
Events 2007 Recapitalization Plan for information
related to our New Credit Facilities.
Property,
Plant and Equipment
As of March 10, 2004 and June 24, 2005, the assets and
liabilities of Covanta Energy and ARC Holdings, respectively,
including property, plant, and equipment, were recorded at our
estimate of their fair values. Additions, improvements and major
expenditures are capitalized if they increase the original
capacity or extend the useful life of the original asset more
than one year. Maintenance repairs and minor expenditures are
expensed in the period incurred. Depreciation is computed using
the straight-line method over the estimated remaining useful
lives of the assets, which range up to 39 years for
energy-from-waste facilities. The original useful lives
generally range from three years for computer equipment to
50 years for components of energy-from-waste facilities.
Leaseholds improvements are depreciated over the life of the
lease or the asset, whichever is shorter. Upon retirement or
disposal of assets, the cost and related accumulated
depreciation are removed from the consolidated balance sheet and
any gain or loss is reflected in the consolidated statement of
operations.
Asset
Retirement Obligations
In accordance with SFAS No. 143, Accounting for
Asset Retirement Obligations (SFAS 143),
we recognize a legal liability for asset retirement obligations
when it is incurred generally upon acquisition,
construction, or development. Our legal liabilities include
closure and post-closure costs for landfill cells and site
restoration for certain energy-from-waste and power producing
sites. We principally determine the liability using internal
estimates of the costs using current information, assumptions,
and interest rates, but also use independent appraisals as
appropriate to estimate costs. When a new liability for asset
retirement obligation is recorded, we capitalize the cost of the
liability by increasing the carrying amount of the related
long-lived asset. The liability is accreted to its present value
each period and the capitalized cost is depreciated over the
useful life of the related asset. We recognize
period-to-period
changes in the liability resulting from revisions to the timing
or the amount of the original estimate of the undiscounted cash
flows. Any changes are incorporated into the carrying amount of
the liability and will result in an adjustment to the amount of
asset retirement cost allocated to expense in subsequent periods.
Waste and
Energy Contracts and Other Intangible Assets
As of March 10, 2004, our waste and energy contracts were
recorded at their estimated fair market values in accordance
with SFAS No. 141, Business Combinations
(SFAS 141), based upon discounted cash flows
from the service contracts and the above market and
below market portion of the energy contracts using
currently available information. The remaining weighted-average
life of the agreements is approximately 10 years. However,
many of such contracts have remaining lives that are
significantly shorter.
100
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of June 24, 2005, ARC Holdings waste and energy
contracts, lease interest, renewable energy credits and other
indefinite-lived assets were recorded at their preliminary fair
value, in accordance with SFAS 141, based upon discounted
cash flows attributable to the above market and
below market portion of these energy contracts and
assets using currently available information.
Amortization for the above market waste and energy
contracts and lease interests was calculated using the
straight-line method over the remaining contract lives which
range from two to twenty-three years. See Note 9.
Intangible Assets and Goodwill. Amortization for the below
market waste and energy contracts were calculated using
the straight-line method over the remaining weighted-average
contract life which is approximately 12 years. See
Note 13. Other Noncurrent Liabilities.
Impairment
of Goodwill, Other Intangibles and Long-Lived Assets
We evaluate goodwill and indefinite-lived intangible assets not
subject to amortization for impairment on an annual basis, or
between annual tests if events occur or circumstances change
indicating that the fair value of a reporting unit may be below
its carrying amount, in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets
(SFAS 142). The evaluation of goodwill requires
a comparison of the estimated fair value of the reporting unit
to which the goodwill has been assigned its carrying value. If
the carrying value of the reporting unit exceeds the fair value
of that reporting unit, then the reporting units carrying
value of goodwill is compared to its implied value of goodwill.
If the carrying value of the reporting units goodwill
exceeds the implied value of goodwill, this difference will be
recorded as an adjustment to the goodwill balance, resulting in
an impairment charge. The fair value was determined using a
discounted cash flow approach based on forward-looking
information regarding market share and costs for each reporting
unit as well as an appropriate discount rate. For
indefinite-lived intangible assets, the evaluation requires a
comparison of the estimated fair value of the asset, which is
generally estimated using a discounted future net cash flow
projection, to the carrying value of the asset. If the carrying
value of an indefinite-lived intangible asset exceeds its fair
value, as generally estimated using a discounted future net cash
flow projection, then the carrying value of the asset is reduced
to its fair value.
Intangible and other long-lived assets such as property, plant
and equipment and purchased intangible assets with finite lives,
are evaluated for impairment whenever events or changes in
circumstances indicate its carrying value may not be recoverable
over their estimated useful life in accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. In reviewing for
impairment, we compare the carrying value of the relevant assets
to the estimated undiscounted future cash flows expected from
the use of the assets and their eventual disposition. When the
estimated undiscounted future cash flows are less than their
carrying amount, an impairment loss is recognized equal to the
difference between the assets fair value and its carrying
value. To determine fair value, we principally use internal
discounted cash flow estimates, but also use quoted market
prices when available and independent appraisals as appropriate
to determine fair value. Cash flow estimates are derived from
historical experience and internal business plans with an
appropriate discount rate applied.
Restricted
Funds Held in Trust
Restricted funds held in trust are primarily amounts received by
third party trustees relating to certain projects owned by
Covanta Energy which may be used only for specified purposes.
Covanta Energy generally does not control these accounts. They
include debt service reserves for payment of principal and
interest on project debt, deposits of revenues received with
respect to projects prior to their disbursement, as provided in
the relevant indenture or other agreements, and lease reserves
for lease payments under operating leases. Such funds are
101
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
invested principally in United States Treasury bills and notes
and United States government agency securities. Restricted fund
balances are as follows (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
Current
|
|
|
Noncurrent
|
|
|
Current
|
|
|
Noncurrent
|
|
|
Debt service funds
|
|
$
|
85,806
|
|
|
$
|
175,528
|
|
|
$
|
123,902
|
|
|
$
|
199,874
|
|
Revenue funds
|
|
|
25,303
|
|
|
|
|
|
|
|
28,247
|
|
|
|
|
|
Lease reserve funds
|
|
|
4,472
|
|
|
|
|
|
|
|
4,221
|
|
|
|
|
|
Construction funds
|
|
|
|
|
|
|
617
|
|
|
|
|
|
|
|
402
|
|
Other funds
|
|
|
62,473
|
|
|
|
53,722
|
|
|
|
41,157
|
|
|
|
49,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
178,054
|
|
|
$
|
229,867
|
|
|
$
|
197,527
|
|
|
$
|
249,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Rate Swap Agreements
We use derivative financial instruments to manage risk from
changes in interest rates pursuant to the requirements under our
debt agreement in existence as of December 31, 2006. We
recognize derivative instruments on the balance sheet at their
fair value. Changes in the fair value of a derivative that is
highly effective as, and that is designated and qualifies as, a
cash flow hedge are included in the consolidated statements of
stockholders equity as a component of AOCI until the
hedged cash flows impact earnings. Any hedge ineffectiveness is
included in current-period earnings. On February 9, 2007,
our interest swap arrangements were settled and unrealized gains
of $2.1 million, net of tax, were reflected in earnings.
For additional information regarding derivative financial
instruments, see Note 18. Financial Instruments.
Foreign
Currency Translation
For foreign operations, assets and liabilities are translated at
year-end exchange rates and revenues and expenses are translated
at the average exchange rates during the year. Gains and losses
resulting from foreign currency translation are included in the
consolidated statements of stockholders equity as a
component of AOCI. For subsidiaries whose functional currency is
deemed to be other than the U.S. dollar, translation
adjustments are included as a separate component of AOCI and
stockholders equity. Currency transaction gains and losses
are recorded in Other Operating Expenses in the consolidated
statements of operations.
Pension
and Postretirement Benefit Obligations
We have adopted SFAS No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans an amendment to FASB Statements No. 87,
88, 106 and 132(R) (SFAS 158), as of
December 31, 2006. Our pension and other postretirement
benefit plans are accounted for in accordance with
SFAS 158, which require costs and the related obligations
and assets arising from the pension and other postretirement
benefit plans to be accounted for based on
actuarially-determined estimates. The funded status of these
plans were recognized in the financial statements on
March 10, 2004 in accordance with SFAS 141. Upon the
adoption of SFAS 158, we recognized a net gain of
$2.5 million, $1.7 million net of deferred tax, in
AOCI to reflect the funded status of the pension and
postretirement benefit obligations. For additional information,
see Note 19. Employee Benefit Plans.
Other
Services
Investments
The insurance subsidiaries fixed maturity debt and equity
securities portfolio are classified as
available-for-sale
and are carried at fair value. Changes in fair value are
credited or charged directly to
102
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
AOCI in the consolidated statements of stockholders equity
as unrealized gains or losses, respectively. All securities
transactions are recorded on the trade date. Investment gains or
losses realized on the sale of securities are determined using
the specific identification method. Other than
temporary declines in fair value are recorded as realized
losses in the consolidated statements of operations and the cost
basis of the security is reduced. Realized gains and losses are
recognized in the consolidated statements of operations based on
the amortized cost of fixed maturities and cost basis for equity
securities on the date of trade, subject to any previous
adjustments for other than temporary declines.
Deferred
Policy Acquisition Costs
The insurance subsidiaries deferred policy acquisition costs,
consisting principally of commissions and premium taxes paid at
the time of issuance of the insurance policy, are deferred and
amortized over the period during which the related insurance
premiums are earned. Deferred policy acquisition costs are
limited to the estimated future profit after anticipated losses
and loss adjustment expenses (LAE) (based on
historical experience), maintenance costs, policyholder
dividends, and anticipated investment income.
Unpaid
Losses and Loss Adjustment Expenses
Unpaid losses and LAE are based on estimates of reported losses
and historical experience for incurred but unreported claims,
including losses reported by other insurance companies for
reinsurance assumed, and estimates of expenses for investigating
and adjusting all incurred and unadjusted claims. We believe
that the provisions for unpaid losses and LAE are adequate to
cover the cost of losses and LAE incurred to date. However, such
liability is, by necessity, based upon estimates, which may
change in the near term, and there can be no assurance that the
ultimate liability will not exceed, or even materially exceed,
such estimates. Unpaid losses and LAE are continually monitored
and reviewed, and as settlements are made or reserves adjusted,
differences are included in current operations.
Reinsurance
In the normal course of business, the insurance subsidiaries
seek to reduce the loss they may incur on the policies they each
write by reinsuring certain portions of the insured benefit with
other insurance enterprises or reinsurers.
The insurance subsidiaries account for their reinsurance
contracts which provide indemnification by reducing earned
premiums for the amounts ceded to the reinsurer and establishing
recoverable amounts for paid and unpaid losses and LAE ceded to
the reinsurer. Amounts recoverable from reinsurers are estimated
in a manner consistent with the claim liability associated with
the reinsured policy. Contracts that do not result in the
reasonable possibility that the reinsurer may realize a
significant loss from the insurance risk generally do not meet
conditions for reinsurance accounting and are accounted for as
deposits. For the years ended December 31, 2006 and 2005,
the insurance subsidiaries had no reinsurance contracts which
were accounted for as deposits.
Earned
Premiums
The insurance subsidiaries earned premium income is recognized
ratably over the contract period of an insurance policy. A
liability is established for unearned insurance premiums
representing the portion of premium received which is applicable
to the remaining portion of the unexpired terms of the related
policies. Reinsurance premiums are accounted for on a basis
consistent with those used in accounting for the original
policies issued and the terms of the reinsurance contracts.
Use of
Estimates
The preparation of financial statements requires us to make
estimates and assumptions that affect the reported amounts of
assets or liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results
103
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
could differ from those estimates. Significant estimates include
useful lives of long-lived assets, unbilled service receivables,
cash flows and taxable income from future operations, unpaid
losses and loss adjustment expenses, allowances for
uncollectible receivables, and liabilities related to pension
obligations, and for workers compensation, severance and
certain litigation.
Reclassifications
Certain prior period amounts have been reclassified in the
financial statements to conform to the current period
presentation.
|
|
Note 2.
|
New
Accounting Pronouncements
|
In June 2006, the Financial Accounting Standards Board
(FASB) issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109
(FIN 48). This interpretation increases the
relevancy and comparability of financial reporting by clarifying
the way companies account for uncertainty in income taxes.
FIN 48 prescribes a consistent recognition threshold and
measurement attribute, as well as clear criteria for
subsequently recognizing, derecognizing and measuring such tax
positions for financial statement purposes. The interpretation
also requires expanded disclosure with respect to the
uncertainty in income taxes. We will be required to adopt the
provisions of FIN 48 in the first quarter of 2007. See
Note 21. Income Taxes.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157).
SFAS 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles
and expands disclosures about fair value measurements.
SFAS 157 will be applied under other accounting principles
that require or permit fair value measurements, as this is a
relevant measurement attribute. This statement does not require
any new fair value measurements. We will adopt the provisions of
SFAS 157 beginning January 1, 2008. We are currently
evaluating the impact of this statement on our consolidated
financial statements.
|
|
Note 3.
|
Acquisitions
and Dispositions
|
Acquisitions
Covanta
Onondaga Limited Partnership
On December 27, 2006, we acquired for $27.5 million in
cash the limited partnership interests held by unaffiliated
entities in Covanta Onondaga Limited Partnership, our subsidiary
which owns and operates an energy-from-waste facility in
Onondaga County, New York. This acquisition is not material to
our consolidated financial statements. Therefore, disclosures of
pro forma financial information have not been presented.
ARC
Holdings
On June 24, 2005, we acquired 100% of the issued and
outstanding shares of ARC Holdings capital stock through
our wholly-owned subsidiary Covanta Energy. Under the terms of
the stock purchase agreement, we paid approximately
$747 million in cash and transaction costs for the capital
stock of ARC Holdings and assumed the consolidated net debt of
ARC Holdings of $1.3 billion as of June 24, 2005
($1.5 billion of consolidated indebtedness net of
$0.2 billion of cash and restricted funds held in trust).
The acquisition of ARC Holdings was financed by a combination of
debt and equity described below. Immediately after the
transaction was completed, ARC Holdings became a wholly-owned
subsidiary of Covanta Energy.
As part of the ARC Holdings acquisition, Covanta Energy entered
into credit arrangements which totaled approximately
$1.1 billion and are guaranteed by us and certain domestic
subsidiaries of Covanta Energy. The proceeds from these credit
arrangements were used to fund the acquisition of ARC Holdings,
to refinance approximately $479 million of Covanta
Energys existing recourse debt and letters of credit, and
to pay related fees
104
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and expenses. The revolving credit and letter of credit
facilities are further available for ongoing permitted
expenditures and for general corporate purposes. These credit
arrangements were amended in May 2006. For details related to
these amended financing arrangements, see Note 16.
Long-Term Debt.
The equity component of the financing consisted of a
$400 million offering of warrants to purchase our common
stock (the ARC Holdings Rights Offering). Such
warrants entitled our existing stockholders to purchase our
stock on a pro rata basis, with each holder entitled to purchase
0.9 shares of our common stock at an exercise price of
$6.00 for each share of our common stock held as of May 27,
2005, the record date. We received net proceeds of approximately
$395.8 million ($400 million gross proceeds, net of
$4.2 million of expenses) and issued 66,673,004 shares
of common stock.
Three of our largest stockholders, SZ Investments L.L.C.
(together with its affiliate EGI-Fund
(05-07)
Investors, L.L.C. to which it transferred a portion of its
shares, SZ Investments), Third Avenue Business
Trust, on behalf of Third Avenue Value Fund Series
(Third Avenue), and D. E. Shaw Laminar Portfolios,
L.L.C. (Laminar), representing an aggregate
ownership, at the time of the ARC Holdings Rights Offering, of
approximately 40% of our outstanding common stock, committed to
participate in the ARC Holdings Rights Offering and acquired at
least their pro rata portion of the shares. As consideration for
their commitments, we paid each of these stockholders an amount
equal to 1.75% of their respective equity commitments, which in
the aggregate was $2.8 million and was accounted for as a
reduction of the ARC Holdings Rights Offering proceeds. See
Note 29. Related-Party Transactions.
The purchase price was comprised of the following (in millions
of dollars):
|
|
|
|
|
Cash
|
|
$
|
740.0
|
|
Debt assumed
|
|
|
1,494.0
|
|
Direct transaction costs
|
|
|
7.3
|
|
Restructuring liability
|
|
|
9.1
|
|
|
|
|
|
|
|
|
$
|
2,250.4
|
|
|
|
|
|
|
The purchase price included acquisition-related restructuring
charges of $9.1 million which were recorded as a liability
and assumed in the ARC Holdings acquisition, and consisted
primarily of severance and related benefits, and the costs of
vacating duplicate facilities. As of December 31, 2006, the
remaining acquisition-related restructuring liability was
$4.0 million.
105
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the allocation of values to the
assets acquired and liabilities assumed at June 24, 2005 in
conformity with the SFAS 141 and SFAS No. 109,
Accounting for Income Taxes
(SFAS 109) (in thousands of dollars):
|
|
|
|
|
Current assets
|
|
$
|
233,659
|
|
Property, plant and equipment
|
|
|
1,982,847
|
|
Intangible assets (excluding
goodwill)
|
|
|
287,421
|
|
Goodwill
|
|
|
91,282
|
|
Other assets
|
|
|
146,495
|
|
|
|
|
|
|
Total assets acquired
|
|
$
|
2,741,704
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
76,258
|
|
Current portion of long-term debt
|
|
|
29,958
|
|
Current portion of project debt
|
|
|
64,344
|
|
Long-term debt
|
|
|
662,379
|
|
Project debt
|
|
|
737,385
|
|
Deferred income taxes
|
|
|
250,945
|
|
Other liabilities
|
|
|
170,029
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
1,991,298
|
|
|
|
|
|
|
Minority interest acquired
|
|
|
3,058
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
747,348
|
|
|
|
|
|
|
The acquired intangible assets of $287.4 million relate to
favorable energy and waste contracts, landfill rights, other
nonamortizing intangibles and a favorable leasehold interest
with an approximate ten-year average useful life. As part of the
purchase price allocation during 2006 for the ARC Holdings
acquisition, goodwill was adjusted from $255.9 million as
of December 31, 2005 to $91.3 million as of
December 31, 2006. See Note 9. Intangible Assets and
Goodwill for additional information regarding these purchase
price allocation adjustments.
Covanta
Energy
On December 2, 2003, we executed a definitive investment
and purchase agreement to acquire Covanta Energy in connection
with Covanta Energys emergence from Chapter 11
proceedings after the non-core and geothermal assets of Covanta
Energy were divested. The primary components of the transaction
were: (1) our purchase of 100% of the equity of Covanta
Energy in consideration for a cash purchase price of
approximately $30 million, and (2) agreement as to new
letter of credit and revolving credit facilities for Covanta
Energys domestic and international operations, provided by
some of the existing Covanta Energy lenders and a group of
additional lenders we organized. Our acquisition of Covanta
Energy was consummated on March 10, 2004.
The aggregate purchase price was $47.5 million which
included the cash purchase price of $30 million,
$6.4 million for professional fees and other estimated
costs incurred in connection with the acquisition, and an
estimated fair value of $11.3 million for our commitment to
sell up to 3.0 million shares of our common stock at
$1.53 per share to certain creditors of Covanta Energy,
subject to certain limitations. See Note 24.
Stockholders Equity of the Notes for additional
information regarding such commitment.
In addition to the purchase price allocation adjustments,
Covanta Energys emergence from Chapter 11 proceedings
on March 10, 2004 resulted in the adoption of fresh start
accounting as of that date, in accordance with AICPA Statement
of Position (SOP)
No. 90-7,
Financial Reporting by Entities in Reorganization Under
the
106
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Bankruptcy Code. The following table summarizes the final
allocation of values to the assets acquired and liabilities
assumed at March 10, 2004 in conformity with SFAS 141
and SFAS 109 (in thousands of dollars):
|
|
|
|
|
Current assets
|
|
$
|
522,659
|
|
Property, plant and equipment
|
|
|
836,221
|
|
Intangible assets
|
|
|
191,943
|
|
Other assets
|
|
|
327,065
|
|
|
|
|
|
|
Total assets acquired
|
|
$
|
1,877,888
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
364,480
|
|
Long-term debt
|
|
|
328,053
|
|
Project debt
|
|
|
850,591
|
|
Deferred income taxes
|
|
|
110,257
|
|
Other liabilities
|
|
|
176,982
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
1,830,363
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
47,525
|
|
|
|
|
|
|
The acquired intangible assets of $191.9 million primarily
relate to service and energy agreements on publicly-owned
energy-from-waste projects.
Pro Forma
Results of Operations
The results of operations from Covanta Energy and ARC Holdings
are included in our consolidated results of operations from
March 11, 2004 and June 25, 2005, respectively. The
following table sets forth certain unaudited consolidated
operating results for 2005 and 2004, as if the acquisitions of
Covanta Energy and ARC Holdings were consummated on the same
terms at January 1, 2004 (in thousands, except per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
Pro Forma (unaudited)
|
|
2005
|
|
|
2004
|
|
|
Total operating revenues
|
|
$
|
1,209,075
|
|
|
$
|
1,204,481
|
|
Net income
|
|
$
|
69,127
|
|
|
$
|
54,789
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
139,996
|
|
|
|
139,150
|
|
Earnings per share
|
|
$
|
0.49
|
|
|
$
|
0.39
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
145,698
|
|
|
|
143,783
|
|
Earnings per share
|
|
$
|
0.47
|
|
|
$
|
0.38
|
|
The pro forma results are not necessarily indicative of the
results of operations that actually would have resulted had the
acquisitions been in effect at the beginning of the period or of
future results.
Restructuring
and Acquisition-Related Charges
We incurred restructuring costs in 2005 of $2.8 million.
The restructuring costs resulted from $2.1 million of
severance payments to CPIH executives in connection with
overhead reductions made possible by the elimination of
CPIHs separate capital structure during the second quarter
of 2005. An additional $0.7 million was paid to remaining
CPIH executives as incentive payments from existing contractual
obligations relating to CPIH debt repayment in connection with
the ARC Holdings acquisition.
107
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In connection with the acquisition of ARC Holdings, we incurred
integration costs of $4.0 million for the year ended
December 31, 2005 primarily related to professional fees
and employee incentive costs. These charges were included as
part of the operating costs of the Waste and Energy Services
segment.
Dispositions
Marine
Services
We had investments in the marine services business, the largest
of which was ACL, an integrated marine transportation and
service company which, throughout 2004 was in Chapter 11
bankruptcy proceedings. ACL is no longer our subsidiary. On
December 30, 2004, ACLs plan of reorganization was
confirmed and ACL has since emerged from bankruptcy. As part of
ACLs plan of reorganization, our ACL stock was cancelled,
and our ownership interest was terminated. We received no cash
distributions under the ACL plan of reorganization but, through
a subsidiary, received from ACLs former creditors warrants
to purchase 672,920 shares of ACL stock at an exercise
price of $3.00 per share after ACLs emergence in January
2005. See Note 18. Financial Instruments of the Notes for a
discussion of these warrants.
Our other investees in the marine services business consisted of
Global Materials Services, LLC (GMS) and Vessel
Leasing, LLC (Vessel Leasing). GMS was our joint
venture with ACL and a third party, in which we held a 5.4%
interest. We sold our interests in GMS to the third party member
of the joint venture as of October 6, 2004. Vessel Leasing
was our joint venture with ACL. We sold our interest in Vessel
Leasing to ACL on January 13, 2005.
|
|
Note 4.
|
Equity in
Net Income from Unconsolidated Investments
|
Our subsidiaries are party to joint venture agreements through
which we have equity investments in several operating projects.
The joint venture agreements generally provide for the sharing
of operational control as well as voting percentages. We record
our share of earnings from our equity investees in equity in net
income from unconsolidated investments in our consolidated
statements of operations.
Equity in net income from unconsolidated investments, after
March 10, 2004, primarily relates to our 26% investment in
Quezon Power, Inc. in the Philippines (Quezon). The
Quezon project sells electricity to Manila Electric Company
(Meralco), the largest electric distribution company
in the Philippines, which serves the area surrounding and
including metropolitan Manila. Under an energy contract expiring
in 2025, Meralco is obligated to
take-or-pay
for stated minimum annual quantities of electricity produced by
the facility at an all-in price which consists of capacity,
operating, energy, transmission and other fees adjusted for
inflation, fuel cost and foreign exchange fluctuations. The
Quezon project has entered into two coal supply contracts
expiring in 2015 and 2022. Under these supply contracts, the
cost of coal is determined using a base energy price adjusted to
fluctuations of specified international benchmark prices. Our
subsidiary operates the project under a long-term agreement with
the Quezon project and we have obtained political risk insurance
for our equity investment in this project. Project management
continues to negotiate with Meralco with respect to proposed
amendments to the contract to modify certain commercial terms
and to resolve issues relating to the projects performance
during its first year of operation.
108
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2006 and 2005, investments in investees
and joint ventures accounted for under the equity method were as
follows (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ownership
|
|
|
|
|
|
Ownership
|
|
|
|
|
|
|
Interest as of
|
|
|
|
|
|
Interest as of
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
Ultrapower Chinese Station Plant
(U.S.)
|
|
|
50
|
%
|
|
$
|
4,824
|
|
|
|
50
|
%
|
|
$
|
4,327
|
|
South Fork Plant (U.S.)
|
|
|
50
|
%
|
|
|
1,009
|
|
|
|
50
|
%
|
|
|
859
|
|
Koma Kulshan Plant (U.S.)
|
|
|
50
|
%
|
|
|
5,051
|
|
|
|
50
|
%
|
|
|
4,519
|
|
Ambiente 2000 (Italy)
|
|
|
40
|
%
|
|
|
283
|
|
|
|
40
|
%
|
|
|
333
|
|
Haripur Barge Plant (Bangladesh)
|
|
|
45
|
%
|
|
|
13,332
|
|
|
|
45
|
%
|
|
|
10,703
|
|
Quezon Power (Philippines)
|
|
|
26
|
%
|
|
|
49,218
|
|
|
|
26
|
%
|
|
|
45,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
|
|
|
$
|
73,717
|
|
|
|
|
|
|
$
|
66,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unaudited combined results of operations and financial
position of our equity method investments are summarized below
(in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Condensed Statements of
Operations for the years ended December 31:
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
321,507
|
|
|
$
|
295,649
|
|
Operating income
|
|
|
129,071
|
|
|
|
128,476
|
|
Net income
|
|
|
83,390
|
|
|
|
77,114
|
|
Companys share of net income
|
|
|
28,636
|
|
|
|
25,609
|
|
Condensed Balance Sheets as of
December 31:
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
155,521
|
|
|
$
|
141,139
|
|
Noncurrent assets
|
|
|
811,403
|
|
|
|
839,575
|
|
Total assets
|
|
|
966,924
|
|
|
|
980,714
|
|
Current liabilities
|
|
|
166,659
|
|
|
|
138,002
|
|
Noncurrent liabilities
|
|
|
400,592
|
|
|
|
457,484
|
|
Total liabilities
|
|
|
567,251
|
|
|
|
595,486
|
|
The reported net income included under the caption equity in net
income from unconsolidated investments is presented below (in
thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
GMS income as of October 6,
2004(1)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
156
|
|
Vessel Leasing income(2)
|
|
|
|
|
|
|
|
|
|
|
318
|
|
Write-down of Vessel Leasing
investment held for sale
|
|
|
|
|
|
|
|
|
|
|
(985
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net loss from
unconsolidated Marine Services investments
|
|
|
|
|
|
|
|
|
|
|
(511
|
)
|
Equity in net income from
unconsolidated Waste and Energy Services investments(3)
|
|
|
28,636
|
|
|
|
25,609
|
|
|
|
17,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net income from
unconsolidated investments
|
|
$
|
28,636
|
|
|
$
|
25,609
|
|
|
$
|
17,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(1) |
|
Our investment in GMS was sold on October 6, 2004. |
|
(2) |
|
Our investment in Vessel Leasing to ACL was sold on
January 13, 2005. |
|
(3) |
|
The year ended December 31, 2004 includes amounts from
March 11 to December 31, 2004. |
The results of operations of our significant equity investee was
(in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Quezon Power
(Philippines)
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
271,817
|
|
|
$
|
245,571
|
|
|
$
|
214,865
|
|
Operating income
|
|
|
119,328
|
|
|
|
110,872
|
|
|
|
101,240
|
|
Net income
|
|
|
73,118
|
|
|
|
66,824
|
|
|
|
53,828
|
|
The Tampa Bay, Florida subsidiaries, the Lake County, Florida
subsidiaries, and the Warren County, New Jersey subsidiaries
emerged from bankruptcy on August 6, 2004,
December 14, 2004, and December 15, 2005,
respectively. We have included Lake County and Warren County as
consolidated subsidiaries in our financial statements since
their respective emergence dates. Upon Tampa Bays
emergence from Chapter 11, we did not have any operating or
ownership rights in this facility.
Equity in net income from unconsolidated investments for the
year ended December 31, 2006 includes approximately
$4.9 million of cumulative deferred income tax benefits
related to unrealized foreign exchange losses at our Quezon
facility that are expected to be tax deductible for Philippine
tax purposes in future years. We recorded a cumulative deferred
income tax benefit of $7.0 million in the quarter ended
June 30, 2006 on the basis of rulings which were issued by
the Philippine tax authorities in June 2006 clarifying the tax
deductibility of such losses upon realization. The realization
of this deferred tax benefit is subject to fluctuations in the
value of the Philippine peso versus the US dollar. During the
last six months of 2006, we reduced this cumulative deferred
income tax benefit by approximately $2.1 million as a
result of the strengthening of the Philippine peso versus the US
dollar.
Over the last six years, Quezon has benefited from Philippine
tax regulations which were designed to promote investments in
certain industries (including power generation). Equity in net
income from unconsolidated investments for the year ended
December 31, 2006 includes approximately $4.1 million
of increased tax expense for Quezon related to the conclusion of
this six-year income tax holiday in May 2006.
During the fourth quarter of 2006, we recorded a
$2.3 million write-off of a deferred income tax asset due
to a change in the deductibility of the amortization of deferred
financing costs related to our Quezon facility.
|
|
Note 5.
|
Revenues
and Unbilled Service Receivables
|
The following table summarizes the components of waste and
service revenues for the periods presented below (in thousands
of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
|
For the Years Ended
|
|
|
March 11, through
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Waste and service revenues
unrelated to project debt
|
|
$
|
711,832
|
|
|
$
|
544,418
|
|
|
$
|
311,669
|
|
Revenue earned explicitly to
service project debt-principal
|
|
|
69,097
|
|
|
|
59,060
|
|
|
|
36,029
|
|
Revenue earned explicitly to
service project debt-interest
|
|
|
36,704
|
|
|
|
35,025
|
|
|
|
25,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total waste and service revenues
|
|
$
|
817,633
|
|
|
$
|
638,503
|
|
|
$
|
372,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
SEMASS Partnership (SEMASS), a Covanta Energy
subsidiary, sells the electric power output from the SEMASS
facility to Commonwealth Electric Company d/b/a NSTAR Electric
(NSTAR) under two separate power sale agreements.
With respect to one of the agreements, a dispute arose between
SEMASS and NSTAR regarding the power purchase rate applicable to
power deliveries on and after January 1, 2005. In December
2005, SEMASS initiated an arbitration process to resolve the
dispute. SEMASS and NSTAR engaged in settlement negotiations,
and executed a definitive settlement agreement and related
amendments to the power sale agreements. The settlement became
effective in December 2006 at which time SEMASS received
approximately $8.1 million, comprised of $4.8 million
related to 2005 and $3.3 related to 2006, which was recorded as
electricity and steam sales.
Unbilled service receivables include fees related to the
principal portion of debt service earned to service project debt
principal where such fees are expressly included as a component
of the service fee paid by the municipality pursuant to
applicable energy-from-waste service agreements. Regardless of
the timing of amounts paid by municipalities relating to project
debt principal, we record service revenue with respect to this
principal component on a levelized basis over the term of the
service agreement. Long-term unbilled service receivables
related to energy-from-waste operations are recorded at their
discounted amounts.
Reinsurance is the transfer of risk, by contract, from one
insurance company to another for consideration (premium).
Reinsurance contracts do not relieve the insurance business from
its obligations to policyholders. Failure of reinsurers to honor
their obligations could result in losses to the insurance
business; consequently, allowances are established for amounts
deemed uncollectible. The insurance business evaluates the
financial condition of its reinsurers and monitors
concentrations of credit risk arising from similar geographic
regions, activities, or economic characteristics to reinsurers
to minimize its exposure to significant losses from reinsurer
insolvencies.
NAICC has reinsurance under both excess of loss and quota share
treaties. NAICC cedes reinsurance on an excess of loss basis for
workers compensation risks in excess of $0.4 million
prior to January 1996, $0.5 million through March 2000 and
$0.2 million thereafter. Beginning in May 2001, NAICC
retained 50% of the loss between $0.2 million and
$0.5 million. For commercial automobile, NAICC cedes
reinsurance on loss basis risks in excess of $0.25 million.
From January 1999 to December 2001, the California non-standard
personal automobile quota share reinsurance ceded percentage was
10%. Between January 2002 and December 2004, no reinsurance was
in place for the personal automobile business, however, with the
introduction of a new program, that business was reinsured at
40% through 2005, and the renewal business, including new
non-owner policies, was reinsured at 28%. The non-standard
automobile reinsurance programs established in 2005 were
cancelled effective January 1, 2006. The property and
casualty book of business of former affiliates contains both
excess of loss and quota share reinsurance protection. Typically
all excess of loss contracts effectively reduce NAICCs net
exposure to any occurrence below $0.1 million.
111
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The effect of reinsurance on written premiums and earned
premiums reflected in other revenues in our consolidated
financial statements is as follows (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Direct written premium
|
|
$
|
11,520
|
|
|
$
|
18,312
|
|
|
$
|
15,165
|
|
Ceded written premium
|
|
|
|
|
|
|
(5,872
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net written premium
|
|
$
|
11,520
|
|
|
$
|
12,440
|
|
|
$
|
15,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct earned premium
|
|
$
|
11,888
|
|
|
$
|
18,557
|
|
|
$
|
18,506
|
|
Ceded earned premium
|
|
|
|
|
|
|
(5,872
|
)
|
|
|
(508
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium
|
|
$
|
11,888
|
|
|
$
|
12,685
|
|
|
$
|
17,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effect of ceded reinsurance on loss and LAE incurred was a
decrease of $0.4 million, $3.9 million, and
$3.5 million for the years ended December 31, 2006,
2005 and 2004, respectively.
As of December 31, 2006, General Reinsurance Corporation
(GenRe) was the only reinsurer that comprised more
than 10% of NAICCs reinsurance recoverable on paid and
unpaid claims. NAICC monitors all reinsurers, by reviewing
A.M. Best reports and ratings, information obtained from
reinsurance intermediaries and analyzing financial statements.
As of December 31, 2006 and 2005, NAICC had reinsurance
recoverable on paid and unpaid balances from GenRe of
$7.5 million and $8.1 million, respectively. GenRe has
an A.M. Best rating of A++. Allowances for paid and unpaid
recoverables were $1.2 million and $1.3 million as of
December 31, 2006 and 2005, respectively.
Note 7. Investments
Other
Services
The cost or amortized cost, unrealized gains, unrealized losses
and fair value of our investments categorized by type of
security, were as follows (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
|
Cost or
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gain
|
|
|
Loss
|
|
|
Value
|
|
|
Fixed maturities
holding company
|
|
$
|
3,200
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
insurance business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government/Agency
|
|
|
17,596
|
|
|
|
3
|
|
|
|
361
|
|
|
|
17,238
|
|
Mortgage-backed
|
|
|
8,456
|
|
|
|
1
|
|
|
|
358
|
|
|
|
8,099
|
|
Corporate
|
|
|
9,781
|
|
|
|
12
|
|
|
|
123
|
|
|
|
9,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
insurance business
|
|
|
35,833
|
|
|
|
16
|
|
|
|
842
|
|
|
|
35,007
|
|
Equity securities
insurance business
|
|
|
1,289
|
|
|
|
261
|
|
|
|
1
|
|
|
|
1,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
|
|
$
|
40,322
|
|
|
$
|
277
|
|
|
$
|
843
|
|
|
$
|
39,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005
|
|
|
|
Cost or
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gain
|
|
|
Loss
|
|
|
Value
|
|
|
Fixed maturities
holding company
|
|
$
|
3,300
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
insurance business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government/Agency
|
|
|
21,240
|
|
|
|
10
|
|
|
|
474
|
|
|
|
20,776
|
|
Mortgage-backed
|
|
|
10,415
|
|
|
|
4
|
|
|
|
414
|
|
|
|
10,005
|
|
Corporate
|
|
|
13,169
|
|
|
|
19
|
|
|
|
302
|
|
|
|
12,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
insurance business
|
|
|
44,824
|
|
|
|
33
|
|
|
|
1,190
|
|
|
|
43,667
|
|
Equity securities
insurance business
|
|
|
1,377
|
|
|
|
146
|
|
|
|
17
|
|
|
|
1,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
|
|
$
|
49,501
|
|
|
$
|
179
|
|
|
$
|
1,207
|
|
|
$
|
48,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth a summary of NAICCs
temporarily impaired investments (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
Description of Investments
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
U.S. Treasury and other
direct U.S. Government obligations
|
|
$
|
16,894
|
|
|
$
|
361
|
|
|
$
|
18,958
|
|
|
$
|
474
|
|
Federal agency MBS
|
|
|
8,060
|
|
|
|
358
|
|
|
|
9,667
|
|
|
|
414
|
|
Corporate Bonds
|
|
|
8,223
|
|
|
|
123
|
|
|
|
10,892
|
|
|
|
302
|
|
Equity Securities
|
|
|
14
|
|
|
|
1
|
|
|
|
287
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired
investments
|
|
$
|
33,191
|
|
|
$
|
843
|
|
|
$
|
39,804
|
|
|
$
|
1,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the fixed maturity investments noted above, 99% were acquired
between June 30, 2002 and December 31, 2004 during an
historic low interest rate environment and are investment grade
securities rated A or better. The number of U.S. Treasury
and federal agency obligations, mortgage backed securities, and
corporate bonds temporarily impaired are 37, 31, and 8
respectively. Of the total temporarily impaired fixed maturity
investments with a fair value of $33.2 million as of
December 31, 2006, approximately $5.7 million have
maturities within 12 months and $27.4 million have
maturities greater than 12 months.
Our fixed maturities include mortgage-backed securities and
collateralized mortgage obligations, collectively
(MBS) representing 23.1% and 22.9% of the total
fixed maturities at years ended December 31, 2006 and 2005,
respectively. Our MBS holdings are issued by the Federal
National Mortgage Association (FNMA) or the Federal
Home Loan Mortgage Corporation (FHLMC), both of
which are rated AAA by Moodys Investors
Services. MBS and callable bonds, in contrast to other bonds,
are more sensitive to market value declines in a rising interest
rate environment than to market value increases in a declining
interest rate environment.
113
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The expected maturities of fixed maturity securities, by
amortized cost and fair value are shown below (in thousands of
dollars):
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
One year or less
|
|
$
|
7,737
|
|
|
$
|
7,650
|
|
Over one year to five years
|
|
|
27,249
|
|
|
|
26,510
|
|
Over five years to ten years
|
|
|
847
|
|
|
|
847
|
|
More than ten years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
$
|
35,833
|
|
|
$
|
35,007
|
|
|
|
|
|
|
|
|
|
|
Our fixed maturity and equity securities portfolio is classified
as
available-for-sale
and is carried at fair value. Changes in fair value are credited
or charged directly to stockholders equity as unrealized
gains or losses included as part of AOCI, respectively.
Other than temporary declines in fair value are
recorded as realized losses in the statement of operations and
the cost basis of the security is reduced.
The following reflects the change in net unrealized gain (loss)
on
available-for-sale
securities included as a separate component of accumulated AOCI
in stockholders equity (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Fixed maturities, net
|
|
$
|
331
|
|
|
$
|
(1,103
|
)
|
|
$
|
(874
|
)
|
Equity securities, net
|
|
|
130
|
|
|
|
22
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized gain
(loss) on investments
|
|
$
|
461
|
|
|
$
|
(1,081
|
)
|
|
$
|
(800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of net unrealized gain (loss) on
available-for-sale
securities consist of the following (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net unrealized holding gains
(losses) on
available-for-sale
securities arising during the period
|
|
$
|
679
|
|
|
$
|
(976
|
)
|
|
$
|
(500
|
)
|
Reclassification adjustment for
net realized losses on
available-for-sale
securities included in net income
|
|
|
(218
|
)
|
|
|
(105
|
)
|
|
|
(300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain (loss) on
available-for-sale
securities
|
|
$
|
461
|
|
|
$
|
(1,081
|
)
|
|
$
|
(800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We consider the following factors in determining whether
declines in the fair value of securities are other than
temporary:
|
|
|
|
|
the significance of the decline in fair value compared to the
cost basis;
|
|
|
the time period during which there has been a significant
decline in fair value;
|
|
|
whether the unrealized loss is credit-driven or a result of
changes in market interest rates;
|
|
|
a fundamental analysis of the business prospects and financial
condition of the issuer; and
|
|
|
our ability and intent to hold the investment for a period of
time sufficient to allow for any anticipated recovery in fair
value.
|
114
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Net realized investment gains (losses) are as follows (in
thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Holding Company
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gain
|
|
$
|
|
|
|
$
|
|
|
|
$
|
252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Business
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
(96
|
)
|
|
$
|
(70
|
)
|
|
$
|
219
|
|
Equity securities
|
|
|
314
|
|
|
|
(1
|
)
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains
(loss)
|
|
$
|
218
|
|
|
$
|
(71
|
)
|
|
$
|
201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains relating to fixed maturities were zero,
$0.06 million, and $0.2 million for the years ended
December 31, 2006, 2005, and 2004, respectively. Gross
realized losses relating to fixed maturities were approximately
$0.1 million, $0.13 million and $0.02 million for
each of the years ended December 31, 2006, 2005, and 2004,
respectively. Gross realized gains relating to equity securities
were $0.31 million, $0.001 million, and zero for the
years ended December 31, 2006, 2005, and 2004,
respectively. Gross realized losses relating to equity
securities were zero, $0.002 million, and
$0.02 million, for the years ended December 31, 2006,
2005, and 2004, respectively.
Net investment income was as follows (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Holding Company
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
199
|
|
Short-term investments
|
|
|
2,318
|
|
|
|
702
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
holding company
|
|
$
|
2,318
|
|
|
$
|
702
|
|
|
$
|
233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance business
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
1,582
|
|
|
$
|
2,021
|
|
|
$
|
2,497
|
|
Dividend income
|
|
|
81
|
|
|
|
74
|
|
|
|
40
|
|
Other, net
|
|
|
183
|
|
|
|
156
|
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
1,846
|
|
|
|
2,251
|
|
|
|
2,644
|
|
Less: investment expense
|
|
|
211
|
|
|
|
252
|
|
|
|
239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
insurance business
|
|
$
|
1,635
|
|
|
$
|
1,999
|
|
|
$
|
2,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The insurance business, in compliance with state insurance laws
and regulations, had securities with a fair value of
approximately $19.4 million and $23.0 million as of
the years ended December 31, 2006 and 2005, respectively,
on deposit with various states or governmental regulatory
authorities. In addition, as of the years ended
December 31, 2006 and 2005, the insurance business had
investments with a fair value of $6.4 million in both
years, held in trust or as collateral under the terms of certain
reinsurance treaties and letters of credit. NAICC has letters of
credit outstanding of $2.8 million as of December 31,
2006.
115
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Waste
and Energy Services
Noncurrent investments are classified in other noncurrent assets
in the consolidated balance sheets. The cost or amortized cost,
unrealized gains, unrealized losses and fair value of Waste and
Energy Services investments categorized by type of
security, were as follows (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
|
Cost or
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Amortized Cost
|
|
|
Gain
|
|
|
Loss
|
|
|
Value
|
|
|
Current investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
3,880
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments at cost
|
|
$
|
3,284
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,284
|
|
Mutual and bond funds
|
|
|
2,206
|
|
|
|
98
|
|
|
|
|
|
|
|
2,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent investments
|
|
$
|
5,490
|
|
|
$
|
98
|
|
|
$
|
|
|
|
$
|
5,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005
|
|
|
|
Cost or
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Amortized Cost
|
|
|
Gain
|
|
|
Loss
|
|
|
Value
|
|
|
Current investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
4,100
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments at cost
|
|
$
|
926
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
926
|
|
Mutual and bond funds
|
|
|
2,149
|
|
|
|
25
|
|
|
|
|
|
|
|
2,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent investments
|
|
$
|
3,075
|
|
|
$
|
25
|
|
|
$
|
|
|
|
$
|
3,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds and realized gains and losses from the sales of
securities classified as
available-for-sale
for the year ended December 31, 2006 were $0.7 million
and zero, respectively. Proceeds and realized gains and losses
from the sales of securities classified as
available-for-sale
for the year ended December 31, 2005 were $0.5 million
and zero, respectively. For the purpose of determining realized
gains and losses, the cost of securities sold was based on
specific identification.
|
|
Note 8.
|
Property,
Plant and Equipment, net
|
Property, plant and equipment consisted of the following (in
thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
Useful Lives
|
|
|
2006
|
|
|
2005
|
|
|
Land
|
|
|
|
|
|
$
|
8,976
|
|
|
$
|
8,972
|
|
Facilities and equipment
|
|
|
3-39 years
|
|
|
|
2,874,305
|
|
|
|
2,813,065
|
|
Landfills
|
|
|
|
|
|
|
29,194
|
|
|
|
28,879
|
|
Construction in progress
|
|
|
|
|
|
|
26,872
|
|
|
|
7,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
2,939,347
|
|
|
|
2,858,506
|
|
Less accumulated depreciation and
amortization
|
|
|
|
|
|
|
(301,424
|
)
|
|
|
(133,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant, and
equipment net
|
|
|
|
|
|
$
|
2,637,923
|
|
|
$
|
2,724,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Depreciation and amortization related to property, plant and
equipment amounted to $156.9 million, $95.8 million
and $37.6 million for the years ended December 31,
2006, 2005 and 2004, respectively.
|
|
Note 9.
|
Intangible
Assets and Goodwill
|
Intangible
Assets
Intangible assets consisted of the following (in thousands of
dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
As of December 31, 2005
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Useful Life
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Waste and energy contracts
|
|
|
2 - 22 years
|
|
|
$
|
388,378
|
|
|
$
|
91,850
|
|
|
$
|
296,528
|
|
|
$
|
388,378
|
|
|
$
|
46,704
|
|
|
$
|
341,674
|
|
Lease interest and other
|
|
|
12 - 23 years
|
|
|
|
72,154
|
|
|
|
4,555
|
|
|
|
67,599
|
|
|
|
72,314
|
|
|
|
1,558
|
|
|
|
70,756
|
|
Landfill
|
|
|
7 years
|
|
|
|
17,985
|
|
|
|
3,066
|
|
|
|
14,919
|
|
|
|
17,985
|
|
|
|
400
|
|
|
|
17,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortizable intangible assets
|
|
|
|
|
|
|
478,517
|
|
|
|
99,471
|
|
|
|
379,046
|
|
|
$
|
478,677
|
|
|
|
48,662
|
|
|
|
430,015
|
|
Other intangibles
|
|
|
Indefinite
|
|
|
|
4,528
|
|
|
|
|
|
|
|
4,528
|
|
|
|
4,528
|
|
|
|
|
|
|
|
4,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
|
|
|
$
|
483,045
|
|
|
$
|
99,471
|
|
|
$
|
383,574
|
|
|
$
|
483,205
|
|
|
$
|
48,662
|
|
|
$
|
434,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to waste and energy contracts and
other intangible assets was $47.8 million,
$33.0 million and $15.2 million for the years ended
December 31, 2006, 2005 and 2004, respectively. The lease
interest asset is amortized to rent expense in plant operating
expenses and was $3.0 million, $1.5 million and zero
for the years ended December 31, 2006, 2005, and 2004
respectively.
The following table details the amount of the actual/estimated
amortization expense associated with intangible assets as of
December 31, 2006 included or expected to be included in
our statement of operations for each of the years indicated (in
thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Waste and
|
|
|
Landfill, Lease
|
|
|
|
|
|
|
Energy
|
|
|
Interest and Other
|
|
|
|
|
|
|
Contracts
|
|
|
Contracts
|
|
|
Totals
|
|
|
Year ended December 31, 2006
|
|
$
|
45,146
|
|
|
$
|
5,663
|
|
|
$
|
50,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
44,854
|
|
|
$
|
5,147
|
|
|
$
|
50,001
|
|
2008
|
|
|
43,180
|
|
|
|
5,147
|
|
|
|
48,327
|
|
2009
|
|
|
39,635
|
|
|
|
5,147
|
|
|
|
44,782
|
|
2010
|
|
|
27,317
|
|
|
|
5,147
|
|
|
|
32,464
|
|
2011
|
|
|
24,228
|
|
|
|
5,147
|
|
|
|
29,375
|
|
Thereafter
|
|
|
117,314
|
|
|
|
56,783
|
|
|
|
174,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
296,528
|
|
|
$
|
82,518
|
|
|
$
|
379,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
Goodwill was $91.3 million and $255.9 million as of
December 31, 2006 and 2005, respectively. Goodwill
represents the total consideration paid in excess of the fair
value of the net tangible and identifiable intangible assets
acquired and the liabilities assumed in the ARC Holdings
acquisition in accordance with the provisions of SFAS 142.
Goodwill has an indefinite life and is not amortized but is to
be reviewed for impairment under the provisions of
SFAS 142. We performed the required annual impairment
review of our recorded goodwill for reporting units using a
discounted cash flow approach as of October 1, 2006 and
determined that no goodwill was impaired. Goodwill is not
deductible for federal income tax purposes.
117
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table details the changes in carrying value of
goodwill for the years ended December 31, 2006 and 2005 (in
thousands of dollars):
|
|
|
|
|
|
|
Total
|
|
|
Balance as of December 31,
2004
|
|
$
|
|
|
Goodwill acquired (preliminary
purchase price allocation)
|
|
|
255,927
|
|
|
|
|
|
|
Balance as of December 31,
2005
|
|
|
255,927
|
|
Purchase price allocation
adjustments for the ARC Holdings acquisition
|
|
|
|
|
Reduction of liability owed to one
of the prior owners of ARC Holdings (Note 13)
|
|
|
(27,358
|
)
|
Increase in an unfavorable waste
contract liability
|
|
|
12,140
|
|
Increase to carrying value of
property, plant and equipment
|
|
|
(9,531
|
)
|
Increase to net deferred tax
assets related to Grantor Trust items (Note 21)
|
|
|
(109,796
|
)
|
Increase to deferred tax assets
associated with opening balance sheet adjustments
|
|
|
(36,940
|
)
|
Other, net
|
|
|
6,840
|
|
|
|
|
|
|
Balance as of December 31,
2006
|
|
$
|
91,282
|
|
|
|
|
|
|
|
|
Note 10.
|
Other
Noncurrent Assets
|
Other noncurrent assets consisted of the following (in thousands
of dollars):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Marketable securities
available-for-sale
|
|
$
|
|
|
|
$
|
926
|
|
Unamortized bond issuance costs
|
|
|
736
|
|
|
|
2,255
|
|
Securities
available-for-sale
(Note 7)
|
|
|
2,206
|
|
|
|
2,149
|
|
Restricted funds for pre-petition
tax liabilities
|
|
|
19,604
|
|
|
|
19,604
|
|
Deferred financing costs
|
|
|
19,440
|
|
|
|
23,834
|
|
Other noncurrent receivables
|
|
|
11,131
|
|
|
|
16,890
|
|
Reinsurance recoverable on unpaid
losses
|
|
|
12,308
|
|
|
|
14,786
|
|
Interest rate swaps
|
|
|
13,125
|
|
|
|
14,949
|
|
Spare parts
|
|
|
14,314
|
|
|
|
14,011
|
|
Other
|
|
|
16,933
|
|
|
|
10,109
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
109,797
|
|
|
$
|
119,513
|
|
|
|
|
|
|
|
|
|
|
The New Credit Facilities do not require the interest rate swap
arrangements, and on February 9, 2007, the swap
arrangements described above were unwound. For additional
information, see Note 30. Subsequent Events.
118
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 11.
|
Accrued
Expenses and Other Current Liabilities
|
Accrued expenses consisted of the following (in thousands of
dollars):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Operating expenses
|
|
$
|
55,460
|
|
|
$
|
48,631
|
|
Insurance
|
|
|
2,208
|
|
|
|
1,346
|
|
Interest payable
|
|
|
31,135
|
|
|
|
38,639
|
|
Municipalities share of
revenues
|
|
|
55,067
|
|
|
|
48,505
|
|
Payroll and payroll taxes
|
|
|
34,284
|
|
|
|
33,963
|
|
Lease payments
|
|
|
1,849
|
|
|
|
1,549
|
|
Pension and profit sharing
|
|
|
2,097
|
|
|
|
4,737
|
|
California Grantor
Trust Settlement (Note 21)
|
|
|
|
|
|
|
10,342
|
|
Taxes payable
|
|
|
1,544
|
|
|
|
3,198
|
|
Other
|
|
|
13,824
|
|
|
|
14,441
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
197,468
|
|
|
$
|
205,351
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 12.
|
Deferred
Revenue
|
Deferred revenue consisted of the following (in thousands of
dollars):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Advance billings to municipalities
|
|
$
|
7,985
|
|
|
$
|
7,636
|
|
Unearned insurance premiums
|
|
|
641
|
|
|
|
1,009
|
|
Other
|
|
|
7,831
|
|
|
|
5,879
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,457
|
|
|
$
|
14,524
|
|
|
|
|
|
|
|
|
|
|
Advance billings to various customers are billed one or two
months prior to performance of service and are recognized as
income in the period the service is provided.
119
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 13.
|
Other
Noncurrent Liabilities
|
Other noncurrent liabilities consisted of the following (in
thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Waste and service contracts
(Note 1)
|
|
$
|
135,607
|
|
|
$
|
135,076
|
|
Interest rate swap
|
|
|
9,855
|
|
|
|
11,852
|
|
Accrued pre-petition tax
liabilities
|
|
|
19,604
|
|
|
|
19,604
|
|
Benefit obligation
|
|
|
38,979
|
|
|
|
45,705
|
|
Asset retirement obligation
|
|
|
23,740
|
|
|
|
25,506
|
|
Liability to prior ARC Holdings
owner
|
|
|
|
|
|
|
25,602
|
|
Insurance loss and loss adjustment
reserves (Note 14)
|
|
|
38,020
|
|
|
|
46,868
|
|
Service contract obligations
|
|
|
9,607
|
|
|
|
8,718
|
|
Other
|
|
|
30,166
|
|
|
|
24,471
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
305,578
|
|
|
$
|
343,402
|
|
|
|
|
|
|
|
|
|
|
The New Credit Facilities do not require the interest rate swap
arrangements, and on February 9, 2007, the interest rate
swap arrangements were settled. For additional information, see
Note 18. Financial Instruments and Note 30. Subsequent
Events.
Agreements between an ARC Holdings subsidiary and one of
the prior owners of ARC Holdings were terminated as of
June 14, 2006. The liability related to these agreements
has been adjusted to recognize the termination of the liability.
See Note 3. Acquisitions and Dispositions for the ARC
Holdings purchase price allocation adjustment related to the
termination of these agreements.
As of June 25, 2005, ARC Holdings waste and service
contracts were recorded at their fair market values, in
accordance with SFAS 141, based upon discounted cash flows
attributable to the below market portion of the
waste and service contracts using currently available
information. Amortization is calculated by the straight-line
method over the remaining weighted-average contract life which
is approximately 12 years.
The following table details the amount of the actual/estimated
amortization contra-expense associated with the below market
waste and service contracts liability as of December 31,
2006 included or expected to be included in our statements of
operations for each of the years indicated (in thousands of
dollars):
|
|
|
|
|
|
|
Waste and
|
|
|
|
Service
|
|
|
|
Contracts
|
|
|
Year ended December 31, 2006
|
|
$
|
11,609
|
|
|
|
|
|
|
2007
|
|
$
|
11,942
|
|
2008
|
|
|
11,955
|
|
2009
|
|
|
12,002
|
|
2010
|
|
|
12,094
|
|
2011
|
|
|
12,153
|
|
Thereafter
|
|
|
75,461
|
|
|
|
|
|
|
Total
|
|
$
|
135,607
|
|
|
|
|
|
|
120
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In accordance with SFAS 143, we recognize a legal liability
for asset retirement obligations when it is incurred
generally upon acquisition, construction, or development. Our
legal liabilities include capping, closure and post-closure
costs of landfill cells and site restoration for certain
energy-from-waste and power producing sites. Our asset
retirement obligation is presented as follows (in thousands of
dollars):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Beginning of period asset
retirement obligation
|
|
$
|
25,506
|
|
|
$
|
18,912
|
|
Accretion expense
|
|
|
2,308
|
|
|
|
1,766
|
|
Deductions(1)
|
|
|
(5,972
|
)
|
|
|
|
|
Additions(2)
|
|
|
4,675
|
|
|
|
4,828
|
|
|
|
|
|
|
|
|
|
|
End of period asset retirement
obligation
|
|
$
|
26,517
|
|
|
$
|
25,506
|
|
Less: current portion
|
|
|
(2,777
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset retirement obligation
|
|
$
|
23,740
|
|
|
$
|
25,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Deductions in 2006 related to expenditures and settlements of
the asset retirement obligation liability and net revisions
based on current estimates of the liability and revised expected
cash flows and life of the liability. |
|
(2) |
|
Additions in 2006 related primarily to asset retirement
obligation revisions based on purchase price allocation during
2006 for the ARC Holdings acquisition (See Note 3.
Acquisitions and Dispositions). Additions in 2005 relate to the
asset retirement obligation established upon emergence for the
Warren County, New Jersey facility and the asset retirement
obligations assumed related to the ARC Holdings acquisition. |
|
|
Note 14.
|
Unpaid
Losses and Loss Adjustment Expenses
|
The following table summarizes the activity in the insurance
subsidiaries liability for unpaid losses and LAE during
the three most recent years (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net unpaid losses and LAE at
beginning of year
|
|
$
|
32,082
|
|
|
$
|
46,228
|
|
|
$
|
65,142
|
|
Incurred, net, related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
7,579
|
|
|
|
8,172
|
|
|
|
10,343
|
|
Prior years
|
|
|
297
|
|
|
|
1,763
|
|
|
|
2,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net incurred
|
|
|
7,876
|
|
|
|
9,935
|
|
|
|
12,861
|
|
Paid, net, related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
(4,085
|
)
|
|
|
(4,792
|
)
|
|
|
(5,427
|
)
|
Prior years
|
|
|
(10,221
|
)
|
|
|
(19,349
|
)
|
|
|
(26,408
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net paid
|
|
|
(14,306
|
)
|
|
|
(24,141
|
)
|
|
|
(31,835
|
)
|
Plus: Increase in allowance for
reinsurance recoverable on unpaid losses
|
|
|
60
|
|
|
|
60
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unpaid losses and LAE at end
of year
|
|
|
25,712
|
|
|
|
32,082
|
|
|
|
46,228
|
|
Plus: Reinsurance recoverable on
unpaid losses
|
|
|
12,308
|
|
|
|
14,786
|
|
|
|
18,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unpaid losses and LAE at end
of year
|
|
$
|
38,020
|
|
|
$
|
46,868
|
|
|
$
|
64,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net losses and LAE incurred during 2006 related to prior
years was $0.3 million. The net losses and LAE incurred
during 2006 related to prior years was attributable to
recognition of unfavorable development in:
121
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
property & casualty of $0.2 million; workers
compensation of $0.4 million; and unallocated LAE for all
lines of $0.5 million. Favorable development on prior
periods was recognized in commercial automobile and private
passenger automobile of $0.2 million and $0.6 million,
respectively. The net losses and LAE incurred during 2005
related to prior years was $1.8 million. The net losses and
LAE incurred during 2005 related to prior years was attributable
to recognition of unfavorable development in: commercial auto of
$0.5 million; workers compensation of
$0.5 million; and unallocated LAE for all lines of
$1.6 million. Favorable development on prior periods was
recognized in property & casualty and private passenger
automobile of $0.4 million and $0.4 million,
respectively. The net losses and LAE incurred during 2004
related to prior years was attributable to recognition of
unfavorable development in: commercial auto of $2.4 million
primarily for accident years 2001 through 2002; and property and
casualty of $1.6 million; and unallocated LAE for all lines
of $0.9 million. Favorable development on prior periods was
recognized in workers compensation and private passenger
automobile of $0.7 million and $1.8 million,
respectively.
The insurance business has claims for asbestos and environmental
cleanup (A&E) against policies issued prior to
1985 and which are currently in run-off. The principal exposure
from these claims arises from direct excess and primary policies
of current and past Fortune 500 companies, the obligations
of which were assumed by NAICC or former affiliate companies.
These direct excess and primary claims are relatively few in
number and have policy limits of between $50,000 and
$1 million, with reinsurance generally above $50,000. NAICC
also has A&E claims primarily associated with participations
in excess of loss facultative reinsurance contracts and
voluntary risk pools assumed by the same former affiliates.
These facultative reinsurance contracts have relatively low
limits, generally less than $25,000, and estimates of unpaid
losses are based on information provided by the primary
insurance company.
The unpaid losses and LAE related to A&E is established
considering facts currently known and the current state of the
law and coverage litigation. Liabilities are estimated for known
claims (including the cost of related litigation) when
sufficient information has been developed to indicate the
involvement of a specific contract of insurance or reinsurance
and we can reasonably estimate our liability. Estimates for
unknown claims and development of reported claims are included
in NAICCs unpaid losses and LAE. The liability for the
development of reported claims is based on estimates of the
range of potential losses for reported claims in the aggregate.
Estimates of liabilities are reviewed and updated continually
and there is the potential that NAICCS exposure could be
materially in excess of amounts which are currently recorded. We
do not expect that liabilities associated with these types of
claims will result in a material adverse effect on the future
liquidity or financial position of our insurance business.
However, claims such as these are based upon estimates and there
can be no assurance that the ultimate liability will not exceed
or even materially exceed such estimates. As of the years ended
December 31, 2006 and 2005, NAICCs net unpaid losses
and LAE relating to A&E were approximately $6.0 million
and $6.4 million, respectively.
Waste and Energy Services principal leases are for leaseholds on
energy-from-waste facilities and independent power projects,
trucks and automobiles, and machinery and equipment. Some of
these operating leases have renewal options.
Rent expense under operating leases was as follows (in thousands
of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Waste and energy services
|
|
$
|
25,916
|
|
|
$
|
20,859
|
|
|
$
|
15,823
|
|
Other services
|
|
|
898
|
|
|
|
849
|
|
|
|
1,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
26,814
|
|
|
$
|
21,708
|
|
|
$
|
17,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a schedule, by year, of future minimum rental
payments required under operating leases that have initial or
remaining non-cancelable lease terms in excess of one year as of
December 31, 2006 (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Recourse Portion
|
|
|
|
Future Minimum
|
|
|
of Future Minimum
|
|
Year
|
|
Rental Payments
|
|
|
Rental Payments
|
|
|
2007
|
|
$
|
33,962
|
|
|
$
|
15,749
|
|
2008
|
|
|
36,178
|
|
|
|
19,278
|
|
2009
|
|
|
56,096
|
|
|
|
23,065
|
|
2010
|
|
|
39,854
|
|
|
|
23,362
|
|
2011
|
|
|
39,935
|
|
|
|
23,571
|
|
Thereafter
|
|
|
214,875
|
|
|
|
143,723
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
420,900
|
|
|
$
|
248,748
|
|
|
|
|
|
|
|
|
|
|
Waste and Energy Services future minimum rental payment
obligations include $248.7 million of future non-recourse
rental payments that relate to energy-from-waste facilities. Of
this amount $147.8 million is supported by third-party
commitments to provide sufficient service revenues to meet such
obligations. The remaining $100.9 million is related to an
energy-from-waste facility at which we serve as operator and
directly markets one half of the facilitys disposal
capacity. This facility currently generates sufficient revenues
from short-, medium-, and long-term contracts to meet rental
payments. We anticipate renewing the contracts or entering into
new contracts to generate sufficient revenues to meet remaining
future rental payments.
Waste and Energy Services electricity and steam sales
include lease income of approximately $95.9 million,
$91.6 million and $66.5 million for the year ended
December 31, 2006, 2005, and 2004, respectively, related to
two Indian and one Chinese power project that were deemed to be
operating lease arrangements under EITF
No. 01-08,
Determining Whether an Arrangement Contains a Lease
(EITF
01-08),
as of March 10, 2004. This amount represents contingent
rentals because the lease payments for each facility depend on a
factor directly related to the future use of the leased
property. The output deliverable and capacity provided by the
two Indian facilities have each been purchased by a single party
under long-term power purchase agreements which expire in 2016.
The electric power and steam off-take arrangements and
maintenance agreement for the Chinese facility are also with one
party. In June 2006, we sold our ownership interest in the
Chinese facility.
Property, plant and equipment accounted for as leased to others
under EITF
01-08
consisted of the following (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Land
|
|
$
|
33
|
|
|
$
|
31
|
|
Energy facilities
|
|
|
75,376
|
|
|
|
86,885
|
|
Buildings, machinery and
improvements
|
|
|
8,220
|
|
|
|
8,430
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
83,629
|
|
|
|
95,346
|
|
Less accumulated depreciation and
amortization
|
|
|
(19,374
|
)
|
|
|
(19,317
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant, and
equipment net
|
|
$
|
64,255
|
|
|
$
|
76,029
|
|
|
|
|
|
|
|
|
|
|
123
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On January 19, 2007, we announced a comprehensive
recapitalization plan utilizing a series of equity and debt
financings. Subsequent to this announcement, we completed the
following transactions:
|
|
|
|
|
the refinancing of Covanta Energys debt facilities with
new Covanta Energy debt facilities, comprised of a
$300 million revolving credit facility, a $320 million
funded letter of credit facility, and a $650 million term
loan facility (collectively referred to as the New Credit
Facilities);
|
|
|
|
an underwritten public offering of 6.118 million shares of
our common stock, which we received proceeds of approximately
$136.6 million, net of underwriting discounts and
commissions;
|
|
|
|
an underwritten public offering of approximately
$373.75 million in aggregate principal amount of
convertible Debentures issued by us, from which we received
proceeds of approximately $364.4 million, net of
underwriting discounts and commissions; and
|
|
|
|
the repayment, by means of a tender offer, of approximately
$604.4 million in principal aggregate amount of outstanding
notes previously issued by Covanta Energys intermediate
subsidiaries.
|
We completed our public offerings of equity and debt, including
over-allotment options exercised by underwriters, on
January 31, 2007 and February 6, 2007, and we closed
on the New Credit Facilities on February 9, 2007. We
completed our tender offer for approximately $604.4 million
in aggregate principal amount of outstanding notes on
February 22, 2007. Additional information, including
material terms and financial statement impacts related to our
recapitalization plan, is provided in Note 30. Subsequent
Events.
As of December 31, 2006 and 2005, long-term debt was
comprised of credit facilities and intermediate debt as follows
(in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Covanta Energy Senior Secured
Credit Facilities
|
|
|
|
|
|
|
|
|
First Lien Term Loan Facility
|
|
$
|
368,389
|
|
|
$
|
229,312
|
|
Second Lien Term Loan Facility
|
|
|
260,000
|
|
|
|
400,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
628,389
|
|
|
|
629,312
|
|
|
|
|
|
|
|
|
|
|
Intermediate Subsidiary
Debt
|
|
|
|
|
|
|
|
|
6.26% Senior Notes due 2015
|
|
|
192,000
|
|
|
|
234,000
|
|
8.50% Senior Secured Notes
due 2010
|
|
|
195,785
|
|
|
|
195,785
|
|
7.375% Senior Secured Notes
due 2010
|
|
|
224,100
|
|
|
|
224,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
611,885
|
|
|
|
653,885
|
|
Unamortized debt premium
|
|
|
19,748
|
|
|
|
24,726
|
|
|
|
|
|
|
|
|
|
|
Total intermediate subsidiary debt
|
|
|
631,633
|
|
|
|
678,611
|
|
|
|
|
|
|
|
|
|
|
Other long-term debt
|
|
|
101
|
|
|
|
196
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
1,260,123
|
|
|
|
1,308,119
|
|
Less: current portion (includes
$4,732 and $4,807 of unamortized premium)
|
|
|
(36,434
|
)
|
|
|
(47,549
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
1,223,689
|
|
|
$
|
1,260,570
|
|
|
|
|
|
|
|
|
|
|
124
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On May 26, 2006, Covanta Energy entered into agreements
which amended its existing credit agreements. All material terms
of Covanta Energys first lien term loan facility and
second lien term loan facility remained unchanged except for the
following:
|
|
|
|
|
Interest rates applicable to the existing First Lien Term
Loan Facility and to credit linked deposits applicable to
its Funded L/C Facility were reduced from a reserve adjusted
British Bankers Association Interest Settlement Rate, commonly
referred to as LIBOR, plus 3.00% to LIBOR plus 2.25%.
|
|
|
|
The amount available for the issuance of letters of credit under
the existing $100 million Revolving L/C Facility was
increased from $75 million to $90 million.
|
|
|
|
New term loan commitments were provided which allowed Covanta
Energy to increase the principal amount outstanding under its
first lien term loan facility by up to $140 million, and
use the proceeds to prepay up to $140 million under the
existing second lien term loan facility.
|
|
|
|
Certain covenants restricting Covanta Energys ability to
invest available cash and enter into limited recourse borrowings
were modified to provide additional flexibility in the context
of permitted acquisitions.
|
On June 30, 2006, Covanta Energy utilized the new term loan
commitment of $140 million on its first lien term loan
facility to prepay $140 million under the second lien term
loan facility. Covanta Energy incurred a call premium of
$2.8 million which was paid on June 30, 2006. Covanta
Energy recognized a loss on extinguishment of debt of
$2.3 million which was classified as other expense on the
consolidated statement of operations and a write-off to interest
expense of a portion of the second lien term loan facility
deferred financing costs of $4.5 million in the three
months ended June 30, 2006 related to the $140 million
prepayment under the second lien term loan facility.
The December 31, 2006 scheduled principal payment on the
amended First Lien Term Loan Facility was made on
January 2, 2007 (the next business day). As of
December 31, 2006, Covanta Energy was in compliance with
covenants under the credit facilities.
Short-Term
Liquidity
As of December 31, 2006, Covanta Energy had available
credit for liquidity as follows (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
Available
|
|
|
|
Available
|
|
|
|
|
|
As of
|
|
|
|
Under Facility
|
|
|
Maturing
|
|
|
December 31, 2006
|
|
|
Revolving Credit Facility(1)
|
|
$
|
100,000
|
|
|
|
2011
|
|
|
$
|
99,000
|
|
Funded L/C Facility
|
|
$
|
320,000
|
|
|
|
2012
|
|
|
$
|
549
|
|
|
|
|
(1) |
|
Up to $90 million of which may be utilized for letters of
credit. |
As of December 31, 2006, Covanta Energy issued
$1 million of letters of credit under the secured revolving
credit facility (Revolving Credit Facility) and had
not drawn any loans from this Revolving Credit Facility. On
March 21, 2006, Covanta Energys availability under
the Funded L/C Facility was voluntarily reduced to
$320 million from $340 million. As of
December 31, 2006, Covanta Energy had approximately
$319.5 million outstanding letters of credit under the
Funded L/C Facility.
Financing
Costs
Deferred financing costs on the consolidated balance sheet as of
December 31, 2006 and 2005 represent capitalizable costs
incurred by us in connection with the acquisition of ARC
Holdings and refinancing of Covanta Energys recourse debt.
All deferred financing costs are amortized to interest expense
over the life of the related debt using the effective interest
method. Deferred financing costs on the consolidated balance
sheet as of December 31, 2004 represented capitalizable
costs incurred by Covanta in connection with the acquisition of
125
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Covanta Energy. These costs were written down to zero on
June 24, 2005 upon the refinancing in connection with the
ARC Holdings acquisition.
Amortization of deferred financing costs is included as a
component of interest expense and was $8.3 million,
$10.8 million, and $7.0 million for the years ended
December 31, 2006, 2005, and 2004, respectively.
Project debt is presented below (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Project debt related to Service
Fee structures
|
|
|
|
|
|
|
|
|
4.0-6.75% serial revenue bonds due
2007 through 2015
|
|
$
|
263,430
|
|
|
$
|
305,360
|
|
3.0-7.0% term revenue bonds due
2007 through 2022
|
|
|
224,225
|
|
|
|
244,390
|
|
Adjustable-rate revenue bonds due
2007 through 2019
|
|
|
111,115
|
|
|
|
121,065
|
|
7.322% other debt obligations due
2007 through 2020
|
|
|
69,509
|
|
|
|
83,621
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
668,279
|
|
|
|
754,436
|
|
Unamortized debt premium, net
|
|
|
22,907
|
|
|
|
34,413
|
|
|
|
|
|
|
|
|
|
|
Total Service Fee structure
related project debt
|
|
|
691,186
|
|
|
|
788,849
|
|
|
|
|
|
|
|
|
|
|
Project debt related to Tip Fee
structures
|
|
|
|
|
|
|
|
|
4.875-6.70% serial revenue bonds
due 2007 through 2016
|
|
|
388,645
|
|
|
|
429,205
|
|
5.00-5.625% term revenue bonds due
2010 through 2019
|
|
|
257,750
|
|
|
|
265,700
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
646,395
|
|
|
|
694,905
|
|
Unamortized debt premium, net
|
|
|
22,216
|
|
|
|
28,897
|
|
|
|
|
|
|
|
|
|
|
Total Tip Fee structure related
project debt
|
|
|
668,611
|
|
|
|
723,802
|
|
|
|
|
|
|
|
|
|
|
International project
debt
|
|
|
76,150
|
|
|
|
85,633
|
|
|
|
|
|
|
|
|
|
|
Total project debt
|
|
|
1,435,947
|
|
|
|
1,598,284
|
|
Less current project debt
(includes $14,656 and
$16,893 of unamortized premium)
|
|
|
(190,242
|
)
|
|
|
(174,114
|
)
|
|
|
|
|
|
|
|
|
|
Noncurrent project
debt
|
|
$
|
1,245,705
|
|
|
$
|
1,424,170
|
|
|
|
|
|
|
|
|
|
|
Project debt associated with the financing of energy-from-waste
facilities is arranged by municipal entities through the
issuance of tax-exempt and taxable revenue bonds or other
borrowings. Generally, debt service for project debt related to
Service Fee Structures is the primary responsibility of
municipal entities, whereas debt service for project debt
related to Tip Fee structures is paid by our project subsidiary
from project revenue expected to be sufficient to cover such
expense.
Payment obligations for the project debt associated with
energy-from-waste facilities owned by Covanta Energy are limited
recourse to the operating subsidiary and non-recourse to Covanta
Energy, subject to operating performance guarantees and
commitments. These obligations are secured by the revenues
pledged under various indentures and are collateralized
principally by a mortgage lien and a security interest in each
of the respective energy-from-waste facilities and related
assets. As of December 31, 2006, such revenue bonds were
collateralized by property, plant and equipment with a net
carrying value of $2.5 billion and restricted funds held in
trust of approximately $355.4 million.
126
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The interest rates on adjustable-rate revenue bonds are adjusted
periodically based on current municipal-based interest rates.
The average adjustable rate for such revenue bonds was 3.84% and
3.47% as of December 31, 2006 and 2005, respectively, and
the average adjustable rate for such revenue bonds was 3.38% and
2.43% during 2006 and 2005 for the full year, respectively.
The $76.2 million in international project debt includes
the following obligations as of December 31, 2006:
|
|
|
|
|
$38.6 million due to financial institutions, of which
$10.1 million is denominated in U.S. dollars and
$28.5 million is denominated in Indian rupees as of
December 31, 2006. This debt relates to the construction of
a heavy fuel-oil fired diesel engine power plant in India and
working capital debt relating to the operations of the project.
The U.S. dollar debt bears a coupon rate at the three-month
LIBOR, plus 4.5% (9.87% as of December 31, 2006). The
outstanding Indian rupee debt borrowed for construction of the
power plant bears a coupon rate at 7.75% and the average coupon
rate on the working capital debt was 9.65% in 2006. The
construction related debt extends through 2011. The entire debt
is non-recourse to Covanta Energy, and is secured by the project
assets. The power off-taker has failed to fund the escrow
account or post the letter of credit required under the energy
contract which failure constitutes a technical default under the
project finance documents. The project lenders have not declared
an event of default due to this matter and have permitted
continued distributions of project dividends.
|
|
|
|
$37.6 million as of December 31, 2006, due to
financial institutions relate to the construction of a second
heavy fuel-oil fired diesel engine power plant in India and
working capital debt relating to the operations of the project.
The entire debt is denominated in Indian rupees. The
construction related debt bears coupon rates ranging from 7.5%
to 12.5% in 2006 and the average coupon rate on the working
capital debt was 9.25% in 2006. The construction related debt
extends through 2010. The entire debt is non-recourse to Covanta
Energy and is secured by the project assets. The power off-taker
has failed to fund the escrow account or post the letter of
credit required under the energy contract which failure
constitutes a technical default under the project finance
documents. The project lenders have not declared an event of
default due to this matter and have permitted continued
distributions of project dividends.
|
As of December 31, 2006, Covanta Energy had one interest
rate swap agreement related to project debt that economically
fixes the interest rate on certain adjustable-rate revenue
bonds. For additional information related to this interest rate
swap, see Note 18. Financial Instruments.
The maturities of long-term project debt were as follows (in
thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
Year
|
|
Debt
|
|
|
Premium
|
|
|
Total
|
|
|
2007
|
|
$
|
175,586
|
|
|
$
|
14,656
|
|
|
$
|
190,242
|
|
2008
|
|
|
164,415
|
|
|
|
10,597
|
|
|
|
175,012
|
|
2009
|
|
|
176,249
|
|
|
|
7,941
|
|
|
|
184,190
|
|
2010
|
|
|
175,488
|
|
|
|
5,364
|
|
|
|
180,852
|
|
2011
|
|
|
120,014
|
|
|
|
2,932
|
|
|
|
122,946
|
|
Thereafter
|
|
|
579,072
|
|
|
|
3,633
|
|
|
|
582,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,390,824
|
|
|
|
45,123
|
|
|
|
1,435,947
|
|
Less current portion
|
|
|
(175,586
|
)
|
|
|
(14,656
|
)
|
|
|
(190,242
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent project debt
|
|
$
|
1,215,238
|
|
|
$
|
30,467
|
|
|
$
|
1,245,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
127
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 18.
|
Financial
Instruments
|
The following disclosure of the estimated fair value of
financial instruments is made in accordance with the
requirements of SFAS No. 107, Disclosures About
Fair Value of Financial Instruments. The estimated
fair-value amounts have been determined using available market
information and appropriate valuation methodologies. However,
considerable judgment is necessarily required in interpreting
market data to develop estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the
amounts that we would realize in a current market exchange.
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it
is practicable to estimate that value.
For cash and cash equivalents, restricted funds, and marketable
securities, the carrying value of these amounts is a reasonable
estimate of their fair value. The fair value of restricted funds
held in trust is based on quoted market prices of the
investments held by the trustee.
Fair values for debt were determined based on interest rates
that are currently available to us for issuance of debt with
similar terms and remaining maturities for debt issues that are
not traded on quoted market prices. The fair value of project
debt is estimated based on quoted market prices for the same or
similar issues.
The fair value of our interest rate swap agreements is the
estimated amount we would receive or pay to terminate the
agreement based on the net present value of the future cash
flows as defined in the agreement.
Waste
and Energy Services
The fair-value estimates presented herein are based on pertinent
information available to us as of December 31, 2006.
However, such amounts have not been comprehensively revalued for
purposes of these financial statements since December 31,
2006, and current estimates of fair value may differ
significantly from the amounts presented herein.
The estimated fair value of financial instruments is presented
as follows (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
173,860
|
|
|
$
|
173,860
|
|
Marketable securities
|
|
|
3,880
|
|
|
|
3,880
|
|
Receivables
|
|
|
223,404
|
|
|
|
223,404
|
|
Restricted funds
|
|
|
427,526
|
|
|
|
428,365
|
|
Interest rate swap receivable
|
|
|
13,125
|
|
|
|
13,125
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Debt
|
|
$
|
1,260,123
|
|
|
$
|
1,261,293
|
|
Project debt
|
|
|
1,435,947
|
|
|
|
1,396,204
|
|
Interest rate swap payable
|
|
|
9,855
|
|
|
|
9,855
|
|
Off Balance-Sheet Financial
Instruments:
|
|
|
|
|
|
|
|
|
Guarantees(a)
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Additionally guarantees include approximately $9 million of
guarantees related to international energy projects. These
guarantees were subsequently reduced to $1.9 million in
February 2007. |
128
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other
Services
The carrying amounts, which approximate the fair values of
financial instruments, are as follows (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
|
Carry
|
|
|
Estimated
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
59,582
|
|
|
$
|
59,582
|
|
Restricted funds
|
|
|
6,660
|
|
|
|
6,660
|
|
Parent investments
fixed maturity securities
|
|
|
3,200
|
|
|
|
3,200
|
|
Insurance business
investments fixed maturity securities
|
|
|
35,007
|
|
|
|
35,007
|
|
Insurance business
investments equity securities
|
|
|
1,549
|
|
|
|
1,549
|
|
ACL
Warrants
On January 12, 2005, two of our subsidiaries received
warrants to purchase 168,230 shares of common stock of ACL
at $12.00 per share. The number of shares and exercise
price subject to the warrants were subsequently adjusted to
672,920 shares at an exercise price of $3.00 per
share, as a result of a
four-for-one
stock split effective as of August 2005. The warrants were given
by certain of the former creditors of ACL under the ACL plan of
reorganization. Our investment in ACL was written down to zero
in 2003.
We recorded the warrants as a derivative security in accordance
with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities
(SFAS 133). We recorded the warrants at their
aggregate fair value of $0.8 million on the grant date and
marked the warrants to their fair value each subsequent
financial statement date. During October 2005, we converted the
ACL warrants into shares of ACLs common stock and sold the
shares resulting in net cash proceeds of $18 million and a
realized pre-tax gain of $15.2 million.
Interest
Rate Swaps
As of December 31, 2006, Covanta Energy had one interest
rate swap agreement related to project debt that economically
fixes the interest rate on certain adjustable-rate revenue
bonds. This swap agreement was entered into in September 1995
and expires in January 2019. Any payments made or received under
the swap agreement, including fair value amounts upon
termination, are included as an explicit component of the client
communitys obligation under the related service agreement.
Therefore, all payments made or received under the swap
agreement are a pass through to the client community. Under the
swap agreement, Covanta Energy paid an average fixed rate of
9.8% from 2003 through January 2005, and will pay 5.18%
thereafter through January 2019, and received a floating rate
equal to the rate on the adjustable rate revenue bonds, unless
certain triggering events occur (primarily credit events), which
results 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
Covanta Energy 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 year
ended December 31, 2006 the floating rate on the swap
averaged 3.39%. The notional amount of the swap as of
December 31, 2006 was $76.4 million and is reduced in
accordance with the scheduled repayments of the applicable
revenue bonds. The counterparty to the swap is a major financial
institution. Covanta Energy believes the credit risk associated
with nonperformance by the counterparty is not significant. The
swap agreement resulted in increased debt service expense of
$1.4 million and $2.2 million for 2006 and 2005,
respectively. The effect on Covanta Energys
weighted-average borrowing rate of the project debt was an
increase of 0.09% for 2006.
Covanta Energy was required, under financing arrangements in
effect since June 24, 2005, to enter into hedging
arrangements with respect to a portion of its exposure to
interest rate changes with respect to its borrowing
129
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
under the Credit Facilities. On July 8, 2005, Covanta
Energy entered into two separate pay fixed, receive floating
interest rate swap agreements with a total notional amount of
$300 million. On March 21, 2006, we entered into one
additional pay fixed, receive floating interest rate swap
agreement with a notional amount of $37.5 million. On
December 27, 2006, the notional amount of the original swap
agreements reduced to $250 million from $300 million.
These swaps were designated as cash flow hedges in accordance
with SFAS 133. Accordingly, unrealized gains or losses will
be deferred in other comprehensive income until the hedged cash
flows affect earnings. The impact of the swaps decreased
interest expense for the year ended December 31, 2006 by
$2.4 million and increased interest expense for the year
ended December 31, 2005 by $0.7 million. As of
December 31, 2006 and 2005, the net after-tax deferred gain
in other comprehensive income was $2.1 million and
$2.0 million, respectively ($3.3 million and
$3.1 million before income taxes, respectively, which was
recorded in other assets). The New Credit Facilities do not
require the interest rate swap arrangements, and on
February 9, 2007, the swap arrangements described above
were settled. For additional information related to the New
Credit Facilities, see Note 30. Subsequent Events.
Note 19. Employee
Benefit Plans
Waste
and Energy Services
We sponsor various retirement plans covering the majority of our
domestic employees and retirees, as well as other
post-retirement benefit plans for a small number of domestic
retirees that include healthcare benefits and life insurance
coverage. Of our international employees, 99% participate in
defined benefit or defined contribution retirement plans as
required or available in accordance with local laws. Effective
December 31, 2005, we froze the defined benefit pension
plan for domestic employees who do not participate in retirement
plans offered by collective bargaining units. All active
employees who were eligible participants in the defined benefit
pension plan, as of December 31, 2005, became 100% vested
and have a non-forfeitable right to these benefits as of such
date. Our funding policy for the defined benefit pension plan
has been to contribute annually an amount to be exempt from the
Pension Benefit Guaranty Corporation variable rate premiums.
Substantially all of our domestic employees are eligible to
participate in savings plans we sponsor. Domestic employees not
participating in our retirement plans generally participate in
retirement plans offered by collective bargaining units of which
these employees are members. The savings plan allows employees
to contribute a portion of their compensation on a pre-tax basis
in accordance with specified guidelines. We match a percentage
of employee contributions up to certain limits. Effective
January 1, 2006, in connection with freezing our defined
benefit pension plans for domestic employees, we enhanced our
savings plan for domestic employees by providing a company
contribution to the savings plan. Our costs related to these
savings plans were $11.0 million and $3.5 million for
the years ended December 31, 2006 and 2005, respectively.
In September 2006, the FASB issued SFAS 158 which requires
recognition of the overfunded or underfunded positions of
defined benefit pension and other postretirement benefit plans
on the balance sheet. For an underfunded plan, the incremental
liability to be recorded is equal to the difference between the
projected benefit obligation and the fair value of plan assets.
SFAS No. 87, Employers Accounting for
Pensions (SFAS 87) and
SFAS No. 106, Employers Accounting for
Postretirement Benefits Other Than Pensions
(SFAS 106) allow for deferred recognition of
this liability through amortization of this difference over
time. Under SFAS 158, actuarial gains and losses and prior
service costs and credits that arise during the period but,
pursuant to SFAS 87 and SFAS 106 are not yet
recognized as components of net periodic benefit cost, would be
recognized as a component of accumulated other comprehensive
income, net of tax. SFAS 158 requires an adjustment to the
beginning balance of accumulated earnings, net of tax, for any
transition obligation remaining from the initial application of
SFAS 87 and SFAS 106. Such amounts would not be
subsequently amortized as a component of net periodic benefit
cost. SFAS 158 was effective for fiscal years ending after
December 15, 2006. We have adopted SFAS 158 for the
year ended December 31, 2006 and have determined that the
impact to be immaterial to our consolidated financial statements.
130
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table is a reconciliation of the changes in the
benefit obligations and fair value of assets for our defined
benefit pension and other postretirement benefit plans, the
funded status (using a December 31 measurement date) of the
plans and the related amounts recognized in our consolidated
balance sheets (in thousands of dollars, except percentages as
noted):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
For the Year
|
|
|
For the Year
|
|
|
For the Year
|
|
|
For the Year
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Change in benefit
obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation
|
|
$
|
75,167
|
|
|
$
|
67,098
|
|
|
$
|
11,582
|
|
|
$
|
11,818
|
|
Service cost
|
|
|
|
|
|
|
7,223
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
|
4,300
|
|
|
|
3,990
|
|
|
|
617
|
|
|
|
657
|
|
Actuarial loss (gain)
|
|
|
2,101
|
|
|
|
(1,384
|
)
|
|
|
2,593
|
|
|
|
272
|
|
Benefits paid
|
|
|
(1,423
|
)
|
|
|
(1,760
|
)
|
|
|
(941
|
)
|
|
|
(1,164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
80,145
|
|
|
$
|
75,167
|
|
|
$
|
13,851
|
|
|
$
|
11,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan assets at fair value
|
|
$
|
45,342
|
|
|
$
|
36,976
|
|
|
$
|
|
|
|
$
|
|
|
Actual return on plan assets
|
|
|
5,275
|
|
|
|
2,600
|
|
|
|
|
|
|
|
|
|
Covanta Energy contributions
|
|
|
6,017
|
|
|
|
7,526
|
|
|
|
941
|
|
|
|
1,164
|
|
Benefits paid
|
|
|
(1,423
|
)
|
|
|
(1,760
|
)
|
|
|
(941
|
)
|
|
|
(1,164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan assets at fair value at end
of year
|
|
$
|
55,211
|
|
|
$
|
45,342
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of accrued
benefit liability and net amount recognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status of the plan
|
|
$
|
(24,934
|
)
|
|
$
|
(29,825
|
)
|
|
$
|
(13,851
|
)
|
|
$
|
(11,583
|
)
|
Unrecognized net gain
|
|
|
|
|
|
|
(5,578
|
)
|
|
|
|
|
|
|
(133
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(24,934
|
)
|
|
$
|
(35,403
|
)
|
|
$
|
(13,851
|
)
|
|
$
|
(11,716
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive
income recognized under
SFAS 158:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial (gain) loss
|
|
$
|
(4,999
|
)
|
|
|
N/A
|
|
|
$
|
2,460
|
|
|
|
N/A
|
|
Net prior service cost
|
|
|
|
|
|
|
N/A
|
|
|
|
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total as of December 31, 2006
|
|
$
|
(4,999
|
)
|
|
|
N/A
|
|
|
$
|
2,460
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average assumptions
used to determine net periodic benefit expense for years ending
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.75
|
%
|
|
|
6.00
|
%
|
|
|
5.75
|
%
|
|
|
6.00
|
%
|
Expected return on plan assets
|
|
|
8.00
|
%
|
|
|
8.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Rate of compensation increase
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Weighted average assumptions
used to determine projected benefit obligations as of
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.75
|
%
|
|
|
5.75
|
%
|
|
|
5.75
|
%
|
|
|
5.75
|
%
|
Rate of compensation increase
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
131
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Plan assets had a fair value of $55.2 million and
$45.3 million as of December 31, 2006 and 2005,
respectively. The allocation of plan assets was as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
U.S. Equities
|
|
|
62
|
%
|
|
|
68
|
%
|
U.S. Debt Securities
|
|
|
19
|
%
|
|
|
19
|
%
|
Other
|
|
|
19
|
%
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Our expected return on plan assets assumption is based on
historical experience and by evaluating input from the trustee
managing the plans assets. The expected return on the plan
assets is also impacted by the target allocation of assets,
which is based on our goal of earning the highest rate of return
while maintaining risk at acceptable levels. The plan strives to
have assets sufficiently diversified so that adverse or
unexpected results from one security class will not have an
unduly detrimental impact on the entire portfolio. The target
ranges of allocation of assets are as follows:
|
|
|
|
|
U.S. Equities
|
|
|
35 70
|
%
|
U.S. Debt Securities
|
|
|
10 55
|
%
|
Other
|
|
|
0 55
|
%
|
We anticipate that the long-term asset allocation on average
will approximate the targeted allocation. Actual asset
allocations are reviewed and the pension plans investments
are rebalanced to reflect the targeted allocation when
considered appropriate.
For management purposes, an annual rate of increase of 9% in the
per capita cost of health care benefits was assumed for 2006 for
covered employees. The rate was assumed to decrease gradually to
5.5% in 2010 and remain at that level.
For the pension plans with accumulated benefit obligations in
excess of plan assets the projected benefit obligation,
accumulated benefit obligation, and fair value of plan assets
were $80.1 million, $60.3 million, and
$55.2 million, respectively as of December 31, 2006
and $75.2 million, $56.8 million, and
$45.3 million, respectively, as of December 31, 2005.
We estimate that the future benefits payable for the retirement
and post-retirement plans in place are as follows (in thousands
of dollars).
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
|
|
Other Benefits
|
|
|
|
Pension
|
|
|
Post
|
|
|
|
Benefits
|
|
|
Medicare
|
|
|
2007
|
|
$
|
912
|
|
|
$
|
1,002
|
|
2008
|
|
|
976
|
|
|
|
1,044
|
|
2009
|
|
|
1,191
|
|
|
|
1,076
|
|
2010
|
|
|
1,180
|
|
|
|
1,097
|
|
2011
|
|
|
1,441
|
|
|
|
1,110
|
|
2012 - 2016
|
|
|
11,641
|
|
|
|
4,731
|
|
132
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Pension costs for our defined benefit plans and other
post-retirement benefit plans included the following components
(in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
For the Year
|
|
|
For the Year
|
|
|
For the Year
|
|
|
For the Year
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Components of Net Periodic
Benefit Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
|
|
|
$
|
7,223
|
|
|
$
|
|
|
|
$
|
|
|
Interest cost
|
|
|
4,300
|
|
|
|
3,990
|
|
|
|
617
|
|
|
|
657
|
|
Expected return on plan assets
|
|
|
(3,689
|
)
|
|
|
(3,015
|
)
|
|
|
|
|
|
|
|
|
Amortization of net actuarial gain
|
|
|
(64
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
547
|
|
|
$
|
8,198
|
|
|
$
|
617
|
|
|
$
|
657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed health care cost trend rates have a significant effect
on the amounts reported for the health care plan. A
one-percentage point change in the assumed health care trend
rate would have the following effects (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
One-Percentage
|
|
|
One-Percentage
|
|
|
|
Point Increase
|
|
|
Point Decrease
|
|
|
Effect on total service and
interest cost components
|
|
$
|
39
|
|
|
$
|
(38
|
)
|
Effect on postretirement benefit
obligation
|
|
|
952
|
|
|
|
(829
|
)
|
On December 8, 2003, the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the Act)
was signed into Law. The Act introduces a prescription drug
benefit under Medicare as well as a federal subsidy to sponsors
of retiree health care benefit plans that provide a prescription
drug benefit that is at least actuarially equivalent to Medicare
Part D. In accordance with FASB Staff Position
FAS 106-2,
Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of
2003, the accumulated post-retirement benefit obligation
and net periodic post-retirement benefit cost in our
consolidated financial statements and this note reflects the
effects of the Act on the plans.
Other
Services
Under the NAICC 401(k) Plan, employees may elect to contribute
up to 20% of the eligible compensation to a maximum dollar
amount allowed by the Internal Revenue Service
(IRS). NAICC provides a matching contribution equal
to 50% of the first 6% of compensation contributed by employees
to the 401(k) Plan. Contributions for each of the three years
ended December 31, 2006, 2005 and 2004 were less than
$0.1 million.
A non-contributory defined benefit pension plan (the
Plan) covers substantially all of NAICCs
employees. However in 2001, service credits under the Plan were
frozen and in 2006 eligibility was frozen. Pension benefits are
based on an employees years of service and average final
compensation. The funding policy of the Plan is for NAICC to
contribute the minimum pension costs equivalent to the amount
required under the Employee Retirement Income Security Act of
1974 and the Internal Revenue Code.
133
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 20.
|
Commitments
and Contingencies
|
We and/or
our subsidiaries are party to a number of claims, lawsuits and
pending actions, most of which are routine and all of which are
incidental to our business. We assess the likelihood of
potential losses on an ongoing basis and when losses are
considered probable and reasonably estimable, record as a loss
an estimate of the ultimate outcome. If we can only estimate the
range of a possible loss, an amount representing the low end of
the range of possible outcomes is recorded. The final
consequences of these proceedings are not presently determinable
with certainty.
Covanta
Energy Corporation
Generally, claims and lawsuits arising from events occurring
prior to their respective petition dates against Covanta Energy
and its subsidiaries, that had filed bankruptcy petitions and
subsequently emerged from bankruptcy, have been resolved
pursuant to the Covanta Energy reorganization plan, and have
been discharged pursuant to orders of the Bankruptcy Court which
confirmed the Covanta Energy reorganization plan or similar
plans of subsidiaries emerging separately from Chapter 11.
However, to the extent that claims are not dischargeable in
bankruptcy, such claims may not be discharged. For example, the
claims of certain persons who were personally injured prior to
the petition date but whose injury only became manifest
thereafter may not be discharged pursuant to the Covanta Energy
reorganization plan.
Environmental
Matters
Covanta Energys operations are subject to environmental
regulatory laws and environmental remediation laws. Although
Covanta Energys operations are occasionally subject to
proceedings and orders pertaining to emissions into the
environment and other environmental violations, which may result
in fines, penalties, damages or other sanctions, we believe that
Covanta Energy is in substantial compliance with existing
environmental laws and regulations.
Covanta Energy may be identified, along with other entities, as
being among parties potentially responsible for contribution to
costs associated with the correction and remediation of
environmental conditions at disposal sites subject to federal
and/or
analogous state laws. In certain instances, Covanta Energy may
be exposed to joint and several liabilities for remedial action
or damages. Covanta Energys ultimate liability in
connection with such environmental claims will depend on many
factors, including its volumetric share of waste, the total cost
of remediation, and the financial viability of other companies
that also sent waste to a given site and, in the case of
divested operations, its contractual arrangement with the
purchaser of such operations. Generally, such claims arising
prior to the first petition date were resolved in and discharged
by Covanta Energys Chapter 11 cases.
The potential costs related to the matters described below and
the possible impact on future operations are uncertain due in
part to the complexity of governmental laws and regulations and
their interpretations, the varying costs and effectiveness of
cleanup technologies, the uncertain level of insurance or other
types of recovery and the questionable level of Covanta
Energys responsibility. Although the ultimate outcome and
expense of any litigation, including environmental remediation,
is uncertain, Covanta Energy believes that the following
proceedings will not have a material adverse effect on our
consolidated financial position or results of operations.
In June 2001, the Environmental Protection Agency
(EPA) named Covanta Energys wholly-owned
subsidiary, Covanta Haverhill, Inc. (Haverhill), as
one of 2,000 potentially responsible parties (PRPs)
at the Beede Waste Oil Superfund Site, Plaistow, New Hampshire
(Beede site), a former waste oil recycling facility.
EPA alleges that approximately 14.3 million gallons of
waste oil were disposed at the Beede site, including
approximately 45,000 gallons of waste oil from Haverhill. On
January 9, 2004, EPA signed its Record of Decision
(ROD) with respect to cleanup of the Beede site. The
estimated cost to implement the selected remedy is
$48 million, exclusive of reimbursement of past costs and
future oversight costs of EPA and the State of New Hampshire. On
June 20, 2006, EPA issued a Unilateral Administrative Order
(UAO) to a group of PRPs, including
134
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Haverhill, with respect to implementation of the Beede site
cleanup; however, the UAO effective date was extended pending
Consent Decree negotiations. On December 15, 2006,
Haverhill together with numerous other PRPs, signed the Beede
Waste Oil Superfund Site RD/RA Consent Decree with respect to
remediation of the Beede site. The Consent Decree, which will
supplant the UAO, becomes effective upon approval and entry by
the U.S. District Court in New Hampshire. We currently
believe that based on the amount of waste oil Haverhill is
alleged to have sent to the Beede site in comparison to other
similarly-situated settling respondent PRPs, its ultimate
liability will not be material to its financial position and
results of operations although it is not possible at this time
to predict that outcome with certainty.
By letters dated August 13, 2004 and May 3, 2005, EPA
notified Covanta Essex Company (Essex and formerly
named American Ref-Fuel Company of Essex County) that it was
potentially liable under CERCLA Section 107(a) for response
actions in the Lower Passaic River Study Area, referred to as
LPRSA, a 17 mile stretch of river in northern
New Jersey. Essex is one of at least 60 PRPs named thus far that
have joined the cooperating PRP group. EPA alleges that
hazardous substances found in the LPRSA were being released from
the Essex site, which abuts the river. EPAs notice letters
stated that Essex may be liable for costs related to a proposed
remedial investigation and feasibility study (RI/FS)
of the Lower Passaic River, for certain past costs incurred by
EPA and for unspecified natural resource damages. Essex entered
into an arrangement with EPA and the cooperating PRP group of
which Essex is a member to settle the potential liability Essex
might have for the $2.8 million in past costs incurred by
EPA, and for the $10 million then estimated by EPA as the
cost of the RI/FS by contributing $0.25 million to the cost
of the RI/FS and by agreeing to share in certain past and
ongoing legal fees and other costs of the cooperating PRP group.
It is anticipated that additional contributions to the cost of
the RI/FS will be required of PRPs, including Essex, as
the RI/FS proceeds through its predicted completion in 2010.
Considering the history of industrial and other discharges into
the LPRSA from other sources, including named PRPs, Essex
believes any releases from its site to be de minimis in
comparison; however, it is not possible at this time to predict
that outcome with certainty or to estimate Essexs ultimate
liability in the matter, including for natural resource damages.
Other
Commitments
Other commitments as of December 31, 2006 were as follows
(in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments Expiring by Period
|
|
|
|
|
|
|
Less Than
|
|
|
More Than
|
|
|
|
Total
|
|
|
One Year
|
|
|
One Year
|
|
|
Letters of credit
|
|
$
|
325,032
|
|
|
$
|
4,401
|
|
|
$
|
320,631
|
|
Surety bonds
|
|
|
61,880
|
|
|
|
|
|
|
|
61,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other
commitments net
|
|
$
|
386,912
|
|
|
$
|
4,401
|
|
|
$
|
382,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The letters of credit were issued pursuant to the facilities to
secure our performance under various contractual undertakings
related to our domestic and international projects, or to secure
obligations under our insurance program. Each letter of credit
relating to a project is required to be maintained in effect for
the period specified in related project contracts, and generally
may be drawn if it is not renewed prior to expiration of that
period.
As of December 31, 2006, Covanta Energy had approximately
$0.5 million in available capacity for additional letters
of credit under its Funded L/C Facility and $89 million
available capacity for letters of credit under its existing
revolving credit facility. We believe that we will be able to
fully perform under our contracts to which these existing
letters of credit relate, and that it is unlikely that letters
of credit would be drawn because of a default of our performance
obligations. If any of these letters of credit were to be drawn
under the current debt facilities, the amount drawn would be
immediately repayable to the issuing bank. If we were unable to
immediately repay such amounts drawn under these letters of
credit, unreimbursed amounts would be treated under the Credit
Facilities as additional term loans issued under the First Lien
Facilities.
135
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The surety bonds listed on the table above relate primarily to
performance obligations ($52.9 million) and support for
closure obligations of various energy projects when such
projects cease operating ($9 million). Were these bonds to
be drawn upon, Covanta Energy would have a contractual
obligation to indemnify the surety company.
We have certain contingent obligations related to the
Debentures. These are:
|
|
|
|
|
holders may require us to repurchase their Debentures on
February 1, 2012, February 1, 2017 and
February 1, 2022;
|
|
|
|
holders may require us to repurchase their Debentures, if a
fundamental change occurs; and
|
|
|
|
holders may exercise their conversion rights, which would
require us to pay the conversion settlement amount in cash
and/or our
common stock.
|
See Note 30. Subsequent Events 2007
Recapitalization Plan Material Terms of the
Debentures for specific criteria related to contingent interest,
conversion or redemption features of the Debentures.
Covanta Energy and certain of its subsidiaries have issued or
are party to performance guarantees and related contractual
support obligations undertaken mainly pursuant to agreements to
construct and operate certain energy-from-waste facilities and a
water facility. With respect to its domestic businesses, Covanta
Energy and certain of its subsidiaries have issued guarantees to
municipal clients and other parties that Covanta Energys
subsidiaries will perform in accordance with contractual terms,
including, where required, the payment of damages or other
obligations. Such contractual damages or other obligations could
be material, and in circumstances where one or more
subsidiarys contract has been terminated for its default,
such damages could include amounts sufficient to repay project
debt. For facilities owned by municipal clients and operated by
Covanta Energy, Covanta Energys potential maximum
liability as of December 31, 2006 associated with the
repayment of the municipalities project debt on such
facilities was approximately $1 billion. This amount was
not recorded as a liability in Covanta Energys
consolidated balance sheet as of December 31, 2006 as
Covanta Energy believes that it had not incurred such liability
at the date of the financial statements. Additionally, damages
payable under such guarantees on Covanta Energy-owned
energy-from-waste facilities could expose Covanta Energy to
recourse liability on project debt. Covanta Energy also believes
that it has not incurred such damages at the date of the
financial statements. If Covanta Energy is asked to perform
under one or more of such guarantees, its liability for damages
upon contract termination would be reduced by funds held in
trust and proceeds from sales of the facilities securing the
project debt, which is presently not estimable.
With respect to our international businesses, Covanta Energy and
certain of its subsidiaries have issued guarantees on behalf of
our international operating subsidiaries with respect to
contractual obligations to operate certain international power
projects and one energy-from-waste project. The potential
damages owed under such arrangements for international projects
may be material.
Depending upon the circumstances giving rise to such domestic
and international damages, the contractual terms of the
applicable contracts, and the contract counterpartys
choice of remedy at the time a claim against a guarantee is
made, the amounts owed pursuant to one or more of such
guarantees could be greater than Covanta Energys
then-available sources of funds. To date, Covanta Energy has not
incurred material liabilities under its guarantees, either on
domestic or international projects.
We file a federal consolidated income tax return with our
eligible subsidiaries. Covanta Lake II, Inc. files outside
of the consolidated return group. Our federal consolidated
income tax return also includes the taxable results of certain
grantor trusts described below.
136
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
SFAS 109 requires the establishment of a valuation
allowance when we conclude that it is more likely than
not that we will not realize our deferred tax assets.
Pursuant to SFAS 109, we make periodic determinations of
whether it is more likely than not that all or a
portion of our deferred tax assets will be realized. In making
these determinations, we consider all of the relevant factors,
both positive and negative, which may impact upon our future
taxable income including the size and operating results of our
subsidiaries, the competitive environment in which these
subsidiaries operate and the impact of the grantor trust
activity. We have evaluated the realizability of our deferred
tax assets as of December 31, 2006 and have concluded that
it is more likely than not that some of these
deferred tax assets will not be realized. As of
December 31, 2006, we have a valuation allowance of
$68 million. During 2006, we reduced our valuation
allowance by $23 million. The reduction primarily included
a net $13 million adjustment to the goodwill associated
with the acquisition of ARC Holdings, since the facts and
circumstances associated with these items existed as of the date
of the ARC Holdings acquisition, and if not for the ARC Holdings
acquisition we would not have been able to make the conclusion
that it was more likely than not that these deferred
tax assets would be realized, and $10 million that was a
reduction to income tax expense.
Beginning in the second quarter of 2006, we adopted the
permanent reinvestment exception under APB 23 whereby we
will no longer provide for deferred taxes on the undistributed
earnings of our international subsidiaries. We intend to
permanently reinvest our international earnings outside of the
United States in our existing international operations and in
any new international business which may be developed or
acquired. As a result of the adoption of APB 23, we
recognized a benefit of $10 million associated with the
reversal of deferred taxes accrued on unremitted earnings of
international affiliates in prior periods. Cumulative
undistributed foreign earnings for which United States taxes
were not provided were included in consolidated retained
earnings in the amount of approximately $54 million as of
December 31, 2006. This policy resulted in an unrecognized
deferred tax liability of approximately $19 million in 2006.
Deferred tax assets relating to tax benefits of employee stock
option grants have been reduced to reflect exercises in the
calendar year ended December 31. 2006. Some exercises
resulted in tax deductions in excess of previously recorded
benefits based on the option value at the time of grant (a
windfall). Although, these additional tax benefits
or windfalls were reflected in the NOLs, pursuant to
SFAS 123R, the additional tax benefit associated with the
windfall is not recognized until the deduction reduces taxes
payable. Accordingly, since the tax benefit does not reduce our
current taxes payable in 2006 due to the NOLs, these windfall
tax benefits were not reflected in our NOLs in the deferred tax
assets for 2006. Windfalls included in NOLs but not reflected in
deferred tax assets for 2006 were $2.8 million.
In June 2006, the FASB issued FIN 48. This interpretation
increases the relevancy and comparability of financial reporting
by clarifying the way companies account for uncertainty in
income taxes. FIN 48 prescribes a consistent recognition
threshold and measurement attribute as well as clear criteria
for subsequently recognizing, derecognizing and measuring such
tax positions for financial statement purposes. The
interpretation also requires expanded disclosure with respect to
uncertainty in income taxes. We will be required to adopt the
provisions of FIN 48 in the first quarter of 2007. We
continue to evaluate the impact of adoption on our consolidated
financial statements. At this time, we do not know what the
impact will be upon adoption of this standard.
137
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We had consolidated federal NOLs estimated to be approximately
$410 million for federal income tax purposes as of the end
of 2006. The NOLs will expire in various amounts from
December 31, 2007 through December 31, 2025, if not
used. Our NOLs will expire, if not used, in the following
amounts in the following years (in thousands of dollars):
|
|
|
|
|
|
|
Amount of
|
|
|
|
Carryforward
|
|
|
|
Expiring
|
|
|
2007
|
|
$
|
87,285
|
|
2008
|
|
|
31,688
|
|
2009
|
|
|
39,665
|
|
2010
|
|
|
23,600
|
|
2011
|
|
|
19,755
|
|
2012
|
|
|
38,255
|
|
2019
|
|
|
33,636
|
|
2022
|
|
|
26,931
|
|
2023
|
|
|
108,331
|
|
2024
|
|
|
212
|
|
2025
|
|
|
203
|
|
|
|
|
|
|
|
|
$
|
409,561
|
|
|
|
|
|
|
In addition to the consolidated federal NOLs, we have additional
federal credits and loss carryforwards of $46 million and
state credits and loss carryforwards of $13 million that
will expire between 2007 and 2026. These deferred tax assets are
offset by a valuation allowance of $37 million.
The components of income tax expense were as follows (in
thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(4,889
|
)
|
|
$
|
5,757
|
|
|
$
|
4,320
|
|
State
|
|
|
15,196
|
|
|
|
4,194
|
|
|
|
5,392
|
|
Foreign
|
|
|
7,250
|
|
|
|
6,941
|
|
|
|
5,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
17,557
|
|
|
|
16,892
|
|
|
|
14,791
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
29,819
|
|
|
|
12,014
|
|
|
|
(2,030
|
)
|
State
|
|
|
1,530
|
|
|
|
5,916
|
|
|
|
(665
|
)
|
Foreign
|
|
|
(10,441
|
)
|
|
|
(171
|
)
|
|
|
(561
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
20,908
|
|
|
|
17,759
|
|
|
|
(3,256
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
38,465
|
|
|
$
|
34,651
|
|
|
$
|
11,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A reconciliation of our income tax expense at the federal
statutory income tax rate of 35% to income tax expense at the
effective tax rate is as follows (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Income tax expense at the federal
statutory rate
|
|
$
|
42,780
|
|
|
$
|
27,148
|
|
|
$
|
12,416
|
|
State and other tax expense
|
|
|
12,296
|
|
|
|
6,572
|
|
|
|
3,072
|
|
Change in valuation allowance
|
|
|
(10,319
|
)
|
|
|
(9,485
|
)
|
|
|
(15,423
|
)
|
Grantor trust income
|
|
|
6,210
|
|
|
|
5,250
|
|
|
|
5,810
|
|
Subpart F income and foreign
dividends
|
|
|
2,328
|
|
|
|
7,190
|
|
|
|
5,153
|
|
Taxes on foreign earnings
|
|
|
(9,531
|
)
|
|
|
(7
|
)
|
|
|
(138
|
)
|
Production tax credits
|
|
|
(3,158
|
)
|
|
|
(3,132
|
)
|
|
|
|
|
Other, net
|
|
|
(2,141
|
)
|
|
|
1,115
|
|
|
|
645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
38,465
|
|
|
$
|
34,651
|
|
|
$
|
11,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tax effects of temporary differences that give rise to the
deferred tax assets and liabilities are presented as follows (in
thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Loss reserve discounting
|
|
$
|
2,135
|
|
|
$
|
2,066
|
|
Capital loss carryforward
|
|
|
24,228
|
|
|
|
25,684
|
|
Net operating loss carryforwards
|
|
|
155,517
|
|
|
|
174,198
|
|
Accrued expenses
|
|
|
42,042
|
|
|
|
51,075
|
|
Tax basis in bond and other costs
|
|
|
12,893
|
|
|
|
22,067
|
|
Deferred tax assets attributable
to Covanta Lake II, Inc.
|
|
|
5,505
|
|
|
|
10,425
|
|
Deferred tax assets attributable
to pass-through entities
|
|
|
84,368
|
|
|
|
|
|
Other
|
|
|
4,290
|
|
|
|
17,306
|
|
AMT and other credit carryforwards
|
|
|
17,441
|
|
|
|
10,203
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax asset
|
|
|
348,419
|
|
|
|
313,024
|
|
Less: valuation allowance
|
|
|
(68,215
|
)
|
|
|
(90,959
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax asset
|
|
|
280,204
|
|
|
|
222,065
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities:
|
|
|
|
|
|
|
|
|
Unremitted earnings of foreign
subsidiaries
|
|
|
|
|
|
|
10,031
|
|
Unbilled accounts receivable
|
|
|
32,728
|
|
|
|
35,049
|
|
Property, plant and equipment
|
|
|
156,340
|
|
|
|
211,741
|
|
Intangible assets
|
|
|
45,425
|
|
|
|
62,992
|
|
Deferred tax liabilities
attributable to pass-through entities
|
|
|
433,857
|
|
|
|
381,334
|
|
Other, net
|
|
|
7,971
|
|
|
|
6,793
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax liability
|
|
|
676,321
|
|
|
|
707,940
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
(396,117
|
)
|
|
$
|
(485,875
|
)
|
|
|
|
|
|
|
|
|
|
139
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Our NOLs predominantly arose from our predecessor insurance
entities (which were subsidiaries of our predecessor, which was
formerly named Mission Insurance Group, Inc.,
Mission). These Mission insurance entities have been
in state insolvency proceedings in California and Missouri since
the late 1980s. The amount of NOLs available to us will be
reduced by any taxable income generated by current members of
our consolidated tax group, which include grantor trusts
associated with the Mission insurance entities. Based on a
review of the claims activity and balance sheets of the
California grantor trusts, we believe that additional tax
deductions will be recognized by the California grantor trusts
as they wind down. In the fourth quarter of 2006, a deferred tax
asset of $84 million was recognized on our consolidated
balance sheet for this expected benefit. Additionally,
$12 million was recognized as a deferred tax asset as a
result of revised taxable losses from the grantor trusts for the
2004 tax year. These increases were recorded as a reduction to
goodwill associated with the ARC Holdings acquisition, since the
facts and circumstances associated with these items existed as
of the date of the ARC Holdings acquisition, and if not for the
ARC Holdings acquisition we would not have been able to make the
conclusion that it was more likely than not that
these deferred tax assets would be realized. See Note 9.
Intangible Assets and Goodwill for additional information
regarding these adjustments to goodwill.
In January 2006, we executed agreements with the California
Commissioner of Insurance (the California
Commissioner), who administers the majority of the grantor
trusts, regarding the final administration and conclusion of
such trusts. The agreements, which were approved by the
California state court overseeing the Mission insolvency
proceedings (the Mission Court), settle matters that
had been in dispute regarding the historic rights and
obligations relating to the conclusion of the grantor trusts.
These include the treatment of certain claims against the
grantor trusts which are entitled to distributions of an
aggregate of 1,572,625 shares of our common stock
previously issued to the California Commissioner under existing
agreements entered into at the inception of the Mission
insurance entities reorganization. The distribution of
such shares by the California Commissioner is among the final
steps necessary to conclude the insolvency cases relating to the
trusts being administered by the California Commissioner.
In connection with these agreements and in order to facilitate
the orderly conclusion of the grantor trust estates, the
distribution of such stock and the settlement of the related
disputes, we have paid an aggregate amount equal to
approximately $9.14 million to the California Commissioner.
Additionally, we agreed to reimburse the California
Commissioners Conservation and Liquidation Office for
certain expenses and provide assistance under the agreements. In
the fourth quarter of 2005, we recorded an additional
$1.175 million related to expenses associated with these
agreements.
We have discussed with the Director of the Division of Insurance
of the State of Missouri (the Missouri Director),
who administers the balance of the grantor trusts relating to
the Mission Insurance entities, similar arrangements for
distribution of the remaining 154,756 shares of our common
stock by the Missouri Director to claimants of the Missouri
grantor trusts. Given the claims activity relating to the
Missouri grantor trusts, and the lack of disputed matters with
the Missouri Director, we do not expect to enter into additional
or amended contractual arrangements with the Missouri Director
with respect to the final administration of the Missouri grantor
trusts or the related distribution by the Missouri Director of
shares of our common stock.
While we cannot predict with certainty what amounts, if any, may
be includable in taxable income as a result of the final
administration of these grantor trusts, we believe that neither
arrangements with the California Commissioner nor the final
administration by the Missouri Director will result in a
material reduction in available NOLs.
|
|
Note 22.
|
Insurance
Regulation, Dividend Restrictions and Statutory
Surplus
|
Our insurance subsidiaries are regulated by various states. For
regulatory purposes, separate financial statements which are
prepared in accordance with statutory accounting principles are
filed with these states. The insurance subsidiaries prepares its
statutory-basis financial statements in accordance with
accounting practices
140
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
prescribed or permitted by the California Department of
Insurance (the CDI). Prescribed statutory accounting
practices include a variety of publications of the National
Association of Insurance Commissioners (the Insurance
Association), as well as state laws, regulations and
general administrative rules. Permitted statutory accounting
practices encompass all accounting practices not so prescribed
(see below for discussion of the insurance businesses permitted
practice). The Insurance Association has adopted a comprehensive
set of accounting principles for qualification as an Other
Comprehensive Basis of Accounting which was effective in 2001.
As of the years ended December 31, 2006 and 2005, our
operating insurance subsidiaries had statutory capital and
surplus of $18.0 million and $17.3 million,
respectively. The combined statutory net income for our
operating insurance subsidiaries, as reported to the regulatory
authorities for the years ended December 31, 2006, 2005 and
2004, was $0.8 million, $4.8 million, and
$0.8 million, respectively. In 2005, NAICC recognized an
other than temporary impairment of its investment in Valor for
an amount equal to its cost basis of $5.9 million, reducing
statutory surplus in 2005 by $0.7 million.
A model for determining the risk-based capital (RBC)
requirements for property and casualty insurance companies was
adopted in December 1993 and companies are required to report
their RBC ratios based on their statutory annual statements. As
of December 31, 2006, NAICCs RBC was substantially in
excess of the regulatory Authorized Control Level.
Insurance companies are subject to insurance laws and
regulations established by the states in which they transact
business. The governmental agencies established pursuant to
these state laws have broad administrative and supervisory
powers over insurance company operations. These powers include
granting and revoking of licenses to transact business,
regulating trade practices, establishing guaranty associations,
licensing agents, approving policy forms, filing premium rates
on certain business, setting reserve requirements, determining
the form and content of required regulatory financial
statements, conducting periodic examination of insurers
records, determining the reasonableness and adequacy of capital
and surplus, and prescribing the maximum concentrations of
certain classes of investments. Most states have also enacted
legislation regulating insurance holding company systems,
including acquisitions, extraordinary dividends, the terms of
affiliate transactions and other related matters. Our insurance
subsidiaries have registered as holding company systems pursuant
to such legislation in California and routinely report to other
jurisdictions.
Under the California Insurance Code, NAICC is prohibited from
paying shareholder dividends, other than from accumulated earned
surplus, exceeding the greater of net income or 10% percent of
the preceding years statutory surplus, without prior
approval of the CDI. No dividends were paid in 2006, 2005 or
2004. The overall limit of dividends that can be paid during
2007 is approximately $1.8 million as long as there is
sufficient accumulated earned surplus to pay such. As of the
year ended December 31, 2006, NAICC did not have sufficient
accumulated earned surplus, as defined by the CDI, to pay
further ordinary dividends.
141
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 23.
|
Stock-Based
Award Plans
|
Stock-Based
Compensation
Effective January 1, 2006, we adopted the fair value
recognition provisions of SFAS 123R using the modified
prospective transition method and therefore have not restated
results for prior periods. Under this transition method,
stock-based compensation expense for the year ended
December 31, 2006 included compensation expense for
stock-based compensation awards granted prior to, but not yet
vested as of December 31, 2005, based on the grant date
fair value estimated in accordance with the original provision
of SFAS 123. Stock-based compensation expense for all
stock-based compensation awards granted after December 31,
2005 is based on the grant date fair value estimated in
accordance with the provisions of SFAS 123R. In March 2005,
the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 107
(SAB 107) regarding the SECs
interpretation of SFAS 123R and the valuation of
share-based payments for public companies. We have applied the
provisions of SAB 107 in our adoption of SFAS 123R.
We recognized compensation expense based upon the number of
stock options and restricted stock awards expected to vest,
which was determined based on historical turnover experience of
Covanta Energy employees populations from the Covanta
Energy pension plan. During the quarter ended September 30,
2006, we adjusted the number of stock options and restricted
stock awards expected to vest due to additional stock option and
restricted stock grants as described below and increased
forfeitures of stock options and stock awards as compared to
previous estimations. We recognize compensation costs using the
graded vesting attribution method over the requisite service
period of the award, which is generally the vesting term of
three years.
The impact to the consolidated financial statements, as a result
of the adoption of SFAS 123R compared to continued
recognition of stock-based compensation under APB 25, was
approximately $1.4 million to income before income taxes
and approximately $1.2 million to net income for the year
ended December 31, 2006. The impact on both basic and
diluted earnings per share was less than $0.01 per share
for the year ended December 31, 2006. The reductions that
resulted from the adoption of SFAS 123R reflected the
stock-based compensation expense associated with the unvested
stock option awards. Stock-based compensation expense previously
recognized in accordance with APB 25 for restricted stock
awards remained essentially unchanged under the provisions of
SFAS 123R.
We received $1.1 million, $3.0 million and
$3.5 million from the exercise of non-qualified stock
options in the years ended December 31, 2006, 2005, and
2004 respectively. The tax benefits related to the exercise of
the non-qualified stock options and the vesting of the
restricted stock award were not recognized during 2006 due to
our NOLs. When the NOLs have been fully utilized by us, we will
recognize a tax benefit and an increase in additional paid-in
capital for the excess tax deductions received on the exercised
non-qualified stock options and vested restricted stock. Future
realization of the tax benefit will be presented in cash flows
from financing activities in the consolidated statements of cash
flows in the period the tax benefit is recognized.
Prior to the adoption of SFAS 123R, we recognized
stock-based compensation expense in accordance with APB 25
and followed the disclosure requirements of SFAS 123. The
stock options fair values were estimated on the date of grant
using the Black-Scholes option pricing model with the following
assumptions for 2005: dividend yield of 0% per annum; an
expected life of approximately 8 years; expected volatility
of 70% - 80%; and a risk free interest rate of 4% -
5%. The stock options fair values were estimated on the date of
grant using the Black-Scholes option pricing model with the
following assumptions for 2004: dividend yield of 0% per
annum; an expected life of approximately 8 years; expected
volatility of 50% - 73%; and a risk free interest rate of
4% - 6%. The following table illustrates the effect on net
income and earnings per share as if we had applied the fair
value recognition
142
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
provisions of SFAS 123, as amended by
SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure
(SFAS 148) (in thousands of dollars, except per
share amounts).
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Net income as reported
|
|
$
|
59,326
|
|
|
$
|
34,094
|
|
Add: Actual stock-based option
expense included in net income net of tax effects
|
|
|
(19
|
)
|
|
|
128
|
|
Less: Stock-based compensation
expense determined under SFAS 123 net of tax
effects
|
|
|
(2,613
|
)
|
|
|
(987
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
56,694
|
|
|
$
|
33,235
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
0.49
|
|
|
$
|
0.39
|
|
Pro forma
|
|
$
|
0.46
|
|
|
$
|
0.38
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
0.46
|
|
|
$
|
0.37
|
|
Pro forma
|
|
$
|
0.44
|
|
|
$
|
0.36
|
|
Stock-Based
Award Plans
We adopted the Covanta Holding Corporation Equity Award Plan for
Employees and Officers (the Employees Plan) and the
Covanta Holding Corporation Equity Award Plan for Directors (the
Directors Plan), (collectively the Award
Plans), effective with stockholder approval on
October 5, 2004. On July 25, 2005, our Board of
Directors approved and on September 19, 2005, our
stockholders approved the amendment to the Employees Plan to
authorize the issuance of an additional 2,000,000 shares.
The 1995 Stock and Incentive Plan (the 1995 Plan)
was terminated with respect to any future awards under such plan
on October 5, 2004 upon stockholder approval of the Award
Plans. The 1995 Plan will remain in effect until all awards have
been satisfied or expired.
The purpose of the Award Plans is to promote our interests
(including our subsidiaries and affiliates) and our
stockholders interests by using equity interests to
attract, retain and motivate our management, non-employee
directors and other eligible persons and to encourage and reward
their contributions to our performance and profitability. The
Award Plans provide for awards to be made in the form of
(a) shares of restricted stock, (b) incentive stock
options, (c) non-qualified stock options, (d) stock
appreciation rights, (e) performance awards, or
(f) other stock-based awards which relate to or serve a
similar function to the awards described above. Awards may be
made on a stand alone, combination or tandem basis. The maximum
aggregate number of shares of common stock available for
issuance is 6,000,000 under the Employees Plan and 400,000 under
the Directors Plan.
Restricted
Stock Awards
Restricted stock awards that have been issued to employees and
directors typically vest over a three-year period. Restricted
stock awards are stock-based awards for which the employee or
director does not have a vested right to the stock
(nonvested) until the requisite service period has
been rendered and the required financial performance factor has
been reached for each pre-determined vesting date. A percentage
of each employee restricted stock award granted has financial
performance factors. Stock-based compensation expense for each
financial performance factor is recognized beginning in the
period when management has determined it is probable the
financial performance factor will be achieved for the respective
vesting period.
Restricted stock awards to employees are subject to forfeiture
if the employee is not employed on the vesting date. Restricted
stock awards issued to directors prior to 2006 were subject to
the same forfeiture restrictions as are
143
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
applicable to employees. Restricted stock awards issued to
directors in 2006 are not subject to forfeiture in the event a
director ceases to be a member of the Board of Directors, except
in limited circumstances. Prior to vesting, restricted stock
awards have all of the rights of common stock (other than the
right to sell or otherwise transfer or to receive dividends,
when issued). The fair value of restricted stock awards is based
on the average of the high and low market price of our common
stock on the day immediately preceding the grant date of the
award.
We entered into an employment agreement with Mark A. Pytosh to
serve as Senior Vice President and Chief Financial Officer (the
Employment Agreement). The Employment Agreement was
effective as of September 1, 2006 and has a term expiring
October 5, 2009. Pursuant to the Employment Agreement, upon
commencement of his employment on September 1, 2006,
Mr. Pytosh received a grant of 20,000 shares of
restricted stock. The restricted stock award will be expensed
over the requisite service period. The terms of the restricted
stock award include vesting provisions based on financial
performance factors (applicable to 66% of the award) and
continued service over the passage of time (applicable to 34% of
the award). If all performance and service criteria are
satisfied, the award vests over three years, with
6,666 shares vesting on March 17, 2007,
6,667 shares vesting on March 17, 2008 and the
remaining 6,667 shares vesting on March 17, 2009.
On May 31, 2006, in accordance with our existing program
for annual director compensation, we granted 36,000 shares
of restricted stock under the Directors Plan. The awards have a
requisite service based vesting period as follows:
12,000 shares (33.33%) vested on May 31, 2006;
12,000 shares (33.33%) vesting on May 31, 2007; and
12,000 shares (33.34%) vesting on May 31, 2008. We
determined that the service vesting condition of the restricted
stock awards granted to the directors on May 31, 2006 to be
non-substantive and, in accordance with SFAS 123R, recorded
the entire fair value of the awards as compensation expense in
the three months ended June 30, 2006.
On March 17, 2006, we awarded certain employees
480,055 shares of restricted stock under the Employees
Plan. The restricted stock awards will be expensed over the
requisite service period, and assumes an eight percent
forfeiture rate. The terms of the restricted stock awards
include vesting provisions based on two financial performance
factors (applicable to 66% of the award) and continued service
over the passage of time (applicable to 34% of the award). If
all performance and service criteria are satisfied, the awards
vest over three years, with 160,002 shares (33.33%) vesting
on March 17, 2007, 160,002 shares (33.33%) vesting on
March 17, 2008 and the remaining 160,051 shares
(33.34%) vesting on March 17, 2009.
On September 19, 2005, in accordance with our existing
program for annual director compensation, we granted
13,500 shares of restricted stock under the Directors Plan.
The restricted stock vests on a pro rata basis over three years
commencing on the date of grant.
On July 7, 2005, we awarded certain key employees
404,000 shares of restricted stock under the Employees
Plan. The terms of the restricted stock awards include vesting
provisions based on two financial performance factors (66%) and
continued service over the passage of time (34%). The awards
vest over approximately 31 months, with 134,636 shares
(33.33%) vesting on February 28, 2006, 134,636 shares
(33.33%) vesting on February 28, 2007 and the remaining
134,728 shares (33.34%) vesting on February 29, 2008.
On October 5, 2004, we granted 641,010 shares of
restricted stock under the Employees Plan. Restrictions upon 50%
of the restricted stock shall lapse on a pro rata basis over
three years commencing on February 28, 2005 and the
restrictions upon the remaining 50% of the restricted stock
shall lapse over the same three year period based upon the
satisfaction of performance-based metrics of operating cash flow
or such other performance measures as may be determined by the
Compensation Committee of the Board of Directors.
On October 5, 2004, we granted 15,500 shares of
restricted stock under the Directors Plan. Restrictions on the
restricted stock shall lapse on a pro rata basis over three
years commencing on the date of grant. On December 5, 2004,
we granted an additional 1,250 shares of restricted stock
under the Directors Plans with similar term and vesting
provisions.
144
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Changes in nonvested restricted stock awards during the year
ended December 31, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Nonvested at December 31, 2005
|
|
|
828,154
|
|
|
$
|
9.88
|
|
Granted
|
|
|
536,055
|
|
|
|
17.05
|
|
Vested
|
|
|
(356,189
|
)
|
|
|
9.61
|
|
Forfeited
|
|
|
(72,487
|
)
|
|
|
13.20
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2006
|
|
|
935,533
|
|
|
|
13.85
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, there was $7.1 million
unrecognized stock-based compensation expense related to
nonvested restricted stock awards. This expense is expected to
be recognized over a period of up to three years. Total
compensation expense for restricted stock awards was
$5.5 million, $4.1 million and $1.1 million for
the years ended December 31, 2006, 2005 and 2004,
respectively.
Stock
Options
2004
Stock Option Plan
We have also awarded stock options to certain employees and
directors. Stock options awarded to directors vested
immediately. Stock options awarded to employees typically vested
annually over three years. We had one nonvested stock option
award outstanding as of December 31, 2005, which was
granted in October 2004. The fair value of the options was
calculated using the Black-Scholes option pricing model with the
following assumptions: fair value option price
$5.68; risk-free interest rate 4.25%; dividend
yield 0%; expected volatility (based on historical
volatility) 76%; and expected
life 8 years.
Pursuant to the Employment Agreement, as discussed above, upon
commencement of his employment on September 1, 2006,
Mr. Pytosh received options to purchase 50,000 shares
of our common stock. The options have an exercise price of
$20.35 per share and expire 10 years from the date of
grant. The options vest in two equal installments, with
25,000 shares vesting on February 28, 2007 and
25,000 shares vesting on February 28, 2008. The fair
value of the options was calculated using the Black-Scholes
option pricing model with the following assumptions: fair value
option price $10.90; risk-free interest
rate 4.65%; dividend yield 0%; expected
volatility (based on historical volatility) 40%; and
expected life 8 years.
On September 19, 2005, in accordance with our existing
program for annual director compensation, we granted options to
purchase an aggregate of 120,006 shares of common stock
under the Directors Plan. The options have an exercise price of
$12.90 per share and expire 10 years from the date of
grant. The options vested upon the date of grant, but were not
exercisable until March 19, 2005.
On October 5, 2004, we granted options to purchase an
aggregate of 1,020,000 shares of common stock under the
Employees Plan. The options have an exercise price of
$7.43 per share and expire 10 years from the date of
grant and vest over three years commencing on February 28,
2006.
On October 5, 2004, we granted options to purchase an
aggregate of 93,338 shares of common stock under the
Directors Plan. The options have an exercise price of
$7.43 per share and expire 10 years from the date of
grant and vested upon the date of grant. On December 5,
2004, we granted an additional 11,111 stock options at an
exercise price of $7.85 under the Directors Plans with similar
term and vesting provisions.
145
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
1995
Stock Option Plan
In September 2001, our stockholders approved amendments to the
1995 Plan which increased the aggregate number of shares
available for option grants from 1,700,000 to 2,540,000 and
provided for options to be awarded to independent contractors.
On July 24, 2002, our Board amended the 1995 Plan to
increase the aggregate number of shares available for grant from
2,540,000 to 4,976,273. The Board reserved 1,936,273 shares
for the grant of stock options to management of ACL, of which
options for 1,560,000 shares of our common stock were
granted. The options have an exercise price of $5.00 per
share and expire 10 years from the date of grant. One-half
of the options time vest over a four-year period in equal annual
installments and one-half of the options vest over a four-year
period in equal annual installments contingent upon the
financial performance of ACL and compliance with the terms of
its senior bank facility. During 2003, options for
829,375 shares of common stock were forfeited due to
terminations and ACL not achieving the performance targets.
In July 2002, options for 918,084 shares previously granted
to our employees, directors and contractors, which would have
expired upon the termination of the service of these individuals
to Covanta on July 24, 2002, were extended two years or two
years beyond the termination of their service in a new capacity,
but in no event longer than the original term with vesting
accelerated simultaneously with the extension.
On August 7, 2003, we granted options for
50,000 shares of common stock to an employee of NAICC. The
options have an exercise price of $1.45 per share and
expire 10 years from the grant date. 20,000 of the options
vest on the first and second anniversary of the grant date and
the remaining 10,000 options vest on the third anniversary of
the grant date.
The following table summarizes activity and balance information
of the options under the Awards Plans and 1995 Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
1995 Stock Option
Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the beginning of
the year
|
|
|
315,093
|
|
|
$
|
5.26
|
|
|
|
795,677
|
|
|
$
|
4.87
|
|
|
|
2,564,543
|
|
|
$
|
4.79
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
136,667
|
|
|
|
5.45
|
|
|
|
427,250
|
|
|
|
4.41
|
|
|
|
965,991
|
|
|
|
4.27
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
53,334
|
|
|
|
6.25
|
|
|
|
802,875
|
|
|
|
5.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the end of the year
|
|
|
178,426
|
|
|
$
|
5.11
|
|
|
|
315,093
|
|
|
$
|
5.26
|
|
|
|
795,677
|
|
|
$
|
4.87
|
|
Options exercisable at year end
|
|
|
178,426
|
|
|
$
|
5.11
|
|
|
|
305,093
|
|
|
$
|
5.38
|
|
|
|
715,675
|
|
|
$
|
5.04
|
|
Options available for future grant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 Stock Option
Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the beginning of
the year
|
|
|
928,115
|
|
|
$
|
8.14
|
|
|
|
1,124,449
|
|
|
$
|
7.43
|
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
50,000
|
|
|
|
20.35
|
|
|
|
120,006
|
|
|
|
12.90
|
|
|
|
1,124,449
|
|
|
|
7.43
|
|
Exercised
|
|
|
41,543
|
|
|
|
9.19
|
|
|
|
296,340
|
|
|
|
7.45
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
85,334
|
|
|
|
7.43
|
|
|
|
20,000
|
|
|
|
7.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the end of the year
|
|
|
851,238
|
|
|
$
|
8.87
|
|
|
|
928,115
|
|
|
$
|
8.14
|
|
|
|
1,124,449
|
|
|
$
|
7.43
|
|
Options exercisable at year end
|
|
|
216,572
|
|
|
$
|
10.12
|
|
|
|
258,115
|
|
|
$
|
9.97
|
|
|
|
104,449
|
|
|
$
|
7.47
|
|
Options available for future grant
|
|
|
3,494,230
|
|
|
|
|
|
|
|
4,081,535
|
|
|
|
|
|
|
|
1,475,551
|
|
|
|
|
|
146
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2006, options for shares were in the
following price ranges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Remaining
|
|
|
Options Exercisable
|
|
|
|
Number of
|
|
|
Weighted Average
|
|
|
Contractual Life
|
|
|
Number of
|
|
|
Weighted Average
|
|
Exercise Price Range
|
|
Shares
|
|
|
Exercise Price
|
|
|
(Years)
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
$1.45 - $4.26
|
|
|
70,001
|
|
|
$
|
3.06
|
|
|
|
6.5
|
|
|
|
70,001
|
|
|
$
|
3.06
|
|
$5.31
|
|
|
38,425
|
|
|
|
5.31
|
|
|
|
3.0
|
|
|
|
38,425
|
|
|
|
5.31
|
|
$7.06
|
|
|
70,000
|
|
|
|
7.06
|
|
|
|
1.0
|
|
|
|
70,000
|
|
|
|
7.06
|
|
$7.43
|
|
|
694,566
|
|
|
|
7.43
|
|
|
|
7.8
|
|
|
|
109,900
|
|
|
|
7.43
|
|
$12.90
|
|
|
106,672
|
|
|
|
12.90
|
|
|
|
8.7
|
|
|
|
106,672
|
|
|
|
12.90
|
|
$20.35
|
|
|
50,000
|
|
|
|
20.35
|
|
|
|
9.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,029,664
|
|
|
|
8.22
|
|
|
|
|
|
|
|
394,998
|
|
|
|
7.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value as of December 31, 2006 for
options outstanding, options vested and expected to vest in the
future and options exercisable was $14.2 million,
$13.5 million and $5.6 million, respectively. The
aggregate intrinsic value represents the total pre-tax intrinsic
value (the difference between the closing stock price on the
last trading day of 2006 and the exercise price, multiplied by
the number of
in-the-money
options) that would have been received by the option holders had
all option holders exercised their options on the last trading
day of 2006 (December 29, 2006). The intrinsic value
changes based on the fair market value of our common stock.
Total intrinsic value of options exercised for the year ended as
of December 31, 2006 was $2.1 million.
As of December 31, 2006, there were options to purchase
978,891 shares of common stock that had vested and were
expected to vest in future periods at a weighted average
exercise price of $8.21. The total fair value of options
expensed was $1.4 million for the year ended
December 31, 2006. As of December 31, 2006, there was
$1.0 million of total unrecognized compensation expense
related to stock options which is expected to be recognized over
a weighted-average period of 1.2 years.
|
|
Note 24.
|
Stockholders
Equity
|
Covantas common stock was traded on the American Stock
Exchange under the symbol DHC until close of trading
on October 4, 2005. Since that date, Covantas stock
has been traded on the New York Stock Exchange under the symbol
CVA.
On January 19, 2007, we announced a comprehensive
recapitalization plan utilizing a series of equity and debt
financings. Subsequent to this announcement, we completed an
underwritten public offering of 6.118 million shares of our
common stock for approximately $136.6 million, net of
underwriting discounts and commissions, and an underwritten
public offering of approximately $373.75 million aggregate
principal amount of convertible debentures issued by us, from
which we received proceeds of approximately $364.4 million,
net of underwriting discounts and commissions. Additional
information, including material terms related to our
recapitalization plan, is contained in Note 30. Subsequent
Events.
In connection with a pro rata rights offering to all
stockholders on May 27, 2005, we issued approximately
66.7 million additional shares of common stock for
approximately $400 million of gross proceeds, as more fully
described in Note 3. Acquisitions and Dispositions of the
Notes. On September 19, 2005, our stockholders approved an
amendment to the charter to increase the number of authorized
shares of common stock to 250,000,000 from 150,000,000. As of
December 31, 2006, there were 147,656,721 shares of
common stock issued of which 147,499,500 were outstanding; the
remaining 157,221 shares of common stock issued but not
outstanding were held as treasury stock as of December 31,
2006.
147
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In connection with a pro rata rights offering to all
stockholders on May 18, 2004, we issued approximately
27.4 million additional shares of common stock for
approximately $42 million of gross proceeds. In addition,
we issued the maximum 8.75 million shares to Laminar
pursuant to the conversion of approximately $13.4 million
in principal amount of notes.
We agreed as part of the Covanta Energy acquisition in March
2004 to conduct a rights offering for up to 3.0 million
shares of our common stock to certain holders of
9.25% debentures issued by Covanta Energy prior to its
bankruptcy at a purchase price of $1.53 per share (the
9.25% Offering). Because of the possibility that the
9.25% Offering could not be completed prior to the completion of
the ARC Holdings acquisition, and the related rights offering to
shareholders (the ARC Holdings Rights Offering), we
restructured the 9.25% Offering so that the holders that
participated in the 9.25% Offering were offered the right to
purchase an additional 2.7 million shares of our common
stock at the same purchase price ($6.00 per share) as in
the ARC Holdings Rights Offering. This represented an equivalent
number of shares of common stock that such holders would have
been entitled to purchase in the ARC Holdings Rights Offering if
the 9.25% Offering was consummated on or prior to the record
date for the ARC Holdings Rights Offering. On February 24,
2006, we completed the 9.25% Offering in which
5,696,911 shares were issued in consideration for
$20.8 million in gross proceeds.
For information related to stock-based award plans, see
Note 23. Stock-Based Award Plans.
The following represents shares of common stock reserved for
future issuance:
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
Estimated stock purchase rights of
certain creditors of Covanta Energy
|
|
|
|
|
Shares available for issuance
under Equity Plans
|
|
|
4,629,228
|
|
As of December 31, 2006, there were 10,000,000 shares
of preferred stock authorized, with none issued or outstanding.
The preferred stock may be divided into a number of series as
defined by the Covanta Board of Directors. The Board of
Directors is authorized to fix the rights, powers, preferences,
privileges and restrictions granted to and imposed upon the
preferred stock upon issuance.
|
|
Note 25.
|
Accumulated
Other Comprehensive Income
|
AOCI, net of income taxes, consists of the following (in
thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Foreign currency translation
|
|
$
|
860
|
|
|
$
|
(126
|
)
|
Minimum pension liability
|
|
|
(303
|
)
|
|
|
(403
|
)
|
Adjustment for unrecognized net
gain upon adoption of SFAS 158
|
|
|
1,650
|
|
|
|
|
|
Net unrealized gain on interest
rate swap
|
|
|
2,125
|
|
|
|
2,013
|
|
Net unrealized loss on
available-for-sale
securities
|
|
|
(390
|
)
|
|
|
(949
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive
income
|
|
$
|
3,942
|
|
|
$
|
535
|
|
|
|
|
|
|
|
|
|
|
148
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 26.
|
Earnings
Per Share
|
Per share data is based on the weighted average outstanding
number of our, par value $0.10 per share, common stock
during the relevant period. Basic earnings per share are
calculated using only the weighted average number of outstanding
shares of common stock. Diluted earnings per share computations,
as calculated under the treasury stock method, include the
weighted average number of shares of additional outstanding
common stock issuable for stock options, restricted stock, and
rights whether or not currently exercisable. Diluted earnings
per share for all the periods presented does not include
securities if their effect was anti-dilutive (in thousands,
except per share amounts).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net income
|
|
$
|
105,789
|
|
|
$
|
59,326
|
|
|
$
|
34,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common
shares outstanding
|
|
|
145,663
|
|
|
|
122,209
|
|
|
|
88,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.73
|
|
|
$
|
0.49
|
|
|
$
|
0.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common
shares outstanding
|
|
|
145,663
|
|
|
|
122,209
|
|
|
|
88,543
|
|
Stock options
|
|
|
557
|
|
|
|
688
|
|
|
|
302
|
|
Restricted stock
|
|
|
402
|
|
|
|
869
|
|
|
|
187
|
|
Rights
|
|
|
408
|
|
|
|
4,144
|
|
|
|
2,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted common
shares outstanding
|
|
|
147,030
|
|
|
|
127,910
|
|
|
|
91,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.72
|
|
|
$
|
0.46
|
|
|
$
|
0.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share and the weighted average
shares outstanding have been retroactively adjusted in 2005 to
reflect the bonus element contained in the ARC Holdings Rights
Offering and retroactively adjusted in 2004 to reflect the bonus
element contained in the 2005 ARC Holdings Rights Offering and
the rights offering completed on May 18, 2004.
There were 50,000 stock options excluded from the weighted
average diluted common shares calculation for the year ended
December 31, 2006 because their inclusion would have been
anti-dilutive as their exercise price was higher than the
average market price during such period.
On January 19, 2007, we announced a comprehensive
recapitalization plan utilizing a series of equity and debt
financings. Subsequent to this announcement, we completed an
underwritten public offering of 6.118 million shares of our
common stock for approximately $136.6 million, net of
underwriting discounts and commissions, and an underwritten
public offering of approximately $373.75 million aggregate
principal amount of convertible debentures issued by us, from
which we received approximately $364.4 million, net of
underwriting discounts and commissions. Additional information,
including material terms related to our recapitalization plan,
is contained in Note 30. Subsequent Events.
On December 2, 2003, pursuant to the note purchase
agreement, 5,120,853 shares of common stock were issued and
included in the weighted average outstanding shares calculation
as of March 10, 2004, the date on which certain conditions
upon which the shares were contingently returnable were
satisfied. The weighted average number of such shares included
in the basic and diluted earnings per share calculation was
4,152,801 for the year ended December 31, 2004.
149
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 27.
|
Business
Segments
|
Given the significance of the Covanta Energy and ARC Holdings
acquisitions to our results of operations and financial
condition, we decided, during the third quarter of 2005, to
combine the previously separate business segments of Insurance
Services and Holding company operations into one reportable
segment called Other Services. We currently have two reportable
business segments Waste and Energy Services and
Other Services. Certain prior period amounts, such as parent
investment income, have been reclassified in the consolidated
financial statements to conform to the current period
presentation.
The Waste and Energy Services segment develops, constructs, owns
and operates key infrastructure for others for the disposal of
waste (primarily energy-from-waste) and independent power
production facilities in the United States and abroad. We also
have one water treatment facility in this segment. The Other
Services segment is comprised of our insurance business, which
writes property and casualty insurance in California, and the
holding company which primarily receives income from its
investments and incurred general and administrative expenses
prior to the acquisition of Covanta Energy.
150
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The accounting policies of the reportable segments are
consistent with those described in the summary of significant
accounting policies, unless otherwise noted. Segment results
were as follows (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Operating Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Waste and Energy Services
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
1,117,927
|
|
|
$
|
831,018
|
|
|
$
|
452,983
|
|
International
|
|
|
136,868
|
|
|
|
132,948
|
|
|
|
102,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal Waste and Energy Services
|
|
|
1,254,795
|
|
|
|
963,966
|
|
|
|
555,328
|
|
Other Services
|
|
|
13,741
|
|
|
|
14,797
|
|
|
|
20,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
$
|
1,268,536
|
|
|
$
|
978,763
|
|
|
$
|
576,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from segment
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Waste and Energy Services
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
206,483
|
|
|
$
|
128,642
|
|
|
$
|
65,001
|
|
International
|
|
|
19,839
|
|
|
|
18,055
|
|
|
|
15,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal Waste and Energy Services
|
|
|
226,322
|
|
|
|
146,697
|
|
|
|
80,198
|
|
Other Services
|
|
|
438
|
|
|
|
(481
|
)
|
|
|
(3,328
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
226,760
|
|
|
|
146,216
|
|
|
|
76,870
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
11,770
|
|
|
|
6,129
|
|
|
|
2,343
|
|
Interest expense
|
|
|
(113,960
|
)
|
|
|
(89,973
|
)
|
|
|
(43,739
|
)
|
Loss on extinguishment of debt
|
|
|
(2,342
|
)
|
|
|
|
|
|
|
|
|
Gain on derivative instruments,
ACL warrants
|
|
|
|
|
|
|
15,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense,
minority interests and equity in net income from unconsolidated
investments
|
|
$
|
122,228
|
|
|
$
|
77,565
|
|
|
$
|
35,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
151
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For the years ended December 31, 2006, 2005, and 2004,
total assets, depreciation and amortization and capital
additions were as follows (in thousands of dollars).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
|
Total
|
|
|
and
|
|
|
Capital
|
|
|
|
Assets
|
|
|
Amortization
|
|
|
Additions
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Waste and Energy Services
(includes goodwill of $91.3 million)
|
|
$
|
4,313,828
|
|
|
$
|
193,114
|
|
|
$
|
54,250
|
|
Other Services
|
|
|
123,992
|
|
|
|
103
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
4,437,820
|
|
|
$
|
193,217
|
|
|
$
|
54,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Waste and Energy Services
(includes goodwill of $255.9 million)
|
|
$
|
4,569,025
|
|
|
$
|
124,814
|
|
|
$
|
23,468
|
|
Other Services
|
|
|
133,140
|
|
|
|
111
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
4,702,165
|
|
|
$
|
124,925
|
|
|
$
|
23,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
Waste and Energy Services
|
|
$
|
1,814,042
|
|
|
$
|
53,131
|
|
|
$
|
11,878
|
|
Other Services
|
|
|
125,039
|
|
|
|
151
|
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
1,939,081
|
|
|
$
|
53,282
|
|
|
$
|
11,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our operations are principally in the United States. Operations
outside of the United States are primarily in Asia, with some
projects in Latin America and Europe. A summary of revenues by
geographic area is as follows (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,131,667
|
|
|
$
|
845,814
|
|
|
$
|
473,851
|
|
India
|
|
|
108,150
|
|
|
|
94,680
|
|
|
|
64,805
|
|
Other Asia
|
|
|
27,741
|
|
|
|
37,735
|
|
|
|
36,648
|
|
Other International
|
|
|
978
|
|
|
|
534
|
|
|
|
892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,268,536
|
|
|
$
|
978,763
|
|
|
$
|
576,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of total assets by geographic area is as follows (in
thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Total Assets:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
4,199,607
|
|
|
$
|
4,470,539
|
|
India
|
|
|
71,098
|
|
|
|
75,279
|
|
Other Asia
|
|
|
110,437
|
|
|
|
103,585
|
|
Other International
|
|
|
56,678
|
|
|
|
52,762
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,437,820
|
|
|
$
|
4,702,165
|
|
|
|
|
|
|
|
|
|
|
152
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 28.
|
Quarterly
Data (Unaudited)
|
The following tables present quarterly unaudited financial data
for the periods presented on the consolidated statements of
operations (in thousands of dollars, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2006
|
|
|
|
|
Fiscal Quarter
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Total
|
|
|
Operating revenue
|
|
$
|
305,356
|
|
|
$
|
334,136
|
|
|
$
|
311,115
|
|
|
$
|
317,929
|
|
|
$
|
1,268,536
|
|
Operating income
|
|
|
35,518
|
|
|
|
76,688
|
|
|
|
71,643
|
|
|
|
42,911
|
|
|
|
226,760
|
|
Net income
|
|
|
11,418
|
|
|
|
51,178
|
|
|
|
31,251
|
|
|
|
11,942
|
|
|
|
105,789
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.08
|
|
|
|
0.35
|
|
|
|
0.21
|
|
|
|
0.08
|
|
|
|
0.73
|
|
Diluted
|
|
|
0.08
|
|
|
|
0.35
|
|
|
|
0.21
|
|
|
|
0.08
|
|
|
|
0.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2005(1)
|
|
|
|
|
Fiscal Quarter
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Total
|
|
|
Operating revenue
|
|
$
|
174,819
|
|
|
$
|
199,092
|
|
|
$
|
301,490
|
|
|
$
|
303,362
|
|
|
$
|
978,763
|
|
Operating income
|
|
|
13,859
|
|
|
|
28,814
|
|
|
|
64,991
|
|
|
|
38,552
|
|
|
|
146,216
|
|
Net income
|
|
|
10,303
|
|
|
|
5,917
|
|
|
|
37,401
|
|
|
|
5,705
|
|
|
|
59,326
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.10
|
|
|
|
0.06
|
|
|
|
0.27
|
|
|
|
0.04
|
|
|
|
0.49
|
|
Diluted
|
|
|
0.10
|
|
|
|
0.05
|
|
|
|
0.26
|
|
|
|
0.04
|
|
|
|
0.46
|
|
|
|
|
(1) |
|
Includes ARC Holdings results of operations since
June 25, 2005. |
Basic and diluted earnings per share and the weighted average
shares outstanding have been retroactively adjusted in 2005 to
reflect the bonus element contained in the ARC Holdings Rights
Offering and retroactively adjusted in 2004 to reflect the bonus
element contained in the 2005 ARC Holdings Rights Offering and
the rights offering completed on May 18, 2004.
|
|
Note 29.
|
Related-Party
Transactions
|
One member of our current Board of Directors is a senior advisor
to a major law firm which Covanta Energy used for several years,
predating our acquisition of Covanta Energy. Such member of the
Board of Directors has had no direct or indirect involvement in
the procurement, oversight or provision of such services, is not
involved in any manner in the billing of such services, and does
not directly or indirectly benefit from associated fees. We have
sought legal services and advice from this firm after
March 10, 2004 and since that date have paid this law firm
approximately $0.1 million in 2004 (after March 10,
2004), $0.8 million in 2005 and $0.3 million in 2006.
As part of the investment and purchase agreement with Covanta
Energy, we were obligated to arrange a second lien credit
facility to be entered into by Covanta Energy. Covanta Energy
paid a fee to the agent bank for the second lien facility which
was shared by the Bridge Lenders, among others. Also, in order
to finance our acquisition of Covanta Energy and to arrange the
second lien facility, Covanta entered into a note purchase
agreement with the Bridge Lenders. In addition, in connection
with such note purchase agreement, Laminar arranged for a
$10 million revolving loan facility for CPIH secured by
CPIHs assets. The second lien facility and the CPIH
revolving loan facility, were refinanced and replaced on
June 24, 2005.
We and Covanta Energy have entered into a corporate services
agreement, pursuant to which we provide to Covanta Energy, at
Covanta Energys expense, certain administrative and
professional services and Covanta Energy pays most of our
expenses, which totaled $5.3 million and $17.8 million
for the year ended December 31, 2006 and
153
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2005, respectively. The amounts accrued but not paid under these
arrangements totaled $1.7 million and $12.4 million
for the years ended December 31, 2006 and 2005.
As described in Note 4. Equity in Net Income from
Unconsolidated Investments of the Notes, Covanta Energy holds a
26% investment in Quezon. Covanta Energy and Quezon are both
party to an agreement in which Covanta Energy assumed
responsibility for the operation and maintenance of
Quezons coal-fired electricity generation facility. For
the fiscal years ended December 31, 2006, 2005 and 2004,
Covanta Energy, subsequent to their acquisition by us, collected
$26.9 million, $29.5 million and $34.7 million,
respectively, for the operation and maintenance of the facility.
As of December 31, 2006, the net amount due to Quezon was
$2.2 million and as of December 31, 2005, the net
amount due from Quezon was $0.1 million.
ACL was our indirect, wholly-owned subsidiary prior to
ACLs bankruptcy proceedings. At that same time, SZ
Investments, LLCs equity ownership in us was approximately
18%. SZ Investments, LLC is affiliated with Samuel Zell, our
current Chairman of the Board of Directors and William Pate, the
former Chairman of our Board and a current Director. Another
affiliate of SZ Investments, HY I Investments, LLC, was a holder
of approximately 42% of ACLs Senior Notes and PIK Notes.
The holders of ACLs Senior Notes were among the class of
grantors of the warrants to our subsidiaries.
SZ Investments, Third Avenue and Laminar, then representing
aggregate ownership of approximately 40% of our outstanding
common stock, each agreed to and participated in the ARC
Holdings Rights Offering and acquired at least their respective
pro rata portion of the shares. As consideration for their
commitments, we paid each of these stockholders an amount equal
to 1.75% of their respective equity commitments, which in the
aggregate was $2.8 million. We also agreed to amend an
existing registration rights agreement to provide these
stockholders with the right to demand that we undertake an
underwritten offering within twelve months of the closing of the
acquisition of ARC Holdings in order to provide such
stockholders with liquidity or to register for resale common
stock acquired in such offering. None of such stockholders
exercised such right to request an underwritten offering prior
to the expiration of such period.
We agreed as part of the Covanta Energy acquisition to conduct
the 9.25% Offering and because of the possibility that the 9.25%
Offering could not be completed prior to the completion of the
ARC Holdings Rights Offering, we restructured the 9.25% Offering
to offer an additional 2.7 million shares of our common
stock at the same purchase price as in the ARC Holdings Rights
Offering. On February 24, 2006, we completed the 9.25%
Offering in which 5,696,911 shares were issued in
consideration for $20.8 million in gross proceeds,
including 633,380 shares purchased by Laminar pursuant to
the exercise of rights held by Laminar as a holder of
9.25% debentures.
|
|
Note 30.
|
Subsequent
Events
|
China
Joint Venture
On February 12, 2007, we entered into agreements relating
to the subscription for a 40% equity interest in Chongqing
Sanfeng Environmental Industry Co., Ltd. (Sanfeng).
Sanfeng, a company located in Chongqing Municipality, China, is
engaged in the business of owning and operating
energy-from-waste projects and providing design and engineering,
procurement and construction services for energy-from-waste
facilities in China. Sanfeng currently owns minority equity
interests in two 1,200 metric tons per day 24 MW mass-burn
energy-from-waste projects. Energy-from-waste facility design
and engineering services are provided by Sanfeng using
technology under license from Martin GmbH fur Umwelt und
Energietechnik.
Our investment in Sanfeng is subject to various regulatory and
other conditions precedent and is expected to be completed
during the second quarter of 2007. Upon completion of our
investment, Sanfeng will be converted into a Sino-foreign equity
joint venture under Chinese law in which Sanfengs current
shareholder, Chongqing Iron & Steel Company (Group)
Limited, will hold the remaining 60% equity interest.
154
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2007
Recapitalization Plan
On January 19, 2007, we announced a comprehensive
recapitalization plan utilizing a series of equity and debt
financings. Subsequent to this announcement, we completed the
following transactions:
|
|
|
|
|
the refinancing of Covanta Energys debt facilities with
new Covanta Energy debt facilities, comprised of a
$300 million revolving credit facility, a $320 million
funded letter of credit facility, and a $650 million term
loan;
|
|
|
|
an underwritten public offering of 6.118 million shares of
our common stock, in which we received proceeds of approximately
$136.6 million, net of underwriting discounts and
commissions;
|
|
|
|
an underwritten public offering of approximately
$373.75 million aggregate principal amount of convertible
debentures issued by us, from which we received proceeds of
approximately $364.4 million, net of underwriting discounts
and commissions; and
|
|
|
|
the repayment, by means of a tender offer, of approximately
$604.4 million in aggregate principal amount of outstanding
notes previously issued by Covanta Energys intermediate
subsidiaries.
|
We completed our public offerings of equity and debt, including
over-allotment options exercised by underwriters, on
January 31, 2007 and February 6, 2007, and we closed
on the New Credit Facilities on February 9, 2007. We
completed our tender offer for approximately $604.4 million
in aggregate principal amount of outstanding notes on
February 22, 2007. As a result of the recapitalization
plan, we expect to record in the first quarter of 2007 an
aggregate charge of approximately $30 million, pre-tax,
which is comprised of the write-down of deferred financing
costs, tender premiums paid for the intermediate subsidiary
debt, a call premium paid for the Second Lien Term Loan
Facility, partially offset by the write-down of unamortized
premiums relating to the intermediate subsidiary debt and a gain
associated with the settlement of our interest rate swap
agreements. Components of this charge will be classified in our
statement of operations as part of either loss on extinguishment
of debt or interest expense. We are currently completing our
analysis based upon the relevant authoritative accounting
literature. The following discussion details the material terms
of each of these transactions.
Material
Terms of New Credit Facilities
The New Credit Facilities are comprised of:
|
|
|
|
|
a $300 million revolving loan facility due 2013, which
includes a $200 million
sub-facility
for the issuance of letters of credit (the Revolving
Loan Facility);
|
|
|
|
a $320 million funded letter of credit facility, due 2014
(the Funded L/C Facility); and
|
|
|
|
a $650 million term loan facility, due 2014 (the Term
Loan Facility).
|
155
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amortization
Terms
The New Credit Facilities include mandatory annual amortization
of the Term Loan Facility to be paid in quarterly
installments beginning June 30, 2007, through the date of
maturity as follows (in thousands of dollars):
|
|
|
|
|
|
|
Annual
|
|
|
|
Remaining
|
|
|
|
Amortization
|
|
|
2007
|
|
$
|
4,875
|
|
2008
|
|
|
6,500
|
|
2009
|
|
|
6,500
|
|
2010
|
|
|
6,500
|
|
2011
|
|
|
6,500
|
|
2012
|
|
|
6,500
|
|
2013
|
|
|
6,500
|
|
2014
|
|
|
606,125
|
|
|
|
|
|
|
Total
|
|
$
|
650,000
|
|
|
|
|
|
|
Under the New Credit Facilities, Covanta Energy is obligated to
apply a portion of excess cash from operations on an annual
basis (calculated pursuant to the credit agreement), as well as
specified other sources, to repay borrowings under the Term
Loan Facility. The portion of excess cash to be used for
this purpose is 50%, 25%, or 0%, based on measurement of the
leverage ratio described below.
Interest
and Fee Terms
Loans under the New Credit Facilities are designated, at our
election, as Eurodollar rate loans or base rate loans.
Eurodollar loans bear interest at a reserve adjusted British
Bankers Association Interest Settlement Rate, commonly referred
to as LIBOR, for deposits in dollars plus a
borrowing margin as described below. Interest on Eurodollar rate
loans is payable at the end of the applicable interest period of
one, two, three or six months (and at the end of every three
months in the case of six month Eurodollar loans). Base rate
loans bear interest at (a) a rate per annum equal to the
greater of (1) the prime rate designated in the
relevant facility or (2) the federal funds rate plus
0.5% per annum, plus (b) a borrowing margin as
described below.
Letters of credit that may be issued in the future under the
Revolving Credit Facility will accrue fees at the then effective
borrowing margins on Eurodollar rate loans (described below),
plus a fee on each issued letter of credit payable to the
issuing bank. Letter of credit availability under the Funded L/C
Facility accrues fees (whether or not letters of credit are
issued thereunder) at the then-effective borrowing margin for
Eurodollar rate loans times the total availability under letters
of credit (whether or not then utilized), plus a fee on each
issued letter of credit payable to the issuing bank. In
addition, Covanta Energy has agreed to pay to the participants
under the Funded L/C Facility a fee equal to 0.10% times the
average daily amount of the credit linked deposit paid by such
participants for their participation under the Funded L/C
Facility.
156
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The borrowing margins referred to above for the Revolving
Credit Facility, the Term Loan Facility and the Funded
L/C Facility are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowing Margin
|
|
|
Borrowing Margin
|
|
|
|
|
|
|
|
|
|
for Term Loans,
|
|
|
for Term Loans,
|
|
|
|
|
|
|
|
|
|
Funded Letters of
|
|
|
Funded Letters of
|
|
|
|
|
|
|
|
|
|
Credit and
|
|
|
Credit and
|
|
|
|
Borrowing Margin
|
|
|
Borrowing Margin
|
|
|
Credit-Linked
|
|
|
Credit-Linked
|
|
|
|
for Revolving Loans
|
|
|
for Revolving Loans
|
|
|
Deposits
|
|
|
Deposits
|
|
Leverage Ratio
|
|
(Eurodollar Loans)
|
|
|
(Base Rate Loans)
|
|
|
(Eurodollar Loans)
|
|
|
(Base Rate Loans)
|
|
|
³
4.00:1.00
|
|
|
2.00
|
%
|
|
|
1.00
|
%
|
|
|
1.75
|
%
|
|
|
0.75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
< 4.00:1.00
³ 3.25:1.00
|
|
|
1.75
|
%
|
|
|
0.75
|
%
|
|
|
1.50
|
%
|
|
|
0.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
< 3.25:1.00
³ 2.75:1.00
|
|
|
1.50
|
%
|
|
|
0.50
|
%
|
|
|
1.50
|
%
|
|
|
0.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
< 2.75:1.00
|
|
|
1.25
|
%
|
|
|
0.25
|
%
|
|
|
1.50
|
%
|
|
|
0.50
|
%
|
Guarantees
and Securitization
The New Credit Facilities are guaranteed by us and by certain
Covanta Energy subsidiaries. Covanta Energy and certain of its
subsidiaries that are party to the New Credit Facilities agreed
to secure all of Covanta Energys obligations under the New
Credit Facilities by granting, for the benefit of secured
parties, a first priority lien on substantially all of their
assets, to the extent permitted by existing contractual
obligations, a pledge of substantially all of the capital stock
of each of Covanta Energys domestic subsidiaries owned by
it and 65% of substantially all the capital stock of each of
Covanta Energys foreign subsidiaries directly owned by it,
in each case to the extent not otherwise pledged.
Debt
Covenants and Defaults
The loan documentation under the New Credit Facilities contains
customary affirmative and negative covenants and financial
covenants. During the term of the New Credit Facilities, we
expect that the negative covenants will place limitations on
Covanta Energy, but be materially less restrictive than the
restrictions in effect during 2006 and prior to February 9,
2007.
The affirmative covenants of the New Credit Facilities include
covenants relating to the following:
|
|
|
|
|
financial statements and other reports;
|
|
|
|
continued existence;
|
|
|
|
payment of taxes and claims;
|
|
|
|
maintenance of properties;
|
|
|
|
insurance coverage;
|
|
|
|
inspections by lenders (subject to frequency and cost
reimbursement limitations);
|
|
|
|
lenders meetings;
|
|
|
|
compliance with laws;
|
|
|
|
environmental matters;
|
|
|
|
additional material real estate assets;
|
|
|
|
designation of subsidiaries; and
|
|
|
|
post-closing matters.
|
157
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The negative covenants of the New Credit Facilities include
limitations on the following:
|
|
|
|
|
indebtedness (including guarantee obligations);
|
|
|
|
liens;
|
|
|
|
negative pledge clauses;
|
|
|
|
restricted junior payments;
|
|
|
|
clauses restricting subsidiary distributions;
|
|
|
|
investments;
|
|
|
|
fundamental changes;
|
|
|
|
disposition of assets;
|
|
|
|
acquisitions;
|
|
|
|
conduct of business;
|
|
|
amendments or waivers of certain agreements;
|
|
|
changes in fiscal year; and
|
|
|
hedge agreements.
|
The financial covenants of the New Credit Facilities include the
following:
|
|
|
|
|
maximum Covanta Energy leverage ratio, which measures Covanta
Energys principal amount of consolidated debt less certain
restricted funds dedicated to repayment of project debt
principal and construction costs (Consolidated Adjusted
Debt) to its adjusted earnings before interest, taxes,
depreciation and amortization, as calculated under the New
Credit Facilities (Adjusted EBITDA);
|
|
|
maximum Covanta Energy capital expenditures; and
|
|
|
minimum Covanta Energy interest coverage ratio, which measures
Covanta Energys Adjusted EBITDA to its consolidated
interest expense plus certain interest expense of ours, to the
extent paid by Covanta Energy.
|
Defaults under the New Credit Facilities include:
|
|
|
|
|
non-payment of principal when due;
|
|
|
non-payment of any amount payable to an issuing bank in
reimbursement of any drawing under a letter of credit when due;
|
|
|
non-payment of interest, fees or other amounts after a grace
period of five days;
|
|
|
cross-default to material indebtedness;
|
|
|
violation of a covenant (subject, in the case of certain
affirmative covenants, to a grace period of thirty days);
|
|
|
material inaccuracy of a representation or warranty when made;
|
|
|
bankruptcy events with respect to us, Covanta Energy or any
material subsidiary or group of subsidiaries of Covanta Energy;
|
|
|
material judgments;
|
|
|
certain material ERISA events;
|
|
|
change of control (subject to exceptions for certain of our
existing owners);
|
|
|
failure of subordination; and
|
|
|
actual or asserted invalidity of any guarantee or security
document.
|
Material
Terms of Equity Offering
On January 31, 2007, we completed an offering of
5.32 million shares of our common stock in an underwritten
public offering. The shares were sold to the public at a price
of $23.50 per share. We granted the underwriters an option
to purchase up to an additional 798,000 shares of common
stock at $22.325 per share for a period of 30 days
beginning on and including the date of original issuance of the
shares in connection with this offering, solely to cover
over-allotments. The option was exercised and such additional
shares were sold on February 6, 2007.
158
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Proceeds received in these offerings were approximately
$136.6 million, net of underwriting discounts and
commissions.
Material
Terms of the Debentures
On January 31, 2007, we also completed an offering of
$373.75 million principal amount of 1.00% Senior
Convertible Debentures due 2027, in an underwritten public
offering. This offering included debentures sold pursuant to an
over-allotment option which was exercised by the underwriters.
The Debentures constitute our general unsecured senior
obligations and will rank equally in right of payment with any
future senior unsecured indebtedness. The Debentures are
effectively junior to our existing and future secured
indebtedness, including the New Credit Facilities, to the extent
of the value of the assets securing such indebtedness. The
Debentures are not guaranteed by any of our subsidiaries and are
effectively subordinated to all existing and future indebtedness
and liabilities (including trade payables) of our subsidiaries.
The Debentures bear interest at a rate of 1.00% per year,
payable semi-annually in arrears, on February 1 and
August 1 of each year, commencing on August 1, 2007
and will mature on February 1, 2027. Beginning with the
six-month interest period commencing February 1, 2012, we
will pay contingent interest on the Debentures during any
six-month interest period in which the trading price of the
Debentures measured over a specified number of trading days is
120% or more of the principal amount of the Debentures. When
applicable, the contingent interest payable per $1,000 principal
amount of Debentures will equal 0.25% of the average trading
price of $1,000 principal amount of Debentures during the five
trading days ending on the second trading day immediately
preceding the first day of the applicable six-month interest
period.
Under limited circumstances, the Debentures are convertible by
the holders thereof, at any time, into cash and shares of our
common stock, if any, initially based on a conversion rate of
35.4610 shares of our common stock per $1,000 principal
amount of Debentures, (which represents an initial conversion
price of approximately $28.20 per share), subject to
adjustment. In the event of certain types of fundamental
changes, such as an acquisition of us by a third party, we will
increase the conversion rate by a number of additional shares
or, in lieu thereof and if applicable, an acquirer may elect to
adjust the conversion obligation and conversion rate so that the
Debentures are convertible based on the shares of the acquired
or surviving company.
At our option, the Debentures are subject to redemption at any
time on or after February 1, 2012, in whole or in part, at
a redemption price equal to 100% of the principal amount of the
Debentures being redeemed, plus accrued and unpaid interest
(including contingent interest, if any). In addition, holders
may require us to repurchase their Debentures on
February 1, 2012, February 1, 2017 and
February 1, 2022, in whole or in part, for cash at a
repurchase price equal to 100% of the principal amount of the
Debentures being repurchased, plus accrued and unpaid interest
(including contingent interest, if any). The Debentures are also
subject to repurchase by us, at the holders option, if a
fundamental change occurs, for cash at a repurchase price equal
to 100% of the principal amount of the Debentures, plus accrued
and unpaid interest (including contingent interest, if any).
Intermediate
Subsidiary Debt Tender Offer
On January 23, 2007, we commenced cash tender offers for
(a) any and all of the outstanding
81/2% Senior
Secured Notes due 2010 (the MSW I Notes) issued by
MSW Energy Holdings LLC and its wholly owned subsidiary, MSW
Energy Finance Co., Inc. (b) any and all of the outstanding
73/8% Senior
Secured Notes due 2010 (the MSW II Notes)
issued by MSW Energy Holdings II LLC and its wholly owned
subsidiary, MSW Energy Finance Co. II, Inc. and
(c) any and all of the outstanding 6.26% Senior Notes
due 2015 (the ARC Notes) of Covanta ARC LLC.
In connection with each of the tender offers, we solicited the
consents of the holders of each of the Notes to certain proposed
amendments to the indentures governing such Notes. The primary
purpose of the solicitations and
159
COVANTA
HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Concluded)
the proposed amendments was to eliminate from the indentures
substantially all of the restrictive covenants and certain
events of default provisions contained therein.
Under the terms of the tender offer for the MSW I Notes and
MSW II Notes, we offered to purchase the outstanding MSW I
Notes and MSW II Notes for a total consideration, for each
$1,000 principal amount of MSW I Notes and MSW II Notes
validly tendered and accepted for payment, equal to $1,096.46
and $1,079.92, respectively, which included a consent fee of $30
for each $1,000 principal amount of MSW I Notes and MSW II
Notes validly tendered and accepted for payment.
Under the terms of the tender offer for the ARC Notes, we
offered to purchase the outstanding ARC Notes for total
consideration, for each $1,000 original principal amount of ARC
Notes validly tendered and accepted for payment, equal to
$729.82, which included a consent fee of $30 for each $1,000
principal amount of ARC Notes validly tendered and accepted for
payment.
The solicitations for each of the Notes expired on
February 5, 2007. At that time, we had received consents
from the requisite number of holders of each of the outstanding
MSW I Notes, MSW II Notes and ARC Notes, to amend the
applicable indentures governing each of the Notes to eliminate
substantially all of the restrictive covenants and certain
events of default provisions. Each of the issuers entered into a
supplemental indenture with the respective trustee for the
applicable Notes. The supplemental indentures became operative
on February 22, 2007.
160
SCHEDULE I
COVANTA
HOLDING CORPORATION
CONDENSED
STATEMENT OF OPERATIONS
HOLDING
COMPANY ONLY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Operating revenues
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
|
|
|
|
|
|
|
|
306
|
|
Director fees
|
|
|
|
|
|
|
|
|
|
|
99
|
|
Professional fees
|
|
|
|
|
|
|
|
|
|
|
1,664
|
|
Insurance expense
|
|
|
|
|
|
|
|
|
|
|
296
|
|
Other general and administrative
expenses
|
|
|
|
|
|
|
|
|
|
|
152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
|
|
|
|
|
|
|
|
2,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss before income taxes
|
|
|
|
|
|
|
|
|
|
|
(2,517
|
)
|
Investment income
|
|
|
2,711
|
|
|
|
800
|
|
|
|
485
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(9,033
|
)
|
Income tax benefit
|
|
|
3,891
|
|
|
|
274
|
|
|
|
13,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before equity in net
income of subsidiaries
|
|
|
6,602
|
|
|
|
1,074
|
|
|
|
2,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net income of Waste and
Energy Services subsidiaries
|
|
|
98,752
|
|
|
|
43,540
|
|
|
|
33,276
|
|
Equity in net (loss) of insurance
subsidiaries excluding gain on ACL warrants
|
|
|
435
|
|
|
|
(481
|
)
|
|
|
(879
|
)
|
Equity in net income of ACL
Holdings LLC (former holder of the ACL warrants)
|
|
|
|
|
|
|
15,193
|
|
|
|
|
|
Equity in net income of marine
services subsidiaries
|
|
|
|
|
|
|
|
|
|
|
(511
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity in net income of
subsidiaries
|
|
|
99,187
|
|
|
|
58,252
|
|
|
|
31,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
105,789
|
|
|
$
|
59,326
|
|
|
$
|
34,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holding company expenses from above
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holding company expenses reported
on Consolidated Statements of Operations
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
161
COVANTA
HOLDING CORPORATION
CONDENSED
STATEMENT OF FINANCIAL POSITION
HOLDING
COMPANY ONLY
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Cash
|
|
$
|
52,763
|
|
|
$
|
29,478
|
|
Fixed maturities,
available-for-sale
at fair value (cost: $3,200 and $3,300)
|
|
|
3,200
|
|
|
|
3,300
|
|
|
|
|
|
|
|
|
|
|
Total cash and investments
|
|
|
55,963
|
|
|
|
32,778
|
|
Restricted cash, insurance
subsidiary escrow
|
|
|
6,660
|
|
|
|
6,520
|
|
Investment in Waste and Energy
Services subsidiaries
|
|
|
465,024
|
|
|
|
511,435
|
|
Investment in insurance
subsidiaries
|
|
|
17,622
|
|
|
|
16,627
|
|
Intercompany receivable
|
|
|
11,635
|
|
|
|
17,567
|
|
Deferred tax asset
|
|
|
171,904
|
|
|
|
26,235
|
|
Prepaid and other assets
|
|
|
2,582
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
731,390
|
|
|
$
|
611,245
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
|
LIABILITIES:
|
Accounts payable
|
|
$
|
1,984
|
|
|
$
|
1,423
|
|
Income taxes payable
|
|
|
(9,746
|
)
|
|
|
239
|
|
Other liabilities
|
|
|
|
|
|
|
10,342
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
(7,762
|
)
|
|
|
12,004
|
|
|
|
|
|
|
|
|
|
|
Stockholders
Equity:
|
|
|
|
|
|
|
|
|
Preferred stock ($0.10 par
value; authorized 10,000 shares; none issued and
outstanding)
|
|
|
|
|
|
|
|
|
Common stock ($0.10 par
value; authorized 250,000 and 150,000 shares; issued
147,657 and 141,246 shares; outstanding 147,500 and
141,166 shares)
|
|
|
14,766
|
|
|
|
14,125
|
|
Additional paid-in capital
|
|
|
619,685
|
|
|
|
594,186
|
|
Unearned compensation
|
|
|
|
|
|
|
(4,583
|
)
|
Accumulated other comprehensive
income
|
|
|
3,942
|
|
|
|
535
|
|
Accumulated earnings (deficit)
|
|
|
100,775
|
|
|
|
(5,014
|
)
|
Treasury stock, at par
|
|
|
(16
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
739,152
|
|
|
|
599,241
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
731,390
|
|
|
$
|
611,245
|
|
|
|
|
|
|
|
|
|
|
162
COVANTA
HOLDING CORPORATION
CONDENSED
STATEMENT CASH FLOWS
HOLDING
COMPANY ONLY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
105,789
|
|
|
$
|
59,326
|
|
|
$
|
34,094
|
|
Adjustments to reconcile net
income to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gain on the sale of
investment securities
|
|
|
|
|
|
|
|
|
|
|
(159
|
)
|
Amortization of deferred financing
costs
|
|
|
|
|
|
|
|
|
|
|
7,045
|
|
Change in accrued investment income
|
|
|
|
|
|
|
|
|
|
|
39
|
|
Stock option and unearned
compensation expense
|
|
|
|
|
|
|
2
|
|
|
|
1,425
|
|
Interest payable
|
|
|
|
|
|
|
|
|
|
|
(400
|
)
|
Deferred tax asset
|
|
|
1,068
|
|
|
|
(6,661
|
)
|
|
|
(16,693
|
)
|
Receivable from Waste and Energy
Services
|
|
|
12,818
|
|
|
|
(11,495
|
)
|
|
|
(2,016
|
)
|
Equity in net income of Waste and
Energy Services subsidiaries
|
|
|
(98,752
|
)
|
|
|
(43,540
|
)
|
|
|
(33,276
|
)
|
Equity in net loss of marine
services subsidiaries
|
|
|
|
|
|
|
|
|
|
|
511
|
|
Equity in net income of ACL
Holdings LLC
|
|
|
|
|
|
|
(15,193
|
)
|
|
|
|
|
Equity in net (income) loss of
insurance subsidiaries
|
|
|
(435
|
)
|
|
|
481
|
|
|
|
879
|
|
Changes in other assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
(2,529
|
)
|
|
|
(190
|
)
|
|
|
(1,723
|
)
|
Other liabilities
|
|
|
(16,221
|
)
|
|
|
8,060
|
|
|
|
3,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities
|
|
|
1,738
|
|
|
|
(9,210
|
)
|
|
|
(7,050
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of Energy and Marine
Services
|
|
|
|
|
|
|
|
|
|
|
(36,400
|
)
|
Contribution to Waste and Energy
Services
|
|
|
|
|
|
|
(384,954
|
)
|
|
|
|
|
Proceeds from sale of marine
services subsidiaries
|
|
|
|
|
|
|
2,500
|
|
|
|
1,512
|
|
Proceeds from the sale of
investment securities
|
|
|
100
|
|
|
|
15,975
|
|
|
|
612
|
|
Restricted cash, Covanta escrow
|
|
|
|
|
|
|
|
|
|
|
37,026
|
|
Purchase of investment securities,
net
|
|
|
|
|
|
|
|
|
|
|
(3,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
|
100
|
|
|
|
(366,479
|
)
|
|
|
(550
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent company debt issue costs
|
|
|
|
|
|
|
|
|
|
|
(900
|
)
|
Repayment of bridge financing
|
|
|
|
|
|
|
|
|
|
|
(26,612
|
)
|
Net proceeds from rights offering
|
|
|
20,498
|
|
|
|
395,791
|
|
|
|
41,021
|
|
Funds held in escrow
|
|
|
|
|
|
|
(6,471
|
)
|
|
|
|
|
Proceeds from the exercise of
options for common stock
|
|
|
1,126
|
|
|
|
2,984
|
|
|
|
3,474
|
|
Other financing activities, net
|
|
|
(177
|
)
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
21,447
|
|
|
|
392,255
|
|
|
|
16,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents
|
|
|
23,285
|
|
|
|
16,566
|
|
|
|
9,383
|
|
Cash and cash equivalents at
beginning of period
|
|
|
29,478
|
|
|
|
12,912
|
|
|
|
3,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of period
|
|
$
|
52,763
|
|
|
$
|
29,478
|
|
|
$
|
12,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
163
Schedule II
Valuation and Qualifying Accounts
Receivables
Valuation and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
Charged to
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning
|
|
|
Costs and
|
|
|
Other
|
|
|
|
|
|
End of
|
|
|
|
of Period
|
|
|
Expense
|
|
|
Accounts
|
|
|
Deductions
|
|
|
Period
|
|
|
|
(In thousands)
|
|
|
WASTE AND ENERGY
SERVICES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances deducted in the balance
sheet from the assets to which they apply:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Doubtful receivables
current
|
|
$
|
3,997
|
|
|
$
|
2,170
|
|
|
$
|
1,003
|
|
|
$
|
3,581
|
|
|
$
|
3,589
|
|
Retention receivables
current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Doubtful receivables
noncurrent
|
|
|
274
|
|
|
|
81
|
|
|
|
|
|
|
|
(27
|
)
|
|
|
382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,271
|
|
|
$
|
2,251
|
|
|
$
|
1,003
|
|
|
$
|
3,554
|
|
|
$
|
3,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances deducted in the balance
sheet from the assets to which they apply:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Doubtful receivables
current
|
|
$
|
434
|
|
|
$
|
2,478
|
|
|
$
|
2,344
|
(1)
|
|
$
|
1,259
|
|
|
$
|
3,997
|
|
Retention receivables
current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Doubtful receivables
noncurrent
|
|
|
170
|
|
|
|
99
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
604
|
|
|
$
|
2,577
|
|
|
$
|
2,344
|
|
|
$
|
1,254
|
|
|
$
|
4,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 11, through
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances deducted in the balance
sheet from the assets to which they apply:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Doubtful receivables
current
|
|
$
|
|
|
|
$
|
733
|
|
|
$
|
|
|
|
$
|
299
|
|
|
$
|
434
|
|
Retention receivables
current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Doubtful receivables
noncurrent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(170
|
)
|
|
|
170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
733
|
|
|
$
|
|
|
|
$
|
129
|
|
|
$
|
604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER SERVICES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for premiums and fees
receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
4
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4
|
|
2005
|
|
|
128
|
|
|
|
(57
|
)
|
|
|
|
|
|
|
67
|
|
|
|
4
|
|
2004
|
|
|
462
|
|
|
|
(40
|
)
|
|
|
|
|
|
|
294
|
|
|
|
128
|
|
Allowance for uncollectible
reinsurance on paid losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
958
|
|
|
$
|
(82
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
876
|
|
2005
|
|
|
893
|
|
|
|
81
|
|
|
|
|
|
|
|
16
|
|
|
|
958
|
|
2004
|
|
|
1,328
|
|
|
|
(103
|
)
|
|
|
|
|
|
|
332
|
|
|
|
893
|
|
Allowance for uncollectible
reinsurance on unpaid losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
296
|
|
|
$
|
60
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
356
|
|
2005
|
|
|
236
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
296
|
|
2004
|
|
|
176
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
236
|
|
|
|
|
(1) |
|
Acquired with purchase of ARC Holdings |
164
|
|
Item 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
There were no disagreements with accountants on accounting and
financial disclosure.
|
|
Item 9A.
|
CONTROLS
AND PROCEDURES
|
Disclosure
Controls and Procedures.
Our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, has evaluated the
effectiveness of Covantas disclosure controls and
procedures, as required by
Rule 13a-15(b)
and
15d-15(b)
under the Securities Exchange Act of 1934 (the Exchange
Act) as of December 31, 2006. Our disclosure controls
and procedures are designed to reasonably assure that
information required to be disclosed by us in reports we file or
submit under the Exchange Act is accumulated and communicated to
our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions
regarding disclosure and is recorded, processed, summarized and
reported within the time periods specified in the SECs
rules and forms.
Our management, with the participation of the Chief Executive
Officer and Chief Financial Officer, believes that our
disclosure controls and procedures are effective to provide such
reasonable assurance.
Our management, including the Chief Executive Officer and Chief
Financial Officer, believes that any disclosure controls and
procedures or internal controls and procedures, no matter how
well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect
the fact that there are resource constraints, and the benefits
of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, we cannot
provide absolute assurance that all control issues and instances
of fraud, if any, within Covanta have been prevented or
detected. These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by unauthorized
override of the control. The design of any systems of controls
also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that
any design will succeed in achieving its stated goals under all
potential future conditions. Accordingly, because of the
inherent limitations in a cost effective control system,
misstatements due to error or fraud may occur and may not be
detected.
Changes
in Internal Control over Financial Reporting
During the second quarter of 2006, we began implementation of a
new operating system for the recording of information relating
to our business. That effort is underway and is expected to
continue into 2007. We initiated this effort as part of a
routine system upgrade and as part of our integration efforts
related to the ARC Holdings acquisition. We believe the new
operating system, when fully implemented, will maintain and
enhance our system of internal controls over financial reporting
and our ability to record, process, summarize and report
information required to be disclosed within the time periods
specified in the Securities and Exchange Commissions rules
and forms.
165
Managements
Report on Internal Control over Financial Reporting
The management of Covanta Holding Corporation
(Covanta) is responsible for establishing and
maintaining adequate internal control over financial reporting,
as such term is defined in Exchange Act
Rules 13a-15(f).
All internal control systems, no matter how well designed, have
inherent limitations including the possibility of human error
and the circumvention or overriding of controls. Further,
because of changes in conditions, the effectiveness of internal
controls may vary over time. Projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures
may deteriorate. Accordingly, even those systems determined to
be effective can provide us only with reasonable assurance with
respect to financial statement preparation and presentation.
Covantas management has assessed the effectiveness of
internal control over financial reporting as of
December 31, 2006, following the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
in Internal Control Integrated Framework.
Based on our assessment under the framework in Internal
Control Integrated Framework, Covantas
management has concluded that our internal control over
financial reporting was effective as of December 31, 2006.
Our independent auditors, Ernst & Young LLP, have
issued an attestation report on our assessment of internal
control over financial reporting. This report appears on
page 166 of this report on
Form 10-K
for the year ended December 31, 2006.
Anthony J. Orlando
President and Chief Executive Officer
Mark A. Pytosh
Senior Vice President and
Chief Financial Officer
February 25, 2007
166
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
of Covanta Holding Corporation
We have audited managements assessment, included in the
accompanying Management Report on Internal Control Over
Financial Reporting, that Covanta Holding Corporation maintained
effective internal control over financial reporting as of
December 31, 2006 based on criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). Covanta Holding Corporations
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on managements
assessment and an opinion on the effectiveness of the
companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Covanta
Holding Corporation maintained effective internal control over
financial reporting as of December 31, 2006, is fairly
stated, in all material respects, based on the COSO criteria.
Also, in our opinion, Covanta Holding Corporation maintained, in
all material respects, effective internal control over financial
reporting as of December 31, 2006, based on the COSO
criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets as of December 31, 2006 and
2005, and the related consolidated statements of operations,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2006 of Covanta
Holding Corporation and our report dated February 25, 2007
expressed an unqualified opinion thereon.
MetroPark, New Jersey
February 25, 2007
167
|
|
Item 9B.
|
OTHER
INFORMATION
|
None.
PART III
|
|
Item 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
Information regarding our executive officers is incorporated by
reference herein from the discussion under Item 1.
Business Executive Officers of this Annual
Report on
Form 10-K.
We have a Code of Conduct and Ethics for Senior Financial
Officers and a Policy of Business Conduct. The Code of Conduct
and Ethics applies to our Chief Executive Officer, Chief
Financial Officer, Chief Accounting Officer, controller or
persons performing similar functions. The Policy of Business
Conduct applies to all of our directors, officers and employees
and those of our subsidiaries. Both the Code of Conduct and
Ethics and the Policy of Business Conduct are posted on our
website at www.covantaholding.com on the Corporate
Governance page. We will post on our website any amendments to
or waivers of the Code of Conduct and Ethics or Policy of
Business Conduct for executive officers or directors, in
accordance with applicable laws and regulations. The remaining
information called for by this Item 10 is incorporated by
reference herein from the discussions under the headings
Election of Directors, Board Structure and
Composition Committees of the Board, and
Security Ownership of Certain Beneficial Owners and
Management Section 16(a) Beneficial Ownership
Reporting Compliance in the definitive Proxy Statement for
the 2007 Annual Meeting of Stockholders.
|
|
Item 11.
|
EXECUTIVE
COMPENSATION
|
The information required by Item 11 of
Form 10-K
is incorporated by reference herein from the discussions under
the headings Compensation Committee Report,
Board Structure and Composition Compensation
of the Board, and Executive Compensation in
our definitive Proxy Statement for the 2007 Annual Meeting of
Stockholders.
|
|
Item 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
The information required by Item 12 of
Form 10-K
with respect to directors, executive officers and certain
beneficial owners is incorporated by reference herein from the
discussion under the heading Security Ownership of Certain
Beneficial Owners and Management in our definitive Proxy
Statement for the 2007 Annual Meeting of Stockholders.
168
Equity
Compensation Plans
The following table sets forth information regarding the number
of our securities which could be issued upon the exercise of
outstanding options, the weighted average exercise price of
those options in the 2004 and 1995 Stock Incentive Plans and the
number of securities remaining for future issuance under the
2004 Stock Incentive Plans. Upon adoption of the 2004 Stock
Incentive Plans, future issuances under the 1995 Plan were
terminated. We do not have any equity compensation plans that
have not been approved by our security holders.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Number of Securities Remaining
|
|
|
|
Number of Securities to
|
|
|
Exercise Price of
|
|
|
Available for Future Issuance
|
|
|
|
be Issued Upon Exercise
|
|
|
Outstanding
|
|
|
Under Equity Compensation
|
|
|
|
of Outstanding Options,
|
|
|
Options, Warrants
|
|
|
Plans (Excluding Securities
|
|
|
|
Warrants and Rights
|
|
|
and Rights
|
|
|
Reflected in Column A)
|
|
Plan category
|
|
(A)
|
|
|
(B)
|
|
|
(C)
|
|
|
Equity Compensation Plans Approved
By Security Holders
|
|
|
1,029,664
|
|
|
$
|
8.22
|
|
|
|
4,970,336
|
(1)
|
Equity Compensation Plans Not
Approved By Security Holders
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
|
1,029,664
|
|
|
$
|
8.22
|
|
|
|
4,970,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Of the 4,970,336 shares that remain available for future
issuance, 3,494,230 are currently reserved for issuance under
the equity compensation plans. |
|
|
Item 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
The information required by Item 13 of
Form 10-K
is incorporated by reference herein from the discussions under
the headings Board Structure and Composition and
Certain Relationships and Related Transactions in
the definitive Proxy Statement for the 2007 Annual Meeting of
Stockholders.
|
|
Item 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
The information required by Item 14 of
Form 10-K
is incorporated by reference herein from the discussion under
the heading Independent Auditor Fees in the
definitive Proxy Statement for the 2007 Annual Meeting of
Stockholders.
PART IV
|
|
Item 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
(a) Documents filed as part of this report:
(1) Consolidated Financial Statements of Covanta Holding
Corporation:
Included in Part II of this Report:
Consolidated Statement of Operations for the years ended
December 31, 2006, 2005 and 2004
Consolidated Balance Sheet as of December 31, 2006 and 2005
Consolidated Statement of Cash Flows for the years ended
December 31, 2006, 2005 and 2004
Consolidated Statement of Stockholders Equity for the
years ended December 31, 2006, 2005 and 2004
Notes to Consolidated Financial Statements, for the years ended
December 31, 2006, 2005 and 2004
Report of Ernst & Young LLP, Independent Auditors, on
the consolidated financial statements of Covanta Holding
Corporation for the years ended December 31, 2006, 2005 and
2004
169
(2) Financial Statement Schedules of Covanta Holding
Corporation:
Included in Part II of this report:
Schedule I Condensed Financial Information of
Registrant
Schedule II Valuation and Qualifying Accounts
Included as Exhibit F in this Part IV:
Separate financial statements of fifty percent or less owned
persons. See
Appendix F-1
through F-23.
All other schedules are omitted because they are not applicable,
not significant or not required, or because the required
information is included in the financial statement notes thereto.
(3) Exhibits:
EXHIBIT INDEX
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
Plan of Acquisition,
Reorganization, Arrangement, Liquidation or
Succession.
|
|
2
|
.1
|
|
Investment and Purchase Agreement
by and between Covanta Holding Corporation and Covanta Energy
Corporation dated as of December 2, 2003 (incorporated
herein by reference to Exhibit 2.1 of Covanta Holding
Corporations Current Report on
Form 8-K
dated December 2, 2003 and filed with the SEC on
December 5, 2003, as amended by Covanta Holding
Corporations Current Report on
Form 8-K/A
dated December 2, 2003 and filed with the SEC on
January 30, 2004).
|
|
2
|
.2
|
|
Note Purchase Agreement by and
between Covanta Holding Corporation and the Purchasers named
therein dated as of December 2, 2003 (incorporated herein
by reference to Exhibit 2.2 of Covanta Holding
Corporations Current Report on
Form 8-K
dated December 2, 2003 and filed with the SEC on
December 5, 2003, as amended by Covanta Holding
Corporations Current Report on
Form 8-K/A
dated December 2, 2003 and filed with the SEC on
January 30, 2004).
|
|
2
|
.3
|
|
Amendment to Investment and
Purchase Agreement by and between Covanta Holding Corporation
and Covanta Energy Corporation dated February 23, 2004
(incorporated herein by reference to Exhibit 2.3 of Covanta
Holding Corporations Current Report on
Form 8-K
dated March 10, 2004 and filed with the SEC on
March 11, 2004).
|
|
2
|
.4
|
|
First Amendment to Note Purchase
Agreement and Consent by and among Covanta Holding Corporation
and D.E. Shaw Laminar Portfolios, L.L.C., SZ Investments, L.L.C.
and Third Avenue Trust, on behalf of The Third Avenue Value Fund
Series, dated as of February 23, 2004 (incorporated herein
by reference to Exhibit 2.4 of Covanta Holding
Corporations Current Report on
Form 8-K
dated March 10, 2004 and filed with the SEC on
March 11, 2004).
|
|
2
|
.5
|
|
Stock Purchase Agreement among
Covanta ARC Holdings, Inc., the Sellers party thereto and
Covanta Holding Corporation dated as of January 31, 2005
(incorporated herein by reference to Exhibit 2.1 of Covanta
Holding Corporations Current Report on
Form 8-K
dated January 31, 2005 and filed with the SEC on
February 2, 2005).
|
Articles of Incorporation and
By-Laws.
|
|
3
|
.1
|
|
Restated Certificate of
Incorporation of Covanta Holding Corporation (incorporated
herein by reference to Exhibit 3.1 of Covanta Holding
Corporations Current Report on
Form 8-K
dated January 19, 2007 and filed with the SEC on
January 19, 2007).
|
|
3
|
.2
|
|
Amended and Restated Bylaws of
Covanta Holding Corporation, as amended and effective
October 5, 2004 (incorporated herein by reference to
Exhibit 3.1 of Covanta Holding Corporations Current
Report on
Form 8-K
dated September 7, 2004 filed with the SEC on
September 9, 2004).
|
Instruments Defining Rights of
Security Holders, Including Indentures.
|
|
4
|
.1
|
|
Specimen certificate representing
shares of Covanta Holding Corporations common stock
(incorporated herein by reference to Exhibit 4.1 of Covanta
Holding Corporations Amendment No. 3 to Registration
Statement on
Form S-1
filed with the SEC on December 19, 2005).
|
170
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
4
|
.2
|
|
Registration Rights Agreement
dated November 8, 2002 among Covanta Holding Corporation
and SZ Investments, L.L.C. (incorporated herein by reference to
Exhibit 10.6 of Covanta Holding Corporations Annual
Report on
Form 10-K
for the year ended December 27, 2002 and filed with the SEC
on March 27, 2003).
|
|
4
|
.3
|
|
Registration Rights Agreement
between Covanta Holding Corporation, D.E. Shaw Laminar
Portfolios, L.L.C., SZ Investments, L.L.C., and Third Avenue
Trust, on behalf of The Third Avenue Value Fund Series, dated
December 2, 2003 (incorporated herein by reference to
Exhibit 4.1 of Covanta Holding Corporations Current
Report on
Form 8-K
dated December 2, 2003 and filed with the SEC on
December 5, 2003).
|
|
4
|
.4
|
|
MSW Energy Holding LLC and MSW
Energy Finance Co., Inc., and each of the Guarantors named
therein, Series A and Series B
81/2% Senior
Secured Note Due 2010 Indenture, dated as of June 25,
2003, by and among MSW Energy Holding LLC, MSW Energy Finance
Co., Inc. and Wells Fargo Bank Minnesota, National Association,
as Trustee (incorporated herein by reference to Exhibit 4.1
of MSW Energy Holding LLCs Registration Statement on
Form S-4
filed with the SEC on September 23, 2003).
|
|
4
|
.5
|
|
Supplemental Indenture, dated as
of July 11, 2003, by and among MSW Energy Hudson LLC, MSW
Energy Holding LLC, MSW Energy Finance Co., Inc. and Wells Fargo
Bank Minnesota, National Association, as Trustee (incorporated
herein by reference to Exhibit 4.2 of MSW Energy Holding
LLCs Registration Statement on
Form S-4
filed with the SEC on September 23, 2003).
|
|
4
|
.6
|
|
Second Supplemental Indenture,
dated as of February 5, 2007, among MSW Energy
Holdings II LLC, MSW Energy Finance Co. II, Inc.
Covanta Ref-Fuel II LLC, as the guaranteeing subsidiary, and
Wells Fargo Bank, National Association, as successor trustee by
merger to Wells Fargo Bank Minnesota, National Association
(incorporated herein by reference to Exhibit 4.2 of Covanta
Holding Corporations Current Report on
Form 8-K
dated February 5, 2007 and filed with the SEC on
February 9, 2007).
|
|
4
|
.7
|
|
Form of Series A and
Series B
81/2%
Senior Secured Note Due 2010 (incorporated herein by
reference to Exhibit 4.1 of MSW Energy Holding LLCs
Registration Statement on
Form S-4
filed with the SEC on September 23, 2003).
|
|
4
|
.8
|
|
MSW Energy Holding II LLC and
MSW Energy Finance Co. II, Inc., and each of the Guarantors
named therein, Series A and Series B
73/8% Senior
Secured Note Due 2010 Indenture, dated as of
November 24, 2003, by and among MSW Energy Holding II
LLC, MSW Energy Finance Co. II, Inc. and Wells Fargo Bank
Minnesota, National Association, as Trustee (incorporated herein
by reference to Exhibit 4.1 of MSW Energy Holding II
LLCs Registration Statement on
Form S-4
filed with the SEC on February 10, 2004).
|
|
4
|
.9
|
|
Supplemental Indenture, dated as
of December 12, 2003, by and among UAE Ref-Fuel II
Corp., MSW Energy Holding II LLC, MSW Energy Finance
Co. II, Inc. and Wells Fargo Bank Minnesota, National
Association, as Trustee (incorporated herein by reference to
Exhibit 4.2 of MSW Energy Holding II LLCs
Registration Statement on
Form S-4
filed with the SEC on February 10, 2004).
|
|
4
|
.10
|
|
Second Supplemental Indenture,
dated as of February 5, 2007, among MSW Energy
Holdings II LLC, MSW Energy Finance Co. II, Inc.
Covanta Ref-Fuel II LLC, as the guaranteeing subsidiary, and
Wells Fargo Bank, National Association, as successor trustee by
merger to Wells Fargo Bank Minnesota, National Association
(incorporated herein by reference to Exhibit 4.2 of Covanta
Holding Corporations Current Report on
Form 8-K
dated February 5, 2007 and filed with the SEC on
February 9, 2007).
|
|
4
|
.11
|
|
Form of Series A and
Series B
73/8%
Senior Secured Note Due 2010 (incorporated herein by
reference to Exhibit 4.10 of Covanta Holding
Corporations Amendment No. 3 to Registration
Statement on
Form S-1
filed with the SEC on December 19, 2005).
|
|
4
|
.12
|
|
Form of Warrant Offering Agreement
between Wells Fargo Bank, National Association and Covanta
Holding Corporation (incorporated herein by reference to
Exhibit 4.11 of Covanta Holding Corporations
Amendment No. 3 to Registration Statement on
Form S-1
filed with the SEC on December 19, 2005).
|
171
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
4
|
.13
|
|
Indenture dated as of May 1,
2003, by and between Covanta ARC LLC and Wachovia Bank, National
Association as Trustee and Securities Intermediary (incorporated
herein by reference to Exhibit 4.12 of Covanta Holding
Corporations Annual Report on
Form 10-K
for the year ended December 31, 2005 and filed with the SEC
on March 14, 2006).
|
|
4
|
.14
|
|
First Supplemental Indenture dated
as of May 1, 2003, by and among Covanta ARC LLC and
Wachovia Bank, National Association as Trustee and Securities
Intermediary (incorporated herein by reference to
Exhibit 4.13 of Covanta Holding Corporations Annual
Report on
Form 10-K
for the year ended December 31, 2005 and filed with the SEC
on March 14, 2006).
|
|
4
|
.15
|
|
Second Supplemental Indenture,
dated as of February 5, 2007, among Covanta ARC LLC,
U.S. Bank National Association, as successor trustee, and
U.S. Bank National Association as successor securities
intermediary (incorporated herein by reference to
Exhibit 4.3 of Covanta Holding Corporations Current
Report on
Form 8-K
dated February 5, 2007 and filed with the SEC on
February 9, 2007).
|
|
4
|
.16
|
|
Specimen copy of Covanta ARC LLC
6.26% Senior Notes due 2015 (incorporated herein by
reference to Exhibit 4.14 of Covanta Holding
Corporations Annual Report on
Form 10-K
for the year ended December 31, 2005 and filed with the SEC
on March 14, 2006).
|
|
4
|
.17
|
|
Indenture dated as of
January 18, 2007 between Covanta Holding Corporation and
Wells Fargo Bank, National Association, as trustee.
(incorporated herein by reference to Exhibit 4.1 of Covanta
Holding Corporations Registration Statement on
Form S-3
(Reg.
No. 333-140082)
filed with the SEC on January 19, 2007).
|
|
4
|
.18
|
|
First Supplemental Indenture dated
as of January 31, 2007 between Covanta Holding Corporation
and Wells Fargo Bank, National Association, as trustee
(including the Form of Global Debenture) (incorporated herein by
reference to Exhibit 4.2 of Covanta Holding
Corporations Current Report on
Form 8-K
dated January 31, 2007 and filed with the SEC on
February 6, 2007).
|
Material Contracts.
|
|
10
|
.1
|
|
Equity Commitment for Rights
Offering between Covanta Holding Corporation and SZ Investments
L.L.C. dated February 1, 2005 (incorporated herein by
reference to Exhibit 10.2 of Covanta Holding
Corporations Current Report on
Form 8-K
dated January 31, 2005 and filed with the SEC on
February 2, 2005).
|
|
10
|
.2
|
|
Equity Commitment for Rights
Offering between Covanta Holding Corporation and EGI-Fund
(05-07) Investors, L.L.C. dated February 1, 2005
(incorporated herein by reference to Exhibit 10.3 of
Covanta Holding Corporations Current Report on
Form 8-K
dated January 31, 2005 and filed with the SEC on
February 2, 2005).
|
|
10
|
.3
|
|
Equity Commitment for Rights
Offering between Covanta Holding Corporation and Third Avenue
Trust, on behalf of The Third Avenue Value Fund Series dated
February 1, 2005 (incorporated herein by reference to
Exhibit 10.4 of Covanta Holding Corporations Current
Report on
Form 8-K
dated January 31, 2005 and filed with the SEC on
February 2, 2005).
|
|
10
|
.4
|
|
Equity Commitment for Rights
Offering between Covanta Holding Corporation and D.E. Shaw
Laminar Portfolios, L.L.C. dated February 1, 2005
(incorporated herein by reference to Exhibit 10.5 of
Covanta Holding Corporations Current Report on
Form 8-K
dated January 31, 2005 and filed with the SEC on
February 2, 2005).
|
|
10
|
.5
|
|
Tax Sharing Agreement, dated as of
March 10, 2004, by and between Covanta Holding Corporation,
Covanta Energy Corporation, and Covanta Power International
Holdings, Inc. (incorporated herein by reference to
Exhibit 10.25 of Covanta Holding Corporations Annual
Report on
Form 10-K
for the year ended December 31, 2003 and filed with the SEC
on March 15, 2004).
|
|
10
|
.6
|
|
Corporate Services and Expenses
Reimbursement Agreement, dated as of March 10, 2004, by and
between Covanta Holding Corporation and Covanta Energy
Corporation (incorporated herein by reference to
Exhibit 10.26 of Covanta Holding Corporations Annual
Report on
Form 10-K
for the year ended December 31, 2003 and filed with the SEC
on March 15, 2004).
|
172
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.7
|
|
Management Services and
Reimbursement Agreement, dated March 10, 2004, among
Covanta Energy Corporation, Covanta Energy Group, Inc., Covanta
Projects, Inc., Covanta Power International Holdings, Inc., and
certain Subsidiaries listed therein (incorporated herein by
reference to Exhibit 10.30 of Covanta Holding
Corporations Annual Report on
Form 10-K
for the year ended December 31, 2003 and filed with the SEC
on March 15, 2004).
|
|
10
|
.8*
|
|
Covanta Energy Savings Plan, as
amended by December 2003 amendment (incorporated herein by
reference to Exhibit 10.25 of Covanta Holding
Corporations Annual Report on
Form 10-K
for the year ended December 31, 2004 and filed with the SEC
on March 16, 2005).
|
|
10
|
.9*
|
|
Covanta Holding Corporation Equity
Award Plan for Employees and Officers, as amended (incorporated
herein by reference to Exhibit 10.1 of Covanta Holding
Corporations Report on
Form 10-Q
for the period ended September 30, 2005 and filed with the
SEC on November 9, 2005).
|
|
10
|
.10*
|
|
Covanta Holding Corporation Equity
Award Plan for Directors (incorporated herein by reference to
Exhibit 4.3 of Covanta Holding Corporations
Registration Statement on
Form S-8
filed with the SEC on October 7, 2004).
|
|
10
|
.11*
|
|
Form of Covanta Holding
Corporation Stock Option Agreement for Employees and Officers
(incorporated herein by reference to Exhibit 10.5 of
Covanta Holding Corporations Current Report on
Form 8-K
dated October 5, 2004 and filed with the SEC on
October 7, 2004).
|
|
10
|
.12*
|
|
Form of Covanta Holding
Corporation Restricted Stock Award Agreement (incorporated
herein by reference to Exhibit 10.4 of Covanta Holding
Corporations Current Report on
Form 8-K
dated October 5, 2004 and filed with the SEC on
October 7, 2004).
|
|
10
|
.13*
|
|
Covanta Holding Corporation 1995
Stock and Incentive Plan (as amended effective December 12,
2000 and as further amended effective July 24, 2002)
(incorporated herein by reference to Appendix A to Covanta
Holding Corporations Proxy Statement filed with the SEC on
June 24, 2002).
|
|
10
|
.14*
|
|
Employment Agreement, dated
October 5, 2004, by and between Anthony J. Orlando and
Covanta Projects, Inc., Covanta Energy Corporation and Covanta
Holding Corporation (incorporated herein by reference to
Exhibit 10.1 of Covanta Holding Corporations Current
Report on
Form 8-K
dated October 5, 2004 and filed with the SEC on
October 7, 2004).
|
|
10
|
.15*
|
|
Employment Agreement, dated
October 5, 2004, by and between Craig D. Abolt and Covanta
Projects, Inc., Covanta Energy Corporation and Covanta Holding
Corporation (incorporated herein by reference to
Exhibit 10.2 of Covanta Holding Corporations Current
Report on
Form 8-K
dated October 5, 2004 and filed with the SEC on
October 7, 2004).
|
|
10
|
.16*
|
|
Employment Agreement, dated
October 5, 2004, by and between Timothy J. Simpson and
Covanta Projects, Inc., Covanta Energy Corporation and Covanta
Holding Corporation (incorporated herein by reference to
Exhibit 10.3 of Covanta Holding Corporations Current
Report on
Form 8-K
dated October 5, 2004 filed with the SEC on October 7,
2004).
|
|
10
|
.17*
|
|
Employment Agreement, dated as of
April 27, 2004, by and between Covanta Holding Corporation
and Jeffrey R. Horowitz (incorporated herein by reference to
Exhibit 10.1 of Covanta Holding Corporations
Registration Statement on
Form S-3/A
filed with the SEC on August 20, 2004).
|
|
10
|
.18*
|
|
Form of Covanta Holding
Corporation Amendment to Stock Option Agreement for Employees
and Officers (incorporated herein by reference to
Exhibit 10.1 of Covanta Holding Corporations Current
Report on
Form 8-K
dated March 18, 2005 and filed with the SEC on
March 24, 2005).
|
|
10
|
.19*
|
|
Covanta Holding Corporation
Amendment to Stock Option Agreement (incorporated herein by
reference to Exhibit 10.1 of Covanta Holding
Corporations Current Report on
Form 8-K
dated May 25, 2005 and filed with the SEC on May 26,
2005).
|
|
10
|
.20
|
|
Second Lien Credit and Guaranty
Agreement, dated as of June 24, 2005, among Covanta Energy
Corporation, Covanta Holding Corporation, as a guarantor,
certain subsidiaries of Covanta Energy Corporation, as
guarantors, various lenders, Credit Suisse, Cayman Islands
Branch, as Joint Lead Arranger, Co-Syndication Agent,
Administrative Agent, Collateral Agent and Paying Agent, and
Goldman Sachs Credit Partners L.P., as Joint Lead Arranger and
Co-Syndication Agent (incorporated herein by reference to
Exhibit 10.2 of Covanta Holding Corporations Current
Report on
Form 8-K
dated June 24, 2005 and filed with the SEC on June 30,
2005).
|
173
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.21
|
|
First Lien Pledge and Security
Agreement between each of Covanta Energy Corporation and the
other Grantors Party thereto and Goldman Sachs Credit Partners
L.P., as Collateral Agent, dated as of June 24, 2005
(incorporated herein by reference to Exhibit 10.3 of
Covanta Holding Corporations Current Report on
Form 8-K
dated June 24, 2005 and filed with the SEC on June 30,
2005).
|
|
10
|
.22
|
|
Parity Lien Pledge and Security
Agreement, dated as of June 24, 2005, between each of
Covanta Energy Corporation and the other Grantors Party thereto
and Credit Suisse, Cayman Islands Branch, as Collateral Agent
(incorporated herein by reference to Exhibit 10.4 of
Covanta Holding Corporations Current Report on
Form 8-K
dated June 24, 2005 and filed with the SEC on June 30,
2005).
|
|
10
|
.23
|
|
First Lien Pledge Agreement, dated
as of June 24, 2005, between Covanta Holding Corporation
and Goldman Sachs Credit Partners L.P., as Collateral Agent
(incorporated herein by reference to Exhibit 10.5 of
Covanta Holding Corporations Current Report on
Form 8-K
dated June 24, 2005 and filed with the SEC on June 30,
2005).
|
|
10
|
.24
|
|
Parity Lien Pledge Agreement,
dated as of June 24, 2005, between Covanta Holding
Corporation and Credit Suisse, Cayman Islands Branch, as
Collateral Agent (incorporated herein by reference to
Exhibit 10.6 of Covanta Holding Corporations Current
Report on
Form 8-K
dated June 24, 2005 and filed with the SEC on June 30,
2005).
|
|
10
|
.25
|
|
Intercreditor Agreement, dated as
of June 24, 2005, among Covanta Energy Corporation, Goldman
Sachs Credit Partners L.P., as Collateral Agent for the First
Lien Claimholders, Credit Suisse, Cayman Islands Branch, as
Administrative Agent for the Second Lien Credit Claimholders and
as Collateral Agent for the Parity Lien Claimholders
(incorporated herein by reference to Exhibit 10.7 of
Covanta Holding Corporations Current Report on
Form 8-K
dated June 24, 2005 and filed with the SEC on June 30,
2005).
|
|
10
|
.26
|
|
Amendment No. 1 to Tax
Sharing Agreement, dated as of June 24, 2005, by and
between Covanta Holding Corporation, Covanta Energy Corporation
and Covanta Power International Holdings, Inc., amending Tax
Sharing Agreement between Covanta Holding Corporation, Covanta
Energy Corporation and Covanta Power International Holdings,
Inc. dated as of March 10, 2004 (incorporated herein by
reference to Exhibit 10.8 of Covanta Holding
Corporations Current Report on
Form 8-K
dated June 24, 2005 and filed with the SEC on June 30,
2005).
|
|
10
|
.27*
|
|
Employment Agreement, dated
October 5, 2004, by and between John Klett and Covanta
Energy Corporation (incorporated herein by reference to
Exhibit 10.7 of Covanta Energy Corporations Current
Report on
Form 8-K
dated October 5, 2004 and filed with the SEC on
October 7, 2004).
|
|
10
|
.28
|
|
Rehabilitation Plan Implementation
Agreement, dated January 11, 2006, by and between John
Garamendi, Insurance Commissioner of the State of California, in
his capacity as Trustee of the Mission Insurance Company Trust,
the Mission National Insurance Company Trust and the Enterprise
Insurance Company Trust, on the one hand, and Covanta Holding
Corporation, on the other hand (incorporated herein by reference
to Exhibit 10.1 of Covanta Holding Corporations
Current Report on
Form 8-K
dated March 2, 2006 and filed with the SEC on March 6,
2006).
|
|
10
|
.29
|
|
Amendment to Rehabilitation Plan
Implementation Agreement, accepted and agreed to on
March 17, 2006 (incorporated herein by reference to
Exhibit 10.1 of Covanta Holding Corporations Current
Report on
Form 8-K
dated March 17, 2006 and filed with the SEC on
March 20, 2006).
|
|
10
|
.30
|
|
Amendment to Agreement Regarding
Closing (Exhibit A to the Rehabilitation Plan
Implementation Agreement), dated January 10, 2006, by and
between John Garamendi, Insurance Commissioner of the State of
California, in his capacity as Trustee of the Mission Insurance
Company Trust, the Mission National Insurance Company Trust, and
the Enterprise Insurance Company Trust, on the one hand, and
Covanta Holding Corporation, on the other hand (incorporated
herein by reference to Exhibit 10.2 of Covanta Holding
Corporations Current Report on
Form 8-K
dated March 2, 2006 and filed with the SEC on March 6,
2006).
|
174
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.31
|
|
Latent Deficiency Claims
Administration Procedures Agreement (Exhibit B to the
Rehabilitation Plan Implementation Agreement), dated
January 11, 2006, by and between John Garamendi, Insurance
Commissioner of the State of California, in his capacity as
Trustee of the Mission Insurance Company Trust, the Mission
National Insurance Company Trust and the Enterprise Insurance
Company Trust, on the one hand, and Covanta Holding Corporation
on the other hand (incorporated herein by reference to
Exhibit 10.3 of Covanta Holding Corporations Current
Report on
Form 8-K
dated March 2, 2006 and filed with the SEC on March 6,
2006).
|
|
10
|
.32*
|
|
Transition and Separation
Agreement, dated April 5, 2006, among Craig D. Abolt,
Covanta Holding Corporation, Covanta Energy Corporation and
Covanta Projects, Inc. (incorporated herein by reference to
Exhibit 10.1 of Covanta Holding Corporations Current
Report on
Form 8-K
dated April 5, 2006 and filed with the SEC on April 7,
2006).
|
|
10
|
.33
|
|
Amended and Restated Credit
Agreement, dated as of May 26, 2006, among Covanta Energy
Corporation, Covanta Holding Corporation as a guarantor, certain
subsidiaries of Covanta Energy Corporation as guarantors,
various lenders, Goldman Sachs Credit Partners L.P., as Sole
Lead Arranger, Sole Book Runner and Sole Syndication Agent,
Administrative Agent and Collateral Agent, JPMorgan Chase Bank,
as Co-Documentation Agent, Revolving Issuing Bank and a Funded
LC Issuing Bank, UBS Securities LLC, as Co-Documentation Agent,
UBS AG, Stamford Branch, as a Funded LC Issuing Bank, and Calyon
New York Branch, as Co-Documentation Agent (incorporated herein
by reference to Exhibit 10.1 of Covanta Holding
Corporations Current Report on
Form 8-K
dated May 26, 2006 and filed with the SEC on May 31,
2006).
|
|
10
|
.34
|
|
Amendment to Second Lien Credit
and Guaranty Agreement, dated as of May 26, 2006, among
Covanta Energy Corporation, Covanta Holding Corporation and the
parties signatory thereto (incorporated herein by reference to
Exhibit 10.2 of Covanta Holding Corporations Current
Report on
Form 8-K
dated May 26, 2006 and filed with the SEC on May 31,
2006).
|
|
10
|
.35
|
|
Amendment and Limited Waiver to
Intercreditor Agreement, dated as of May 26, 2006, among
Covanta Energy Corporation, Goldman Sachs Credit Partners L.P.,
as Collateral Agent under the First Lien Credit Agreement,
Credit Suisse, Cayman Islands Branch, as Administrative Agent
for the Second Lien Credit Agreement and as Collateral Agent for
the Parity Lien Claimholders (incorporated herein by reference
to Exhibit 10.3 of Covanta Holding Corporations
Current Report on
Form 8-K
dated May 26, 2006 and filed with the SEC on May 31,
2006).
|
|
10
|
.36*
|
|
Form of Covanta Holding
Corporation Restricted Stock Award Agreement for Directors
(incorporated herein by reference to Exhibit 10.1 of
Covanta Holding Corporations Current Report on
Form 8-K
dated May 31, 2006 and filed with the SEC on June 2,
2006).
|
|
10
|
.37*
|
|
Employment Agreement, dated as of
August 17, 2006, among Covanta Holding Corporation, Covanta
Energy Corporation and Mark A. Pytosh (incorporated herein by
reference to Exhibit 10.1 of Covanta Holding
Corporations Current Report on
Form 8-K
dated August 17, 2006 and filed with the SEC on
August 17, 2006).
|
|
10
|
.38
|
|
Credit and Guaranty Agreement,
dated as of February 9, 2007, among Covanta Energy
Corporation, Covanta Holding Corporation, certain subsidiaries
of Covanta Energy Corporation, as guarantors, the lenders party
thereto, JPMorgan Chase Bank, N.A., as Administrative Agent,
Collateral Agent, Revolving Issuing Bank and a Funded LC Issuing
Bank, UBS AG, Stamford Branch, as a Funded LC Issuing Bank,
Lehman Commercial Paper Inc. and Merrill Lynch, Pierce,
Fenner & Smith Incorporated, as Syndication Agents, and
Bank of America, N.A. and Barclays Bank PLC, as Documentation
Agents (incorporated herein by reference to Exhibit 10.1 of
Covanta Holding Corporations Current Report on
Form 8-K
dated February 9, 2007 and filed with the SEC on
February 15, 2007).
|
|
10
|
.39
|
|
Pledge and Security Agreement,
dated as of February 9, 2007, between each of Covanta
Energy Corporation and the other grantors party thereto, and
JPMorgan Chase Bank, N.A., as Collateral Agent (incorporated
herein by reference to Exhibit 10.2 of Covanta Holding
Corporations Current Report on
Form 8-K
dated February 9, 2007 and filed with the SEC on
February 15, 2007).
|
|
10
|
.40
|
|
Pledge Agreement, dated as of
February 9, 2007, between Covanta Holding Corporation and
JPMorgan Chase Bank, N.A., as Collateral Agent (incorporated
herein by reference to Exhibit 10.3 of Covanta Holding
Corporations Current Report on
Form 8-K
dated February 9, 2007 and filed with the SEC on
February 15, 2007).
|
175
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.41
|
|
Intercompany Subordination
Agreement, dated as of February 9, 2007, among Covanta
Energy Corporation, Covanta Holding Corporation, certain
subsidiaries of Covanta Energy Corporation, as Guarantor
Subsidiaries, certain other subsidiaries of Covanta Energy
Company, as Excluded Subsidiaries or Unrestricted Subsidiaries,
and JPMorgan Chase Bank, N.A., as Administrative Agent
(incorporated herein by reference to Exhibit 10.4 of
Covanta Holding Corporations Current Report on
Form 8-K
dated February 9, 2007 and filed with the SEC on
February 15, 2007).
|
Subsidiaries of the
Registrant.
|
|
21
|
.1
|
|
List of Subsidiaries.
|
Consents of Experts and
Counsel.
|
|
23
|
.1
|
|
Consent of Independent Registered
Public Accounting Firm of Covanta Holding Corporation and
Subsidiaries: Ernst & Young LLP.
|
|
23
|
.2
|
|
Consent of Independent Registered
Public Accounting Firm of Quezon Power, Inc.: Sycip Gorres
Velayo & Co., a member practice of Ernst &
Young Global.
|
Rule 13a-14(a)/15d-14(a)
Certifications.
|
|
31
|
.1
|
|
Certification of the Chief
Executive Officer Pursuant to Section 302 of the Sarbanes
Oxley Act of 2002 (pursuant to
Rule 13a-14(a)
and
Rule 15d-14(a)
of the Securities Exchange Act, as amended).
|
|
31
|
.2
|
|
Certification of the Chief
Financial Officer Pursuant to Section 302 of the Sarbanes
Oxley Act of 2002 (pursuant to
Rule 13a-14(a)
and
Rule 15d-14(a)
of the Securities Exchange Act, as amended).
|
Section 1350
Certifications.
|
|
32
|
.1
|
|
Certification pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 from the
Chief Executive Officer and the Chief Financial Officer of
Covanta Holding Corporation.
|
|
|
|
|
|
Not filed herewith, but incorporated herein by reference. |
|
* |
|
Management contract or compensatory plan or arrangement. |
Pursuant to paragraph 601(b)(4)(iii)(A) of
Regulation S-K,
the registrant has omitted from the foregoing list of exhibits,
and hereby agrees to furnish to the Securities and Exchange
Commission, upon its request, copies of certain instruments,
each relating to long-term debt not exceeding 10% of the total
assets of the registrant and its subsidiaries on a consolidated
basis.
(b) Exhibits: See list of Exhibits in
this Part IV, Item 15(a)(3) above.
(c) Financial Statement Schedules: See
Part IV, Item 15(a)(2) above.
176
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
COVANTA HOLDING CORPORATION
(Registrant)
|
|
|
|
By:
|
/s/ Anthony
J. Orlando
|
Anthony J. Orlando
President and Chief Executive Officer
Date: February 26, 2007
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Name
|
|
Title
|
|
Date
|
|
/s/ Anthony
J. Orlando
Anthony
J. Orlando
|
|
President and Chief Executive
Officer and Director
(Principal Executive Officer)
|
|
February 26, 2007
|
|
|
|
|
|
/s/ Mark
A. Pytosh
Mark
A. Pytosh
|
|
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
|
|
February 26, 2007
|
|
|
|
|
|
/s/ Thomas
E. Bucks
Thomas
E. Bucks
|
|
Vice President and
Chief Accounting Officer
(Principal Accounting Officer)
|
|
February 26, 2007
|
|
|
|
|
|
/s/ Samuel
Zell
Samuel
Zell
|
|
Chairman of the Board
|
|
February 26, 2007
|
|
|
|
|
|
/s/ David
M. Barse
David
M. Barse
|
|
Director
|
|
February 26, 2007
|
|
|
|
|
|
/s/ Ronald
J. Broglio
Ronald
J. Broglio
|
|
Director
|
|
February 26, 2007
|
|
|
|
|
|
/s/ Peter
C. B. Bynoe
Peter
C. B. Bynoe
|
|
Director
|
|
February 26, 2007
|
|
|
|
|
|
/s/ Richard
L. Huber
Richard
L. Huber
|
|
Director
|
|
February 26, 2007
|
|
|
|
|
|
/s/ William
C. Pate
William
C. Pate
|
|
Director
|
|
February 26, 2007
|
177
|
|
|
|
|
|
|
Name
|
|
Title
|
|
Date
|
|
Robert
S. Silberman
|
|
Director
|
|
February 26, 2007
|
|
|
|
|
|
/s/ Jean
Smith
Jean
Smith
|
|
Director
|
|
February 26, 2007
|
|
|
|
|
|
/s/ Clayton
Yeutter
Clayton
Yeutter
|
|
Director
|
|
February 26, 2007
|
178
QUEZON
POWER, INC.
Consolidated
Financial Statements
December 31, 2006 and 2005
and Years Ended December 31, 2006, 2005 and 2004
(In United States Dollars)
and
Report of
Independent Auditors
F-1
Report of
Independent Registered Public Accounting Firm
To the Management Committee of
Quezon Power, Inc.
We have audited the accompanying consolidated balance sheets of
Quezon Power, Inc. (incorporated in the Cayman Islands, British
West Indies) and subsidiary as of December 31, 2006 and
2005, and the related consolidated statements of operations,
changes in stockholders equity and cash flows for each of
the three years ended December 31, 2006. These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Quezon Power, Inc. and subsidiary as of December 31,
2006 and 2005, and the results of their operations and their
cash flows for each of the three years ended December 31,
2006 in conformity with U.S. generally accepted accounting
principles.
Makati City, Philippines
February 9, 2007
F-2
QUEZON
POWER, INC.
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
ASSETS
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
18,683,459
|
|
|
$
|
35,939,993
|
|
Accounts receivable
net of allowance for bad debts of $ in 2006 and $ in
2005 (Notes 9 and 11)
|
|
|
73,866,818
|
|
|
|
41,698,703
|
|
Fuel inventories
|
|
|
8,132,162
|
|
|
|
12,104,570
|
|
Spare parts
|
|
|
14,239,098
|
|
|
|
13,793,870
|
|
Due from affiliated companies
(Note 7)
|
|
|
411,156
|
|
|
|
469,312
|
|
Prepaid input value-added
taxes net (Note 4)
|
|
|
3,513,866
|
|
|
|
9,074,191
|
|
Prepaid expenses and other current
assets
|
|
|
3,223,205
|
|
|
|
4,182,879
|
|
Deferred income taxes (Note 4)
|
|
|
2,733,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
124,803,447
|
|
|
|
117,263,518
|
|
Property, Plant and
Equipment
net (Notes 3, 6 and 9)
|
|
|
659,075,478
|
|
|
|
675,212,269
|
|
Deferred Financing
Costs net
(Note 6)
|
|
|
16,799,334
|
|
|
|
21,758,848
|
|
Deferred Income
Taxes net
(Note 4)
|
|
|
20,229,614
|
|
|
|
9,531,174
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
820,907,873
|
|
|
$
|
823,765,809
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Short-term notes payable
(Note 5)
|
|
$
|
19,000,000
|
|
|
$
|
11,666,667
|
|
Accounts payable and accrued
expenses (Notes 9 and 11)
|
|
|
83,818,004
|
|
|
|
64,211,536
|
|
Due to affiliated companies
(Note 7)
|
|
|
223,998
|
|
|
|
348,836
|
|
Current portion of (Note 6):
|
|
|
|
|
|
|
|
|
Long-term loans payable
|
|
|
38,799,027
|
|
|
|
41,005,046
|
|
Bonds payable
|
|
|
10,750,000
|
|
|
|
7,525,000
|
|
Income taxes payable (Note 4)
|
|
|
7,361,841
|
|
|
|
121,675
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
159,952,870
|
|
|
|
124,878,760
|
|
Long-term Loans
Payable net
of current portion (Note 6)
|
|
|
176,948,631
|
|
|
|
215,747,657
|
|
Bonds
Payable net
of current portion (Note 6)
|
|
|
172,000,000
|
|
|
|
182,750,000
|
|
Asset Retirement Obligation
(Note 2)
|
|
|
4,296,843
|
|
|
|
4,053,639
|
|
Minority Interest
|
|
|
7,090,428
|
|
|
|
6,604,434
|
|
Stockholders Equity
(Note 8)
|
|
|
300,619,101
|
|
|
|
289,731,319
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
820,907,873
|
|
|
$
|
823,765,809
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-3
QUEZON
POWER, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
OPERATING REVENUES
(Note 9)
|
|
$
|
271,817,485
|
|
|
$
|
245,570,990
|
|
|
$
|
214,865,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel costs
|
|
|
85,773,607
|
|
|
|
68,022,825
|
|
|
|
40,822,798
|
|
Operations and maintenance
|
|
|
32,060,447
|
|
|
|
32,048,502
|
|
|
|
36,770,262
|
|
Depreciation and amortization
(Note 3)
|
|
|
17,805,160
|
|
|
|
18,557,511
|
|
|
|
19,263,376
|
|
General and administrative
|
|
|
16,849,783
|
|
|
|
16,069,798
|
|
|
|
16,768,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
152,488,997
|
|
|
|
134,698,636
|
|
|
|
113,625,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM
OPERATIONS
|
|
|
119,328,488
|
|
|
|
110,872,354
|
|
|
|
101,239,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME
(CHARGES)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,803,600
|
|
|
|
1,169,215
|
|
|
|
731,751
|
|
Foreign exchange gain
net
|
|
|
952,748
|
|
|
|
182,650
|
|
|
|
105,899
|
|
Interest expense (Notes 5 and
6)
|
|
|
(34,258,529
|
)
|
|
|
(37,079,185
|
)
|
|
|
(39,502,726
|
)
|
Amortization of deferred financing
costs
|
|
|
(4,959,514
|
)
|
|
|
(5,618,118
|
)
|
|
|
(6,362,934
|
)
|
Other charges net
|
|
|
(2,633,358
|
)
|
|
|
(950,363
|
)
|
|
|
(409,779
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,095,053
|
)
|
|
|
(42,295,801
|
)
|
|
|
(45,437,789
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAX AND
MINORITY INTEREST
|
|
|
80,233,435
|
|
|
|
68,576,553
|
|
|
|
55,801,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BENEFIT FROM (PROVISION FOR)
INCOME TAX
(Note 4)
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(18,791,782
|
)
|
|
|
(338,975
|
)
|
|
|
(216,786
|
)
|
Deferred
|
|
|
13,432,123
|
|
|
|
190,607
|
|
|
|
(465,018
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,359,659
|
)
|
|
|
(148,368
|
)
|
|
|
(681,804
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE MINORITY
INTEREST
|
|
|
74,873,776
|
|
|
|
68,428,185
|
|
|
|
55,120,147
|
|
MINORITY INTEREST
[Note 1(a)]
|
|
|
(1,755,994
|
)
|
|
|
(1,604,489
|
)
|
|
|
(1,292,540
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
73,117,782
|
|
|
$
|
66,823,696
|
|
|
$
|
53,827,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-4
QUEZON
POWER, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
73,117,782
|
|
|
$
|
66,823,696
|
|
|
$
|
53,827,607
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
17,805,160
|
|
|
|
18,557,511
|
|
|
|
19,263,376
|
|
Amortization of deferred financing
costs
|
|
|
4,959,514
|
|
|
|
5,618,118
|
|
|
|
6,362,934
|
|
Minority interest
|
|
|
1,755,994
|
|
|
|
1,604,489
|
|
|
|
1,292,540
|
|
Losses on:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement of property, plant and
equipment
|
|
|
1,262,715
|
|
|
|
|
|
|
|
|
|
Sale of property, plant and
equipment
|
|
|
|
|
|
|
1,915
|
|
|
|
|
|
Accretion on asset retirement
obligation
|
|
|
243,204
|
|
|
|
226,801
|
|
|
|
182,600
|
|
Unrealized foreign exchange
gain net
|
|
|
(194,287
|
)
|
|
|
(220,092
|
)
|
|
|
(182,117
|
)
|
Deferred income taxes
|
|
|
(13,432,123
|
)
|
|
|
(190,607
|
)
|
|
|
465,018
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(31,993,873
|
)
|
|
|
(8,357,875
|
)
|
|
|
(3,233,753
|
)
|
Fuel inventories
|
|
|
3,972,408
|
|
|
|
(4,363,668
|
)
|
|
|
(4,927,484
|
)
|
Spare parts
|
|
|
(445,228
|
)
|
|
|
(1,796,267
|
)
|
|
|
(4,134,891
|
)
|
Prepaid input value-added taxes
|
|
|
5,560,325
|
|
|
|
537,647
|
|
|
|
(3,586,180
|
)
|
Prepaid expenses and other current
assets
|
|
|
1,245,424
|
|
|
|
2,827,170
|
|
|
|
(1,275,504
|
)
|
Increase in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
expenses
|
|
|
19,163,765
|
|
|
|
25,953,692
|
|
|
|
10,996,927
|
|
Income taxes payable
|
|
|
7,240,166
|
|
|
|
50,851
|
|
|
|
16,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash generated from operating
activities
|
|
|
90,260,946
|
|
|
|
107,273,381
|
|
|
|
75,067,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and
equipment
|
|
|
(2,931,084
|
)
|
|
|
(7,729,509
|
)
|
|
|
(3,337,655
|
)
|
Proceeds from sale of property,
plant and equipment
|
|
|
|
|
|
|
39,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(2,931,084
|
)
|
|
|
(7,690,210
|
)
|
|
|
(3,337,655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash received from short-term notes
payable
|
|
$
|
10,666,667
|
|
|
$
|
23,333,333
|
|
|
$
|
|
|
Cash dividends
|
|
|
(62,230,000
|
)
|
|
|
(67,209,380
|
)
|
|
|
(75,849,060
|
)
|
Net changes in accounts with
affiliated companies
|
|
|
(123,219
|
)
|
|
|
166,182
|
|
|
|
(1,979,103
|
)
|
Payments of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term notes payable
|
|
|
(3,333,334
|
)
|
|
|
(11,666,666
|
)
|
|
|
|
|
Bonds payable
|
|
|
(7,525,000
|
)
|
|
|
(6,450,000
|
)
|
|
|
(6,450,000
|
)
|
Long-term loans payable
|
|
|
(41,005,046
|
)
|
|
|
(40,002,310
|
)
|
|
|
(38,598,483
|
)
|
Minority interest
|
|
|
(1,270,000
|
)
|
|
|
(1,371,620
|
)
|
|
|
(1,547,940
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing
activities
|
|
|
(104,819,932
|
)
|
|
|
(103,200,461
|
)
|
|
|
(124,424,586
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGES
ON CASH
|
|
|
233,536
|
|
|
|
153,102
|
|
|
|
64,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH
|
|
|
(17,256,534
|
)
|
|
|
(3,464,188
|
)
|
|
|
(52,630,470
|
)
|
CASH AT BEGINNING OF
YEAR
|
|
|
35,939,993
|
|
|
|
39,404,181
|
|
|
|
92,034,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AT END OF YEAR
|
|
$
|
18,683,459
|
|
|
$
|
35,939,993
|
|
|
$
|
39,404,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
37,508,960
|
|
|
$
|
37,360,460
|
|
|
$
|
39,694,095
|
|
Income taxes
|
|
|
11,551,616
|
|
|
|
288,124
|
|
|
|
200,427
|
|
Noncash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement of property, plant and
equipment
|
|
|
1,262,715
|
|
|
|
|
|
|
|
|
|
Revision for estimated cash flows
of asset retirement obligation
|
|
|
|
|
|
|
345,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-5
QUEZON
POWER, INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
For the Years Ended December 31, 2006, 2005 and
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Capital Stock
|
|
|
Paid-in
|
|
|
Retained
|
|
|
|
|
|
|
(Note 8)
|
|
|
Capital
|
|
|
Earnings
|
|
|
Total
|
|
|
Balance at December 31, 2003
|
|
$
|
1,001
|
|
|
$
|
207,641,266
|
|
|
$
|
104,496,189
|
|
|
$
|
312,138,456
|
|
Cash dividends
|
|
|
|
|
|
|
|
|
|
|
(75,849,060
|
)
|
|
|
(75,849,060
|
)
|
Net income for the year
|
|
|
|
|
|
|
|
|
|
|
53,827,607
|
|
|
|
53,827,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
$
|
1,001
|
|
|
$
|
207,641,266
|
|
|
$
|
82,474,736
|
|
|
$
|
290,117,003
|
|
Cash dividends
|
|
|
|
|
|
|
|
|
|
|
(67,209,380
|
)
|
|
|
(67,209,380
|
)
|
Net income for the year
|
|
|
|
|
|
|
|
|
|
|
66,823,696
|
|
|
|
66,823,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
$
|
1,001
|
|
|
$
|
207,641,266
|
|
|
$
|
82,089,052
|
|
|
$
|
289,731,319
|
|
Cash dividends
|
|
|
|
|
|
|
|
|
|
|
(62,230,000
|
)
|
|
|
(62,230,000
|
)
|
Net income for the year
|
|
|
|
|
|
|
|
|
|
|
73,117,782
|
|
|
|
73,117,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
$
|
1,001
|
|
|
$
|
207,641,266
|
|
|
$
|
92,976,834
|
|
|
$
|
300,619,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-6
QUEZON
POWER, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
Organization
and Business
|
Quezon Power, Inc. (the Company; formerly Ogden Quezon Power,
Inc.), an exempted company with limited liability, was
incorporated in the Cayman Islands, British West Indies on
August 4, 1995 primarily: (i) to be a promoter, a
general or limited partner, member, associate, or manager of any
general or limited partnership, joint venture, trust or other
entity, whether established in the Republic of the Philippines
or elsewhere and (ii) to engage in the business of power
generation and transmission and in any development or other
activity related thereto; provided that the Company shall only
carry on the business for which a license is required under the
laws of the Cayman Islands when so licensed under the terms of
such laws. The Philippine Branch (the Branch) was registered
with the Philippine Securities and Exchange Commission on
March 15, 1996 to carry out the Companys business in
the Republic of the Philippines to the extent allowed by law
including, but not limited to, developing, designing and
arranging financing for a 470-megawatt (net) base load
pulverized coal-fired power plant and related electricity
transmission line (the Project) located in Quezon Province,
Republic of the Philippines. In addition, the Branch is
responsible for the organization and is the sole general partner
of Quezon Power (Philippines), Limited Co. (the Partnership), a
limited partnership in the Philippines. The Partnership is
responsible for financing, constructing, owning and operating
the Project.
The Branch is the legal and beneficial owner of (i) the
entire general partnership interest in the Partnership
representing 21% of the economic interest in the Partnership and
(ii) a limited partnership interest representing 77% of the
economic interest in the Partnership. The remaining 2% economic
interest in the Partnership is in the form of a limited
partnership interest held by PMR Limited Co. (PMRL). PMRL does
not have any equity funding obligation. The accompanying
financial statements include the consolidated results of the
Company and the Partnership.
Ultimately, 100% of the aggregate capital contributions of the
Company to the Partnership were indirectly made by Quezon
Generating Company, Ltd. (QGC), a Cayman Islands limited
liability company, and Covanta Power Development
Cayman, Inc. (CPD; formerly Ogden Power Development
Cayman, Inc.), an indirect wholly owned subsidiary of Covanta
Energy Group, Inc. (formerly Ogden Energy Group, Inc.), a
Delaware corporation. The shareholders of QGC are QGC Holdings,
Ltd. and Global Power Investment, L.P. (GPI), both Cayman
Islands companies. QGC Holdings, Ltd. is a wholly owned
subsidiary of InterGen N.V. (formerly InterGen) which was a
joint venture between Bechtel Enterprises, Inc. (Bechtel) and
Shell Generating Limited (Shell). In August 2005, Shell and
Bechtel completed the sale of InterGen N.V. and 10 of its power
plants including its interest in the Quezon Project to a
partnership between AIG Highstar Capital II, L.P. and
Ontario Teachers Pension Plan. The ultimate economic
ownership percentages among QGC, CPD and PMRL in the Partnership
are 71.875%, 26.125% and 2%, respectively.
|
|
(b)
|
Allocation
of Earnings
|
Each item of income and loss of the Partnership for each fiscal
year (or portion thereof) shall be allocated 21% to the Company,
as a general partner; 77% to the Company, as a limited partner;
and 2% to PMRL, as a limited partner.
The Project is a 470-megawatt (net) base load pulverized
coal-fired electricity generation facility and related
transmission line. The Project receives substantially all of its
revenue from a
25-year
take-or-pay
Power Purchase Agreement (PPA) and a Transmission Line Agreement
(TLA) with the Manila Electric Company (Meralco). Construction
of the Project commenced in December 1996 and the Project
started commercial operations on May 30, 2000. The total
cost of the Project was $895.4 million.
F-7
QUEZON
POWER, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(d)
|
Principal
Business Risks
|
The principal risks associated with the Project include
operating risks, dependence on one customer (Meralco),
environmental matters, permits, political and economic factors
and fluctuations in currency.
The risks associated with operating the Project include the
breakdown or failure of equipment or processes and the
performance of the Project below expected levels of output or
efficiency due to operator fault
and/or
equipment failure. Meralco is subject to regulation by the
Energy Regulatory Commission (ERC) with respect to sales charged
to consumers. In addition, pursuant to the Philippine
Constitution, the Philippine government at any time may purchase
Meralcos property upon payment of just compensation. If
the Philippine government was to purchase Meralcos
property or the ERC ordered any substantial disallowance of
costs, Meralco would remain obligated under the PPA to make the
firm payments to the Partnership. Such purchase or disallowance,
however, could result in Meralco being unable to fulfill its
obligations under the PPA, which would have an adverse material
effect on the ability of the Partnership to meet its obligations
under the credit facilities [see Notes 6, 9(a) and 9(b)].
|
|
2.
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation
The consolidated financial statements of the Company include the
financial position and results of operations of the Partnership
and have been prepared in conformity with U.S. generally
accepted accounting principles.
Principles
of Consolidation
The consolidated financial statements include the accounts of
the Company and the Partnership, a 98%-owned and controlled
limited partnership. All significant intercompany transactions
have been eliminated.
Use of
Estimates
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from
those estimates.
Accounts
Receivable
Accounts receivable are recognized and carried at original
invoice amount less an allowance for any uncollectible amounts.
An estimate for doubtful accounts is made when collection of the
full amount is no longer probable.
Inventories
Fuel inventories and spare parts are valued at the lower of cost
or market value, net of any provision for inventory losses. Cost
is determined using the moving average cost method.
Property,
Plant and Equipment
Property, plant and equipment are carried at cost less
accumulated depreciation and amortization. Cost includes the
fair value of asset retirement obligation, capitalized interest
and amortized deferred financing costs incurred in connection
with the construction of the Project. Capitalization of interest
and amortization of deferred financing costs ceased upon
completion of the Project.
F-8
QUEZON
POWER, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the
assets. The estimated useful lives of the assets are as follows:
|
|
|
|
|
Category
|
|
Number of years
|
|
|
Power plant
|
|
|
50
|
|
Transmission lines
|
|
|
25
|
|
Others
|
|
|
3 to 5
|
|
The cost of routine maintenance and repairs is charged to income
as incurred while significant renewals and betterments are
capitalized. When assets are retired or otherwise disposed of,
both the cost and related accumulated depreciation and
amortization are removed from the accounts and any resulting
gain or loss is credited or charged to current operations.
Deferred
Financing Costs
Deferred financing costs represent the costs incurred to obtain
project financing and are amortized, using the effective
interest rate method, over the term of the related loans.
Derivative
Instruments and Hedging Activities
The Company accounts for derivative instruments and hedging
activities under Statement of Financial Accounting Standards
(SFAS) No. 133 (subsequently amended by
SFAS No. 138 and No. 149), Accounting for
Derivative Instruments and Hedging Activities. This
statement, as amended, establishes certain accounting and
reporting standards requiring all derivative instruments to be
recorded as either assets or liabilities measured at fair value.
Changes in derivative fair values are recognized currently in
earnings unless specific hedge accounting criteria are met.
Special accounting treatment for qualifying hedges allows a
derivatives gains and losses to offset related results on
the hedged item in the statement of operations and requires the
Company to formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. The
Company periodically reviews its existing contracts to determine
the existence of any embedded derivatives. As of
December 31, 2006 and 2005, there are no significant
embedded derivatives that exist.
Prepaid
Input Value-Added Taxes
Prepaid input value-added taxes (VAT) represent VAT imposed on
the Partnership by its suppliers for the acquisition of goods
and services required under Philippine taxation laws and
regulations.
The input VAT is recognized as an asset and will be used to
offset the Partnerships current VAT liabilities [see
Notes 4 and 11(a)]. Excess input VAT, if any, will be
claimed as tax credits. Input taxes are stated at their
estimated net realizable values.
Revenue
Recognition
Revenue is recognized when electric capacity and energy are
delivered to Meralco [see Note 9(a)]. Commencing on the
Commercial Operations Date and continuing throughout the term of
the PPA, the Partnership receives payment, net of penalty
obligation for each kilowatt hour (kWh) of shortfall deliveries,
consisting of a Monthly Capacity Payment, Monthly Operating
Payment and Monthly Energy Payment as defined in the PPA.
Revenue from transmission lines consists of Capital Cost
Recovery Payment (CCRP) and the Transmission Line Monthly
Operating Payment as defined in the TLA. Transmission Line
Monthly Operating Payment is recognized as revenue in the period
it is intended for.
F-9
QUEZON
POWER, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Income
Taxes
The Partnership is registered with the Philippine Board of
Investments as a pioneer enterprise under a statutory scheme
designed to promote investments in certain industries (including
power generation). As such, the Partnership benefited from a
six-year income tax holiday on its registered activities
starting on January 1, 2000. During 2004, the Partnership
was able to move the effective date of its income tax holiday
period to May 30, 2000, coinciding with the start of
commercial operations. Under the present Philippine taxation
laws, a corporate income tax rate of 35% is levied against
Philippine taxable income effective November 1, 2005 and
30% starting January 1, 2009 (see Note 4). Prior to
November 1, 2005, the corporate income tax rate was 32%.
Net operating losses can be carried forward for three
immediately succeeding years. The income tax holiday incentive
of the Partnership expired on May 29, 2006. The
Partnerships income from the registered activities for the
period thereafter became subject to the regular corporate income
tax rate of 35%.
The Partnership accounts for corporate income taxes in
accordance with SFAS No. 109, Accounting for Income
Taxes, which requires an asset and liability approach in
determining income tax liabilities. The standard recognizes
deferred tax assets and liabilities for the future tax
consequences attributable to differences between the financial
reporting bases of assets and liabilities and their related tax
bases. Deferred tax assets and liabilities are measured using
the tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be
recovered or settled. Deferred tax assets and deferred tax
liabilities that will reverse during the income tax holiday
period are not recognized.
The Company is not subject to income taxes as a result of the
Companys incorporation in the Cayman Islands. However, the
Philippine branch profit remittance tax of 15% will be levied
against the total profit applied or earmarked for remittance by
the Branch to the Company.
Functional
Currency
The functional currency of the Company and the Partnership has
been designated as the U.S. dollar because borrowings under
the credit facilities are made and repaid in U.S. dollars.
In addition, all major agreements are primarily denominated in
U.S. dollars or are U.S. dollar linked. Consequently,
the consolidated financial statements and transactions of the
Company and the Partnership have been recorded in
U.S. dollars.
Valuation
of Long-lived Assets
Long-lived assets are accounted for in accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-lived Assets. The Partnership periodically
evaluates its long-lived assets for events or changes in
circumstances that might indicate that the carrying amount of
the assets may not be recoverable. The Partnership assesses the
recoverability of the assets by determining whether the
amortization of such long-lived assets over their estimated
lives can be recovered through projected undiscounted future
cash flows. The amount of impairment, if any, is measured based
on the fair value of the assets. For the years ended
December 31, 2006, 2005 and 2004, no such impairment was
recorded in the accompanying consolidated statements of
operations.
Asset
Retirement Obligation
The Partnership accounts for asset retirement obligations in
accordance with SFAS No. 143, Accounting for Asset
Retirement Obligations. The Partnership recognizes asset
retirement obligations in the period in which they are incurred
if a reasonable estimate of fair value can be made. In
estimating fair value, the Partnership did not use a market risk
premium since a reliable estimate of the premium is not
obtainable given that the retirement activities will be
performed many years into the future and the Partnership has
insufficient information on how much a third party contractor
would charge to assume the risk that the actual costs will
change in the future. The associated asset retirement costs are
capitalized as part of the carrying amount of the Power plant.
F-10
QUEZON
POWER, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On January 1, 2005, the Partnership revised its estimate of
asset retirement obligation to reflect an increase in the
marketplace rates of labor, overhead and materials. This change
in estimate resulted in a charge to income for the year ended
December 31, 2005 amounting to $29,936, net of related
benefit from income tax of $12,830. The charge to income
resulted from the increase in depreciation and accretion
expenses as a result of the revision in the estimated cash flow.
No payments of asset retirement obligation were made as of
December 31, 2006 and 2005.
The following table describes all changes to the
Partnerships asset retirement obligation liability as of
December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Asset retirement obligation at
beginning of year
|
|
$
|
4,053,639
|
|
|
$
|
3,481,098
|
|
Revision in the estimated cash
flows of asset retirement obligation
|
|
|
|
|
|
|
345,740
|
|
Accretion expense for the year
|
|
|
243,204
|
|
|
|
226,801
|
|
|
|
|
|
|
|
|
|
|
Asset retirement obligation at end
of year
|
|
$
|
4,296,843
|
|
|
$
|
4,053,639
|
|
|
|
|
|
|
|
|
|
|
Impact
of Recently Issued Accounting Standards
In June 2006, the Financial Accounting Standards Board
(FASB) issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement
No. 109 (FIN 48). This
interpretation increases the relevancy and comparability of
financial reporting by clarifying the way companies account for
uncertainty in income taxes. FIN 48 prescribes a consistent
recognition threshold and measurement attribute, as well as
clear criteria for subsequently recognizing, derecognizing and
measuring such tax positions for financial statement purposes.
The interpretation also requires expanded disclosure with
respect to the uncertainty in income taxes. FIN 48 is
effective for fiscal years beginning after December 15,
2006. The Partnership does not expect the adoption of
FIN 48 to have a material effect on its results of
operations or financial condition.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS 157). SFAS 157 defines fair value,
establishes a framework for measuring fair value under generally
accepted accounting principles and expands disclosures about
fair value measurements. SFAS 157 will be applied under
other accounting principles that require or permit fair value
measurements, as this is a relevant measurement attribute. This
statement does not require any new fair value measurements.
SFAS 157 is effective for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal
years. The Partnership does not expect the adoption of
SFAS 157 to have a material effect on its result of
operations or financial condition.
|
|
3.
|
Property,
Plant and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Power plant
|
|
$
|
689,622,879
|
|
|
$
|
688,172,245
|
|
Transmission lines
|
|
|
86,596,580
|
|
|
|
86,593,717
|
|
Furniture and fixtures
|
|
|
4,124,997
|
|
|
|
4,083,459
|
|
Transportation equipment
|
|
|
311,555
|
|
|
|
319,266
|
|
Leasehold improvements
|
|
|
189,543
|
|
|
|
184,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
780,845,554
|
|
|
|
779,352,720
|
|
Less accumulated depreciation and
amortization
|
|
|
121,770,076
|
|
|
|
104,140,451
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
659,075,478
|
|
|
$
|
675,212,269
|
|
|
|
|
|
|
|
|
|
|
Approximately $99.0 million of interest on borrowings and
$11.8 million of amortization of deferred financing costs
have been capitalized as part of the cost of property, plant and
equipment and depreciated over the estimated useful life of the
Power plant. No interest on borrowings and amortization of
deferred financing costs were
F-11
QUEZON
POWER, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
capitalized to property, plant and equipment in 2006, 2005 and
2004 since the Project started commercial operations on
May 30, 2000.
Total depreciation and amortization related to property, plant
and equipment charged to operations amounted to
$17.8 million, $18.6 million and $19.3 million in
2006, 2005 and 2004, respectively.
The significant components of the Partnerships deferred
tax assets and liabilities at December 31, 2006 and 2005
are as follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Unrealized foreign exchange losses
|
|
$
|
1,252,278
|
|
|
$
|
|
|
Provision for probable losses
|
|
|
858,678
|
|
|
|
|
|
Loss on retirement of property,
plant and equipment
|
|
|
441,950
|
|
|
|
|
|
Others
|
|
|
180,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current deferred tax assets
|
|
$
|
2,733,683
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Noncurrent:
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Unrealized foreign exchange losses
|
|
$
|
21,005,149
|
|
|
$
|
3,883,992
|
|
Asset retirement obligations
|
|
|
490,023
|
|
|
|
398,262
|
|
Deferred financing costs
|
|
|
|
|
|
|
9,762,369
|
|
Valuation allowance on unrealized
foreign exchange losses
|
|
|
|
|
|
|
(3,883,992
|
)
|
|
|
|
|
|
|
|
|
|
Noncurrent deferred tax assets
|
|
|
21,495,172
|
|
|
|
10,160,631
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability:
|
|
|
|
|
|
|
|
|
Excess of tax over book
depreciation
|
|
|
1,265,558
|
|
|
|
629,457
|
|
|
|
|
|
|
|
|
|
|
Net noncurrent deferred tax assets
|
|
$
|
20,229,614
|
|
|
$
|
9,531,174
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax provision is provided for the temporary
differences in financial reporting of unrealized foreign
exchange losses, accretion and depreciation expenses related to
asset retirement obligation, provision for probable losses, loss
on retirement of property, plant and equipment and the excess of
tax over book depreciation. Under accounting principles
generally accepted in the U. S., the deferred financing costs
were treated as a deferred asset and amortized, using the
effective interest rate method, over the lives of the related
loans. Prior to 2006, for Philippine income tax reporting
purposes, deferred financing costs and foreign exchange losses
are capitalized and depreciated as part of the cost of property,
plant and equipment except for the depreciation of capitalized
unrealized foreign exchange losses which is not deductible under
the Philippine tax base.
The Partnership provided for a full valuation allowance on
deferred tax assets pertaining to capitalized unrealized foreign
exchange losses beginning in 2004 in view of a then pending
revenue regulation of the Philippine Bureau of Internal Revenue
(BIR) on the use of functional currency other than the
Philippine peso which may result in the write-off of these
amounts.
In May 2006, the BIR issued Revenue
Regulation 6-2006
formally establishing its position on the use of Philippine peso
as the currency for tax reporting purposes. Furthermore, in July
2006, the Partnership obtained a
F-12
QUEZON
POWER, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
ruling from the BIR, effective January 1, 2006, allowing
the Partnership to recognize retroactively foreign exchange
losses as deductible expense when realized. With this change,
the Partnership recognized a deferred tax asset on the full tax
consequence of the unrealized foreign exchange losses which
amounted to $22.3 million as of December 31, 2006 and
reversed the valuation allowance on the deferred tax asset on
unrealized foreign exchange losses of $3.9 million as of
December 31, 2005.
In August 2006, the Partnership obtained from the BIR a ruling,
effective January 1, 2006, allowing the Partnership to
recognize retroactively the amortization of deferred financing
costs using the effective interest rate method over the terms of
the related loans to be consistent with the Partnerships
accounting treatment. Consequently, the Partnership reversed the
deferred tax asset relating to the excess of accounting over tax
amortization of deferred financing costs of about
$9.8 million as of December 31, 2005.
Income from nonregistered operations of the Partnership is not
covered by its income tax holiday incentives. The current
provision for income tax in 2005 pertains to income tax due on
interest income from offshore bank deposits and certain other
income. Starting May 30, 2006, the Partnerships
income tax holiday incentives expired. Consequently, the
registered operations became subject to the regular corporate
income tax rate of 35%.
A reconciliation of the statutory income tax rates to the
effective income tax rates as a percentage of income before
income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Statutory income tax rates
|
|
|
35.0
|
%
|
|
|
32.5
|
%
|
|
|
32.0
|
%
|
Tax effects of:
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys operations
|
|
|
6.3
|
|
|
|
5.5
|
|
|
|
5.4
|
|
Change in valuation allowance
|
|
|
(4.8
|
)
|
|
|
1.2
|
|
|
|
5.5
|
|
Change in tax rate
|
|
|
3.0
|
|
|
|
1.0
|
|
|
|
|
|
Partnerships operations
under income tax holiday
|
|
|
(32.8
|
)
|
|
|
(40.0
|
)
|
|
|
(42.0
|
)
|
Others
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rates
|
|
|
6.7
|
%
|
|
|
0.2
|
%
|
|
|
1.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic Act (RA) No. 9337 was enacted into law effective
November 1, 2005 amending various provisions in the
existing 1997 National Internal Revenue Code of the Philippines
(1997 NIRCP). Among the reforms introduced by the said RA
are as follows:
|
|
|
|
|
Increase in the corporate income tax rate from 32% to 35%, with
a reduction thereof to 30% beginning January 1, 2009;
|
|
|
|
Expanded the scope of transactions subject to VAT which includes
the sale of generated power;
|
|
|
|
Grant of authority to the Philippine President to increase the
10% value added tax (VAT) rate to 12% effective January 1,
2006, subject to compliance with certain economic conditions;
|
|
|
|
Revised invoicing and reporting requirements for VAT; and
|
|
|
|
Provided thresholds and limitation on the amount of VAT credits
that can be claimed.
|
Due to the enactment of RA No. 9337, the effective
statutory income tax rate as of December 31, 2006 is at
35%. The deferred income tax assets and liabilities were
measured using the appropriate corporate income tax rate on the
year it is expected to be reversed or settled.
On January 31, 2006, the BIR issued Revenue Memorandum
Circular
No. 7-2006
increasing the VAT rate from 10% to 12% effective
February 1, 2006.
F-13
QUEZON
POWER, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
RA No. 9361 was enacted into law effective
December 13, 2006, amending Section 110B of the 1997
NIRCP and abolishing the limitation on the amount of VAT credits
that can be claimed.
The Partnership entered into a $15.0 million Credit
Facility Agreement (CFA) with Banco de Oro Universal Bank
(BDO) dated May 11, 2005 for the general working capital
requirements of the Partnership. The Partnership drew down on
this facility in May 2005 and November 2005.
The Partnership has paid in full the $3.3 million from the
May 2005 drawdown and was able to extend the maturity of the
November 2005 drawdown to September 12, 2007.
In November 2006, the Partnership amended its existing CFA with
BDO to increase the total commitment of BDO under the credit
facility to $19.0 million under the same commercial terms
as in the existing credit agreement. The Partnership availed the
remaining balance of the total commitment on November 10,
2006.
The outstanding balances of these drawdowns are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Outstanding
|
|
|
Interest
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Rate
|
|
Term
|
|
May 2005 drawdown
|
|
$
|
|
|
|
$
|
3,333,334
|
|
|
LIBOR plus a
margin of 2%
|
|
Due in 2 equal monthly
installments on January 13,
2006 and February 13, 2006
|
November 2005 drawdown
|
|
|
8,333,333
|
|
|
|
8,333,333
|
|
|
At market rates
|
|
September 12, 2007
|
November 2006 drawdown
|
|
|
10,666,667
|
|
|
|
|
|
|
At market rates
|
|
September 12, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,000,000
|
|
|
$
|
11,666,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Debt
Financing Agreements
|
The Partnership was financed through the collective arrangement
of the Common Agreement, Eximbank-Supported Construction Credit
Facility, Trust Agreement, Uninsured Alternative Credit
Agreement, Indenture, Bank Notes, Bank Letters of Credit, Bonds,
Interest Hedge Contracts, Eximbank Political Risk Guarantee,
OPIC Political Risk Insurance Policy, Eximbank Term Loan
Agreement, Intercreditor Agreement, Side Letter Agreements,
Security Documents and Equity Documents.
The Common Agreement contains affirmative and negative covenants
including, among other items, restrictions on the sale of
assets, modifications to agreements, certain transactions with
affiliates, incurrence of additional indebtedness, capital
expenditures and distributions and collateralization of the
Projects assets. The debt is collateralized by
substantially all of the assets of the Partnership and a pledge
of certain affiliated companies shares of stock. The
Partnership has complied with the provisions of the debt
financing agreements, in all material respects, or has obtained
a waiver for noncompliance from the lenders [see
Notes 11(c) and (d)].
The debt financing agreements contemplated that the outstanding
principal amount of the Eximbank-Supported Construction Loans
will be repaid on the Eximbank Conversion Date with the proceeds
of a loan from Eximbank under the Eximbank Term Loan.
Under the Eximbank Term Loan Agreement, Eximbank was to provide
for a $442.1 million direct term loan, the proceeds of
which could only be used to refinance the outstanding
Eximbank-Supported Construction Credit Facility and to pay the
Eximbank Construction Exposure Fee to Eximbank. This term loan,
which would have had interest at a fixed rate of 7.10% per
annum, would have had a
12-year term
and would have been amortized in 24 approximately equal
semi-annual payments during such term.
F-14
QUEZON
POWER, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In April 2001, in lieu of the Eximbank Term Loan, the
Partnership availed of the alternative refinancing of the
Eximbank-Supported Construction Loans allowed under the Eximbank
Option Agreement through an Export Credit Facility guaranteed by
Eximbank and financed by Private Export Funding Corporation
(PEFCO). Under the terms of the agreement, PEFCO established
credit in an aggregate amount of $424.7 million which bears
interest at a fixed rate of 6.20% per annum and payable
under the payment terms identical with the Eximbank Term Loan.
Upon compliance with the conditions precedent as set forth in
the Term Loan Agreement, the PEFCO Term Loan was drawn and the
proceeds were applied to the Eximbank-Supported Construction
Loans.
Amendments to the Omnibus Agreement were made to include, among
other things, PEFCO as a party to the Agreement in the capacity
of a lender.
Annual future amortization payments for the next five years
ending December 31 are as follows:
|
|
|
|
|
2007
|
|
$
|
35,389,726
|
|
2008
|
|
|
35,389,726
|
|
2009
|
|
|
35,389,726
|
|
2010
|
|
|
35,389,726
|
|
2011
|
|
|
35,389,726
|
|
and thereafter
|
|
|
35,389,727
|
|
|
|
(b)
|
Uninsured
Alternative Credit Agreement
|
The Uninsured Alternative Credit Agreement provides for the
arrangement of Construction Loans, Refunding Loans and Cost
Overrun Loans (collectively, the Uninsured Alternative Credit
Facility Loans) as well as the issuance of the PPA Letter of
Credit and the Coal Supply Letter of Credit.
In July 1997, the Partnership terminated commitments in excess
of $30 million in respect of the Construction Loans in
connection with the issuance of the bonds. The Construction
Loans will have a seven-year term and will be amortized in
14 semi-annual payments during such term commencing on
January 15, 2001. Interest will accrue at a rate equal to
LIBOR plus a margin of 2.75% to 3.25%.
As of December 31, 2006 and 2005, approximately
$3.4 million and $9.0 million, respectively, were
outstanding with respect to the Construction Loans. The
$3.4 million outstanding as of December 31, 2006 will
be repaid in two equal semi-annual installments in 2007.
There were no outstanding balances at December 31, 2006 and
2005 for the Refunding Loans and Cost Overrun Loans.
|
|
(c)
|
Trust and
Retention Agreement
|
The Trust and Retention Agreement provides, among others, for
(i) the establishment, maintenance and operation of one or
more U.S. dollar and Philippine peso accounts into which
power sales revenues and other project-related cash receipts of
the Partnership will be deposited and from which all operating
and maintenance disbursements, debt service payments and equity
distributions will be made; and (ii) the sharing by the
lenders on a pari passu basis of the benefit of certain security.
Bonds payable represents the proceeds from the issuance of the
$215.0 million in aggregate principal amount of the
Partnerships 8.86% Senior Secured Bonds Due 2017 (the
Series 1997 Bonds). The interest rate is 8.86% per
annum and is payable quarterly on March 15, June 15,
September 15 and December 15 of each year (each, a
Bond Payment Date), with the first Bond Payment Date being
September 15, 1997. The principal amount of the
Series 1997 Bonds is payable in quarterly installments on
each Bond Payment Date occurring on or after
F-15
QUEZON
POWER, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
September 15, 2001 with the Final Maturity Date on
June 15, 2017. The proceeds of the Series 1997 Bonds
were applied primarily by the Partnership to the payment of a
portion of the development, construction and certain initial
operating costs of the Project.
The Series 1997 Bonds are treated as senior secured
obligations of the Partnership and rank pari passu in right of
payment with all other credit facilities, as well as all other
existing and future senior indebtedness of the Partnership
(other than a working capital facility of up to
$15.0 million, subject to escalation), and senior in right
of payment to all existing and future indebtedness of the
Partnership that is designated as subordinate or junior in right
of payment to the Series 1997 Bonds. The Series 1997
Bonds are subject to redemption by the Partnership in whole or
in part, beginning five years from the date of issuance, at par
plus a make-whole premium, calculated using a discount rate
equal to the applicable U.S. Treasury rate plus 0.75%.
Annual future amortization payments for the next five years
ending December 31 are as follows:
|
|
|
|
|
2007
|
|
$
|
10,750,000
|
|
2008
|
|
|
12,900,000
|
|
2009
|
|
|
12,900,000
|
|
2010
|
|
|
12,900,000
|
|
2011
|
|
|
12,900,000
|
|
and thereafter
|
|
|
120,400,000
|
|
|
|
7.
|
Related
Party Transactions
|
Due to the nature of the ownership structure, the majority of
the transactions were among the Company, the Partnership and the
Partners, their affiliates or related entities.
The following approximate amounts were paid to affiliates of the
Partners for the operation and maintenance and management of the
Project under the agreements discussed in Note 9:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Covanta
|
|
$
|
26,854,303
|
|
|
$
|
29,524,335
|
|
|
$
|
40,564,370
|
|
InterGen
|
|
|
1,794,111
|
|
|
|
1,599,178
|
|
|
|
2,400,924
|
|
As of December 31, 2006 and 2005, the net amounts due from
affiliated companies related to costs and expenses incurred and
cash advanced by the Project were $187,158 and $120,476,
respectively.
F-16
QUEZON
POWER, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
Number of
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Class A, $0.01 par value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized
|
|
|
1,000,000
|
|
|
|
|
|
|
|
1,000,000
|
|
|
|
|
|
Issued
|
|
|
26,151
|
|
|
$
|
262
|
|
|
|
26,151
|
|
|
$
|
262
|
|
Class B, $0.01 par value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized
|
|
|
1,000,000
|
|
|
|
|
|
|
|
1,000,000
|
|
|
|
|
|
Issued
|
|
|
2,002
|
|
|
|
20
|
|
|
|
2,002
|
|
|
|
20
|
|
Class C, $0.01 par value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized
|
|
|
1,000,000
|
|
|
|
|
|
|
|
1,000,000
|
|
|
|
|
|
Issued
|
|
|
71,947
|
|
|
|
719
|
|
|
|
71,947
|
|
|
|
719
|
|
Class D, $0.01 par value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized
|
|
|
10
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
Issued
|
|
|
10
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,001
|
|
|
|
|
|
|
$
|
1,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A and Class C shares have an aggregate 100%
beneficial economic interest and 98% voting interest in the
Company divided among the holders of the Class A and
Class C shares. Class B shares have a 2% voting
interest in the Company. On October 18, 2004, the
shareholders of the Company entered into a Third Amended and
Restated Development and Shareholders Agreement (D&S
Agreement) to, among others, add GPI as party to the D&S
Agreement as a shareholder and holder of newly issued
Class D shares. Class D shares have no economic
interest, no right to dividends and other distributions and no
voting rights other than the power to appoint a director and an
alternate director.
|
|
9.
|
Commitments
and Contingencies
|
The Partnership has entered into separate site lease,
construction, energy sales, electric transmission, coal supply
and transportation, operations and maintenance and project
management agreements.
In connection with the construction and operation of the
Project, the Partnership is obligated under the following key
agreements:
|
|
(a)
|
Offtake
Agreements General Terms
|
PPA
The Partnership and Meralco are parties to the PPA (as amended
on June 9, 1995 and December 1, 1996). The PPA
provides for the sale of electricity from the Partnerships
Generation Facility to Meralco. The term extends 25 years
from the Commercial Operations Date, as defined in the PPA. As
disclosed in Note 1(c), the Commercial Operations Date
occurred on May 30, 2000.
The PPA provides that commencing on the Commercial Operations
Date, the Partnership is required to deliver to Meralco, and
Meralco is required to take and pay for, in each year a minimum
guaranteed electrical quantity (MGEQ) of kWhs of net electrical
output (NEO). The Partnerships delivery obligations are
measured monthly and annually.
Meralco is obligated to pay to the Partnership each month a
monthly payment consisting of the following: (i) a Monthly
Capacity Payment, (ii) a fixed Monthly Operating Payment,
(iii) a variable Monthly Operating Payment
F-17
QUEZON
POWER, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and (iv) a Monthly Energy Payment. Under the PPA and
related foreign exchange protocols between the parties, Meralco
may pay the dollar denominated components of the Monthly
Capacity Payment, the Monthly Energy Payment and the Monthly
Operating Payment in U.S. dollars or in Philippine pesos
based on prevailing exchange rates at the time of payment.
Under the PPA, the Partnership has provided Meralco with a
letter of credit in the amount of $6.5 million to secure
its obligations under the PPA.
TLA
Under the TLA dated as of June 13, 1996 (as amended on
December 1, 1996) between the Partnership and Meralco,
the Partnership accepted responsibility for obtaining all
necessary
rights-of-way
for, and the siting, design, construction, operation and
maintenance of the Transmission Line. The term of the TLA will
extend for the duration of the term of the PPA, commencing on
the date of execution of the TLA and expiring on the
25th anniversary of the Commercial Operations Date. Under
the TLA, Meralco is obligated to make a monthly Capital Cost
Recovery Payment and a Monthly Operating Payment to the
Partnership.
|
|
(b)
|
Offtake
Agreements Re-Negotiation and Capital Cost Recovery
Payment History
|
Initial
PPA Discussions
During the initial operating period (May 2000 through October
2001), the Plant did not provide the required NEO to Meralco.
Under the terms of the PPA, Meralco was entitled to specified
shortfall payments for each kWh of shortfall which would have
reimbursed Meralco for a portion of the Monthly Capacity Payment
and Monthly Fixed Operating Payment.
In mid-2001, Meralco requested that the Partnership renegotiate
certain terms of the PPA. In addition, Meralco withheld payments
of approximately $10.8 million ($2.3 million of which
was otherwise payable to Meralco as shortfall penalties in
accordance with the PPA). A provision had already been
recognized for the $8.5 million Meralco withheld amount for
which there were no offsetting shortfall penalties payable. The
nature of the proposed changes, agreements in principle and
agreements that were executed but never became effective has
evolved since 2001.
In 2002, the parties agreed in principle to the following
changes to the PPA (which did not become effective):
|
|
|
|
|
The parties would increase the amount of shortfall payments to
be equal to the per kWh full Capacity Payment and the Fixed
Operating Payment, thereby placing availability risk with the
Partnership.
|
|
|
|
The Partnership would provide Meralco a $40.1 million
rebate payable over 6 years.
|
|
|
|
Meralco would pay the Monthly Capacity Payment, the Monthly
Fixed Operating Payment and the Monthly Variable Operating
Payment based on the availability of the Plant.
|
|
|
|
Meralco would reimburse the Partnership for extra fuel costs due
to low dispatch of the Plant.
|
|
|
|
As consideration for full settlement, the Partnership would pay
the $8.5 million withheld amount to Meralco.
|
Transmission
Line Capital Cost Disallowance and Partial CCRP
Deferral
In 2003, the ERC issued a preliminary order dated March 20,
2003 disallowing a portion of the capital cost associated with
the construction of the transmission line. While confirming that
the Partnership would be entitled to payment by Meralco of the
full CCRP despite the ERC order, Meralco requested and the
Partnership agreed to the deferral of a portion of the CCRP on a
temporary basis and subject to resolution of all outstanding
issues.
In 2004, the ERC issued its final order dated September 20,
2004 disallowing approximately 30% of the capital cost
associated with the construction of the transmission line. That
order allowed Meralco to recover $60.7 million
F-18
QUEZON
POWER, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of transmission line costs out of the total $88.8 million
actual costs incurred by the Partnership and disallowed
$28.1 million of the total composed mainly of schedule
extension costs. The impact of that decision on Meralco was to
reduce the annual CCRP that may be recovered by Meralco from its
customers from $13.2 million to $9.0 million. The
monthly impact amounted to approximately $350,000 per month.
At approximately the same time, the Partnership reduced the
temporary CCRP deferral amount. Meralco also paid excess past
deferrals to the Partnership.
Continuing
PPA and TLA Amendment Discussions
The parties have continued to discuss possible amendments to the
PPA consistent with the points that were proposed in 2002.
In 2004, based on the aforementioned ERC orders, Meralco
requested a reduction of the CCRP from March 26, 2003
through its remaining term in lieu of the $40.1 million
six-year PPA rebate.
In 2005, Meralco again requested the Partnership to consider
possible alternatives to evolving amendments to the PPA and the
TLA. This prompted a reevaluation by the Partnership of the
provisions to be recognized as a result of the renegotiations of
the PPA and the TLA. As a result of this reevaluation, the
Partnership recognized a contingency to reflect
managements best estimate of the probable loss from the
reasonably expected CCRP reduction amendment to the TLA. This
estimate assumes that a full resolution with Meralco can be
agreed and that the required approvals will be received.
In 2006, the parties have continued to discuss proposals for
resolution of outstanding offtake issues.
The total outstanding CCRP deferred for collection amounted to
$16.1 million and $11.9 million as of
December 31, 2006 and 2005, respectively.
The existing PPA and the existing TLA remain effective. The
potential effect of any proposals to amend the PPA and TLA are
based on the reasonable expectations of management consistent
with applicable accounting principles and taking into account
the likely retroactive effect of any such amendments. Any
amendments to either the PPA or TLA would be subject to lender
consent, approval of the board of directors of the general
partner of the Partnership and appropriate regulatory approvals.
|
|
(c)
|
Coal
Supply Agreements
|
In order to ensure that there is an adequate supply of coal to
operate the Generation Facility, the Partnership has entered
into two coal supply agreements (CSA) with the intent to
purchase approximately 70% of its coal requirements from PT
Adaro Indonesia (Adaro) and the remainder of its coal
requirements from PT Kaltim Prima Coal (Kaltim Prima, and
together with Adaro, the Coal Suppliers). The agreement with
Adaro (the Adaro CSA) will continue to be in effect until
October 1, 2022. If the term of the Coal Cooperation
Agreement between Adaro and the Ministry of Mines and Energy of
the Government of the Republic of Indonesia is extended beyond
October 1, 2022, the Partnership may elect to extend the
Adaro CSA until the earlier of the expiration of the PPA or the
expiration of the extended Coal Cooperation Agreement, subject
to certain conditions. The agreement with Kaltim Prima (the
Kaltim Prima CSA) has a scheduled termination date 15 years
after the Commercial Operations Date. The Partnership may renew
the Kaltim Prima CSA for two additional five-year periods by
giving not less than one year prior written notice. The second
renewal period will be subject to the parties agreeing to the
total base price to be applied during that period.
The Partnership is subject to minimum take obligations of
900,000 Metric Tonnes (MT) for Adaro and 360,000 MT for
Kaltim Prima.
In 2003, the Partnership and its coal suppliers started
discussions on the use of an alternative to the
Australian-Japanese benchmark price, which is the basis for
adjusting the energy-base price under the Partnerships
CSA. On
F-19
QUEZON
POWER, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
November 18, 2004, the Adaro CSA was amended to reflect the
change in the benchmark price. Both parties agreed to use the
six-month rolling average of the ACR Asia Index with a certain
discount as the new benchmark price applied retroactively to
April 1, 2003.
With respect to Kaltim Prima, the Project and Kaltim Prima,
finalized in March 2006 the price adjustment for coal shipments
during the period April 2005 up to March 2006 which was
consistent with the amounts already provided for in 2005. The
Partnership and Kaltim Prima agreed to continue to use the
Australian-Japanese benchmark price.
|
|
(d)
|
Operations
and Maintenance Agreement
|
The Partnership and Covanta Philippines Operating, Inc. (the
Operator; formerly Ogden Philippines Operating, Inc.), a Cayman
Islands corporation and a wholly owned subsidiary of Covanta
Projects, Inc. (CPI; formerly Ogden Projects, Inc.), a
subsidiary of CEGI, have entered into the Plant Operation and
Maintenance Agreement dated December 1, 1995 (as amended on
February 29, 1996, December 10, 1996 and
October 18, 2004, the O&M Agreement) under which the
Operator assumed responsibility for the operation and
maintenance of the Project pursuant to a cost-reimbursable
contract. CPI, pursuant to an O&M Agreement Guarantee,
guarantees the obligations of the Operator. The initial term of
the O&M Agreement extends 25 years from the Commercial
Operations Date. Two automatic renewals for successive five year
periods are available to the Operator, provided that
(i) the PPA has been extended; (ii) no default by the
Operator exists; and (iii) the O&M Agreement has not
been previously terminated by either party. The Partnership is
obligated to compensate the Operator for services under the
O&M Agreement, to reimburse the Operator for all
reimbursable costs one month in advance of the incurrence of
such costs and to pay the Operator a base fee and certain
bonuses. In certain circumstances, the Operator could be
required to pay liquidated damages depending on the operating
performance of the Project, subject to contractual limitations.
Beginning on Provisional Acceptance, as defined in the O&M
Agreement, the Partnership is obligated to pay the Operator a
monthly fee of $160,000, subject to escalation.
The Operator may earn additional fees or reduced fees based on
defined results with respect to output or reduced operating
costs. The 2004 amendments to the O&M Agreement brought
several changes including changes in the terms concerning
material breach of the O&M Agreement; introduction of
surviving service fees to the Operator in case the agreement is
pre-terminated; changes in the methodology of computing
additions or reduction in fees when NEO is greater or less than
the MGEQ of each contract year; and introduction of banked hours
that can be applied to future reductions in fees or exchanged
for cash subject to a 5 year expiration period. The
adjustments in Operators fee, including the cash value of
all banked hours accrued during a contract year, shall not
exceed $1.0 million, adjusted pursuant to an escalation
index. These amendments in the O&M Agreement were effective
from December 26, 2003.
|
|
(e)
|
Management
Services Agreement
|
The Partnership has entered into the Project Management Services
Agreement, dated as of September 20, 1996 (as amended, the
Management Services Agreement), with InterGen Management
Services (Philippines), Ltd. (as assignee of International
Generating Company, Inc.), an affiliate of InterGen N.V., (the
Manager), pursuant to which, the Manager is providing management
services for the Project. Pursuant to the Management Services
Agreement, the Manager nominates a person to act as a General
Manager of the Partnership, and, acting on behalf of the
Partnership, to be responsible for the
day-to-day
management of the Project. The initial term of the Management
Services Agreement extends for a period ending 25 years
after the Commercial Operations Date, unless terminated earlier,
with provisions for extension upon mutually acceptable terms and
conditions. InterGen N.V., pursuant to a Project Management
Services Agreement Guarantee dated as of December 10, 1996,
guarantees the obligations of the Manager.
The Partnership is obligated to pay the Manager an annual fee
equal to $400,000 subject to escalation after the first year
relative to an
agreed-upon
index payable in 12 equal monthly installments.
F-20
QUEZON
POWER, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Similar to the O&M Agreement, amendments to the Management
Services Agreement were made in 2004. Significant changes to the
Management Services Agreement include, among others, amendments
to the duties of the Manager, General Manager, rights of the
Partnership, acting through the BOD of QPI, to audit the
Managers procedures and past practices, changes in
termination provisions and the introduction of a Surviving
Management Fee in case the agreement is pre-terminated. The
amendments to the Management Services Agreement also have a
retroactive effect beginning December 26, 2003.
|
|
(f)
|
Project
Site Lease, Transmission Line Site Lease and Foreshore Lease
Agreements
|
Due to Philippine legal requirements that limit the ownership
interests in real properties and foreshore piers and utilities
to Philippine nationals and in order to facilitate the exercise
by Meralco of its power of condemnation should it be obligated
to exercise such powers on the Partnerships behalf,
Meralco owns the Project Site and leases the Project Site to the
Partnership. Meralco has also agreed in the Foreshore Lease
Agreement dated January 1, 1997, as amended, to lease from
the Philippine government the foreshore property on which the
Project piers were constructed, to apply for and maintain in
effect the permits necessary for the construction and operation
of the Project piers and to accept ownership of the piers.
The Company has obtained
rights-of-way
for the Transmission line for a majority of the sites necessary
to build, operate and maintain the Transmission line. Meralco
has agreed, pursuant to a letter agreement dated
December 19, 1996, that notwithstanding the provisions of
the TLA that anticipates that Meralco would be the lessor of the
entire Transmission Line Site, Meralco will only be the
Transmission Line Site Lessor with respect to
rights-of-way
acquired through the exercise of its condemnation powers.
The Company, as lessor, and the Partnership, as lessee, have
entered into the Transmission Line Site Leases, dated as of
December 20, 1996, with respect to real property required
for the construction, operation and maintenance of the
Transmission line other than
rights-of-way
to be acquired through the exercise of Meralcos
condemnation powers. The initial term of each of the Project
Site Leases and each of the Transmission Line Site Leases
(collectively, the Site Leases) extends for the duration of the
PPA, commencing on the date of execution of such Site Lease and
expiring 25 years following the Commercial Operations Date.
The Partnership has the right to extend the term of any Site
Lease for consecutive periods of five years each, provided that
the extended term of such Site Lease may not exceed
50 years in the aggregate.
|
|
(g)
|
Community
Memorandum of Agreement
|
The Partnership has entered into a Community Memorandum of
Agreement (MOA) with the Province of Quezon, the Municipality of
Mauban, the Barangay of Cagsiay and the Department of
Environmental and Natural Resources (DENR) of the Philippines.
Under the MOA, the Partnership is obligated to consult with
local officials and residents of the Municipality and Barangay
and other affected parties about Project related matters and to
provide for relocation and compensation of affected families,
employment and community assistance funds. The funds include an
electrification fund, development and livelihood fund and
reforestation, watershed, management health
and/or
environmental enhancement fund. Total estimated amount to be
contributed by the Partnership over the
25-year life
and during the construction period is approximately
$16.0 million. In accordance with the MOA, a certain
portion of this amount will be in the form of advance financial
assistance to be given during the construction period.
In addition, the Partnership is obligated to design, construct,
maintain and decommission the Project in accordance with
existing rules and regulations. The Partnership deposited the
amount of P5.0 million (about $94,000) to an Environmental
Guarantee Fund for rehabilitation of areas affected by damage in
the environment, monitoring compensation for parties affected
and education activities.
F-21
QUEZON
POWER, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
10.
|
Fair
Value of Financial Instruments
|
The required disclosures under SFAS No. 107,
Disclosure about Fair Value of Financial Instruments,
follow:
The financial instruments recorded in the consolidated balance
sheets include cash, accounts receivable, due from (to)
affiliated companies, notes payable, accounts payable and
accrued expenses, loans payable and bonds payable. Because of
their short-term maturities, the carrying amounts of cash,
accounts receivable, due from (to) affiliated companies, notes
payable and accounts payable and accrued expenses approximate
their fair values.
The fair value of long-term debt was based on the following:
|
|
|
Debt Type
|
|
Fair Value Assumptions
|
|
Term loan
|
|
Estimated fair value is based on
the discounted value of future cash flows using the applicable
risk free rates for similar types of loans adjusted for credit
risk.
|
Bonds payable
|
|
Estimated fair value is based on
the discounted value of future cash flows using the latest
available yield percentage of the Partnerships bonds prior
to balance sheet dates.
|
Other variable rate loans
|
|
The carrying value approximates
fair value because of recent and frequent repricing based on
market conditions.
|
Following is a summary of the estimated fair value (in millions)
as of December 31, 2006 and 2005 of the Partnerships
financial instruments other than those whose carrying amounts
approximate their fair values:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Term loan $212.3 in
2006 and $247.7 in 2005
|
|
$
|
204.2
|
|
|
$
|
224.6
|
|
Bonds payable $182.8
in 2006 and $190.3 in 2005
|
|
|
192.6
|
|
|
|
184.7
|
|
|
|
(a)
|
Electric
Power Industry Reform Act (EPIRA)
|
Republic Act No. 9136, the EPIRA, and the covering
Implementing Rules and Regulations (IRR) provides for
significant changes in the power sector, which include among
others:
(i) The unbundling of the generation, transmission,
distribution and supply and other disposable assets of a
company, including its contracts with independent power
producers and electricity rates;
(ii) Creation of a Wholesale Electricity Spot
Market; and
(iii) Open and non-discriminatory access to transmission
and distribution systems.
The law also requires public listing of not less than 15% of
common shares of generation and distribution companies within
5 years from the effective date of the EPIRA. It provides
cross ownership restrictions between transmission and generation
companies and between transmission and distribution companies
and a cap of 50% of its demand that a distribution utility is
allowed to source from an associated company engaged in
generation except for contracts entered into prior to the
effective date of the EPIRA. In 2005, the Partnership has
requested for clarification from the ERC on the applicability of
the public offering requirement under the provisions of the
EPIRA since it is in the form of a limited partnership and not a
stock corporation. As of February 9, 2007, the Partnership
has not yet received any confirmation from ERC on this matter.
There are also certain sections of the EPIRA, specifically
relating to generation companies, which provide for:
(i) a cap on the concentration of ownership to only 30% of
the installed capacity of the grid
and/or 25%
of the national installed generating capacity; and
(ii) VAT zero-rating of sale of generated power.
F-22
QUEZON
POWER, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Starting November 1, 2005, by virtue of RA No. 9337,
sale of generated power was subject to VAT (see Note 4).
The Partnership is complying with the applicable provisions of
the EPIRA and its law.
The Clean Air Act and the related IRR contain provisions that
have an impact on the industry as a whole, and to the
Partnership in particular, that need to be complied with within
44 months from the effective date or by July 2004. Based on
the assessment made on the Partnerships existing
facilities, the Partnership believes it complies with the
provisions of the Clean Air Act and the related IRR.
|
|
(c)
|
Insurance
Coverage Waiver
|
The Partnership was able to improve insurance coverage for the
April 2006 to March 2007 insurance coverage period. However, the
insurance coverage amounts required by the lenders under the
debt financing agreements still have not been met due to market
unavailability on commercially reasonable terms, based on
determinations of the Partnerships insurance advisor and
the lenders insurance advisor. Consequently, the
Partnership requested, and was granted by the requisite lender
representatives, a waiver of certain insurance requirements. The
latest waiver received by the Partnership is effective until
March 31, 2007, the end of the current insurance coverage
period.
In 2002, the Partnership successfully obtained consent from the
requisite percentage of senior lenders to waive on an interim
basis the non-payment by Meralco of the $8.5 million [see
Note 9(b)]. This interim waiver by the Partnership had the
effect of temporarily abating the effect of Meralcos
non-payment. All conditions to the lenders consent for the
interim waiver have been fulfilled or removed.
In 2005, the Partnership elected to, in accordance with the
project financing agreements, write-off the $8.5 million
withheld amount as an adjustment to receivables in the ordinary
course of business.
F-23