e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
March 31,
2011
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number 1-06732
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. Employer
Identification Number)
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445 South Street, Morristown, NJ
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07960
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(Address of Principal Executive Office)
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(Zip Code)
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(862) 345-5000
(Registrants telephone number including area code)
Indicate by check mark whether the registrant (1) has filed
allreports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
Applicable
Only to Corporate Issuers:
The number of shares of the registrants Common Stock
outstanding as of the last practicable date.
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Class
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Outstanding at April 14, 2011
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Common Stock, $0.10 par value
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147,094,386 shares
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1
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on
Form 10-Q
may constitute forward-looking statements as defined
in Section 27A of the Securities Act of 1933 (the
Securities Act), Section 21E of the Securities
Exchange Act of 1934 (the Exchange Act), the Private
Securities Litigation Reform Act of 1995 (the PSLRA)
or in releases made by the Securities and Exchange Commission
(SEC), all as may be amended from time to time. Such
forward-looking statements involve known and unknown risks,
uncertainties and other important factors that could cause the
actual results, performance or achievements of Covanta Holding
Corporation and its subsidiaries (Covanta) or
industry results, to differ materially from any future results,
performance or achievements expressed or implied by such
forward-looking statements. Statements that are not historical
fact are forward-looking statements. Forward-looking statements
can be identified by, among other things, the use of
forward-looking language, such as the words plan,
believe, expect, anticipate,
intend, estimate, project,
may, will, would,
could, should, seeks, or
scheduled to, or other similar words, or the
negative of these terms or other variations of these terms or
comparable language, or by discussion of strategy or intentions.
These cautionary statements are being made pursuant to the
Securities Act, the Exchange Act and the PSLRA with the
intention of obtaining the benefits of the safe
harbor provisions of such laws. Covanta cautions investors
that any forward-looking statements made by Covanta are not
guarantees or indicative of future performance. Important
assumptions and other important factors that could cause actual
results to differ materially from those forward-looking
statements with respect to Covanta include, but are not limited
to, the risks and uncertainties affecting their businesses
described in Item 1A. Risk Factors of Covantas Annual
Report on
Form 10-K
for the year ended December 31, 2010 and in other filings
by Covanta with the SEC.
Although Covanta believes that its plans, intentions and
expectations reflected in or suggested by such forward-looking
statements are reasonable, actual results could differ
materially from a projection or assumption in any of its
forward-looking statements. Covantas future financial
condition and results of operations, as well as any
forward-looking statements, are subject to change and inherent
risks and uncertainties. The forward-looking statements
contained in this Quarterly Report on
Form 10-Q
are made only as of the date hereof and Covanta does not have or
undertake any obligation to update or revise any forward-looking
statements whether as a result of new information, subsequent
events or otherwise, unless otherwise required by law.
3
PART I.
FINANCIAL INFORMATION
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Item 1.
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FINANCIAL
STATEMENTS
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For the Three Months Ended
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March 31,
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2011
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2010
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(Unaudited)
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(In thousands, except per share amounts)
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OPERATING REVENUES:
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Waste and service revenues
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$
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251,096
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$
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241,221
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Electricity and steam sales
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94,332
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100,923
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Other operating revenues
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31,342
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25,549
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Total operating revenues
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376,770
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367,693
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OPERATING EXPENSES:
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Plant operating expenses
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271,248
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263,636
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Other operating expenses
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27,333
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23,528
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General and administrative expenses
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24,503
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26,190
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Depreciation and amortization expense
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47,365
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48,438
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Net interest expense on project debt
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7,963
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10,282
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Total operating expenses
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378,412
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372,074
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|
|
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|
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Operating loss
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(1,642
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)
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|
|
(4,381
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)
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|
|
|
|
|
|
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Other income (expense):
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|
|
|
|
|
|
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Investment income
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|
261
|
|
|
|
223
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Interest expense
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(16,761
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)
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(10,586
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)
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Non-cash convertible debt related expense
|
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(5,160
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)
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|
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(8,247
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)
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Loss on extinguishment of debt
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(356
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)
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|
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Total other expenses
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(22,016
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)
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(18,610
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)
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|
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Loss from continuing operations before income tax benefit and
equity in net income (loss) from unconsolidated investments
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(23,658
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)
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(22,991
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)
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Income tax benefit
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9,986
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9,882
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Equity in net income (loss) from unconsolidated investments
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123
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(1,342
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)
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|
|
|
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|
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Loss from continuing operations
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(13,549
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)
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(14,451
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)
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|
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Income from discontinued operations (including net gain on
disposal of assets held for sale of $135,601 in 2011), net of
income tax expense of $2,193 and $2,007, respectively
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148,942
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9,718
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NET INCOME (LOSS)
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135,393
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(4,733
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)
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Less: Net income from continuing operations attributable to
noncontrolling interests in subsidiaries
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(92
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)
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(1,562
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)
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Less: Net income from discontinued operations attributable to
noncontrolling interests in subsidiaries
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(1,808
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)
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(938
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)
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Net income attributable to noncontrolling interests in
subsidiaries
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(1,900
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)
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(2,500
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)
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NET INCOME (LOSS) ATTRIBUTABLE TO COVANTA HOLDING
CORPORATION
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$
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133,493
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$
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(7,233
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)
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Amounts Attributable to Covanta Holding Corporation
stockholders:
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|
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Continuing operations
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$
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(13,641
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)
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$
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(16,013
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)
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Discontinued operations
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147,134
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8,780
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Net Income (Loss) Attributable to Covanta Holding Corporation
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$
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133,493
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|
$
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(7,233
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)
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|
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Earnings (Loss) Per Share Attributable to Covanta Holding
Corporation stockholders:
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Basic
|
|
|
|
|
|
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Continuing operations
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$
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(0.09
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)
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|
$
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(0.10
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)
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Discontinued operations
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|
1.00
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|
|
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0.05
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|
|
|
|
|
|
|
|
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Covanta Holding Corporation
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$
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0.91
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|
$
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(0.05
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)
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|
|
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Weighted Average Shares
|
|
|
146,859
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153,894
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|
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|
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Diluted
|
|
|
|
|
|
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Continuing operations
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$
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(0.09
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)
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|
$
|
(0.10
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)
|
Discontinued operations
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|
|
1.00
|
|
|
|
0.05
|
|
|
|
|
|
|
|
|
|
|
Covanta Holding Corporation
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|
$
|
0.91
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|
|
$
|
(0.05
|
)
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|
|
|
|
|
|
|
|
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Weighted Average Shares
|
|
|
146,859
|
|
|
|
153,894
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|
|
|
|
|
|
|
|
|
|
Cash Dividend Declared Per Share:
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|
$
|
0.075
|
|
|
$
|
|
|
|
|
|
|
|
|
|
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|
The accompanying notes are an integral part of the condensed
consolidated financial statements.
4
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As of
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|
|
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March 31, 2011
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|
|
December 31, 2010
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except per share amounts)
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|
|
ASSETS
|
Current:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
326,597
|
|
|
$
|
126,439
|
|
Restricted funds held in trust
|
|
|
96,747
|
|
|
|
125,568
|
|
Receivables (less allowances of $3,898 and $3,192, respectively)
|
|
|
240,718
|
|
|
|
271,549
|
|
Unbilled service receivables
|
|
|
17,874
|
|
|
|
23,080
|
|
Deferred income taxes
|
|
|
27,363
|
|
|
|
27,459
|
|
Prepaid expenses and other current assets
|
|
|
114,754
|
|
|
|
110,071
|
|
Assets held for sale
|
|
|
88,479
|
|
|
|
190,957
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
912,532
|
|
|
|
875,123
|
|
Property, plant and equipment, net
|
|
|
2,475,473
|
|
|
|
2,478,019
|
|
Investments in fixed maturities at market (cost: $28,111 and
$28,537, respectively)
|
|
|
28,669
|
|
|
|
29,022
|
|
Restricted funds held in trust
|
|
|
107,580
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|
|
|
107,424
|
|
Unbilled service receivables
|
|
|
29,830
|
|
|
|
31,804
|
|
Waste, service and energy contracts, net
|
|
|
463,670
|
|
|
|
472,190
|
|
Other intangible assets, net
|
|
|
77,555
|
|
|
|
78,892
|
|
Goodwill
|
|
|
230,020
|
|
|
|
230,020
|
|
Investments in investees and joint ventures
|
|
|
42,272
|
|
|
|
45,742
|
|
Other assets
|
|
|
323,809
|
|
|
|
328,066
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
4,691,410
|
|
|
$
|
4,676,302
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
Current:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
55,489
|
|
|
$
|
6,710
|
|
Current portion of project debt
|
|
|
94,059
|
|
|
|
141,515
|
|
Accounts payable
|
|
|
34,469
|
|
|
|
23,033
|
|
Deferred revenue
|
|
|
75,404
|
|
|
|
71,503
|
|
Accrued expenses and other current liabilities
|
|
|
229,557
|
|
|
|
186,395
|
|
Liabilities held for sale
|
|
|
27,381
|
|
|
|
34,266
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
516,359
|
|
|
|
463,422
|
|
Long-term debt
|
|
|
1,497,579
|
|
|
|
1,557,701
|
|
Project debt
|
|
|
636,337
|
|
|
|
661,788
|
|
Deferred income taxes
|
|
|
596,836
|
|
|
|
604,501
|
|
Waste and service contracts
|
|
|
85,531
|
|
|
|
88,632
|
|
Other liabilities
|
|
|
141,456
|
|
|
|
139,799
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
3,474,098
|
|
|
|
3,515,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 14)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
Covanta Holding Corporation stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock ($0.10 par value; authorized
10,000 shares; none issued and outstanding)
|
|
|
|
|
|
|
|
|
Common stock ($0.10 par value; authorized
250,000 shares; issued 157,541 and 156,847 shares;
outstanding 147,134 and 149,891 shares)
|
|
|
15,754
|
|
|
|
15,685
|
|
Additional paid-in capital
|
|
|
877,523
|
|
|
|
893,373
|
|
Accumulated other comprehensive income
|
|
|
12,547
|
|
|
|
5,233
|
|
Accumulated earnings
|
|
|
297,766
|
|
|
|
214,091
|
|
Treasury stock, at par
|
|
|
(1,041
|
)
|
|
|
(696
|
)
|
|
|
|
|
|
|
|
|
|
Total Covanta Holding Corporation stockholders equity
|
|
|
1,202,549
|
|
|
|
1,127,686
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interests in subsidiaries
|
|
|
14,763
|
|
|
|
32,773
|
|
|
|
|
|
|
|
|
|
|
Total Equity
|
|
|
1,217,312
|
|
|
|
1,160,459
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity
|
|
$
|
4,691,410
|
|
|
$
|
4,676,302
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed
consolidated financial statements.
5
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
135,393
|
|
|
$
|
(4,733
|
)
|
Less: Income from discontinued operations, net of tax expense
|
|
|
148,942
|
|
|
|
9,718
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(13,549
|
)
|
|
|
(14,451
|
)
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss from continuing operations to
net cash provided by operating activities from continuing
operations:
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
47,365
|
|
|
|
48,438
|
|
Amortization of long-term debt deferred financing costs
|
|
|
1,435
|
|
|
|
1,682
|
|
Amortization of debt premium and discount
|
|
|
(1,301
|
)
|
|
|
(1,851
|
)
|
Loss on extinguishment of debt
|
|
|
356
|
|
|
|
|
|
Non-cash convertible debt related expense
|
|
|
5,160
|
|
|
|
8,247
|
|
Stock-based compensation expense
|
|
|
4,569
|
|
|
|
3,500
|
|
Equity in net (income) loss from unconsolidated investments
|
|
|
(123
|
)
|
|
|
1,342
|
|
Dividends from unconsolidated investments
|
|
|
4,410
|
|
|
|
447
|
|
Deferred income taxes
|
|
|
(9,452
|
)
|
|
|
(8,541
|
)
|
Other, net
|
|
|
(1,860
|
)
|
|
|
126
|
|
Change in restricted funds held in trust
|
|
|
(14,748
|
)
|
|
|
(12,027
|
)
|
Change in working capital, net of effects of acquisitions
|
|
|
71,186
|
|
|
|
88,767
|
|
|
|
|
|
|
|
|
|
|
Total adjustments for continuing operations
|
|
|
106,997
|
|
|
|
130,130
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities from continuing
operations
|
|
|
93,448
|
|
|
|
115,679
|
|
Net cash (used in) provided by operating activities from
discontinued operations
|
|
|
(10,218
|
)
|
|
|
3,347
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
83,230
|
|
|
|
119,026
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from the sale of investment securities
|
|
|
4,568
|
|
|
|
1,228
|
|
Purchase of investment securities
|
|
|
(4,138
|
)
|
|
|
(6,411
|
)
|
Purchase of property, plant and equipment
|
|
|
(38,292
|
)
|
|
|
(37,917
|
)
|
Acquisition of noncontrolling interests in subsidiaries
|
|
|
|
|
|
|
(2,000
|
)
|
Acquisition of businesses, net of cash acquired
|
|
|
|
|
|
|
(128,254
|
)
|
Loan issued for the Harrisburg EfW facility to fund certain
facility improvements, net of repayments
|
|
|
|
|
|
|
(400
|
)
|
Other, net
|
|
|
4,026
|
|
|
|
(10,439
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities from continuing operations
|
|
|
(33,836
|
)
|
|
|
(184,193
|
)
|
Net cash provided by (used in) investing activities from
discontinued operations
|
|
|
220,248
|
|
|
|
(65
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
186,412
|
|
|
|
(184,258
|
)
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Principal payments on long-term debt
|
|
|
(7,578
|
)
|
|
|
(1,857
|
)
|
Principal payments on project debt
|
|
|
(74,471
|
)
|
|
|
(43,107
|
)
|
Proceeds from borrowings on project debt
|
|
|
2,169
|
|
|
|
|
|
Change in restricted funds held in trust
|
|
|
43,659
|
|
|
|
11,383
|
|
Proceeds from the exercise of options for common stock, net
|
|
|
|
|
|
|
278
|
|
Common stock repurchased
|
|
|
(54,371
|
)
|
|
|
|
|
Distributions to partners of noncontrolling interests in
subsidiaries
|
|
|
(1,534
|
)
|
|
|
(1,402
|
)
|
Other, net
|
|
|
(1,834
|
)
|
|
|
2,010
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities from continuing operations
|
|
|
(93,960
|
)
|
|
|
(32,695
|
)
|
Net cash provided by (used in) financing activities from
discontinued operations
|
|
|
9,898
|
|
|
|
(6,085
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(84,062
|
)
|
|
|
(38,780
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
1,506
|
|
|
|
(308
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
187,086
|
|
|
|
(104,320
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
140,646
|
|
|
|
433,683
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
|
327,732
|
|
|
|
329,363
|
|
Less: Cash and cash equivalents of discontinued operations at
end of period
|
|
|
1,135
|
|
|
|
12,814
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents of continuing operations at end of
period
|
|
$
|
326,597
|
|
|
$
|
316,549
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed
consolidated financial statements.
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Covanta Holding Corporation
Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Treasury Stock
|
|
|
Interests in
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income
|
|
|
Earnings
|
|
|
Shares
|
|
|
Amount
|
|
|
Subsidiaries
|
|
|
Total
|
|
|
|
(Unaudited, in thousands)
|
|
|
Balance as of December 31, 2010
|
|
|
156,847
|
|
|
$
|
15,685
|
|
|
$
|
893,373
|
|
|
$
|
5,233
|
|
|
$
|
214,091
|
|
|
|
6,956
|
|
|
$
|
(696
|
)
|
|
$
|
32,773
|
|
|
$
|
1,160,459
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
4,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,569
|
|
Deferred tax adjustment on stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
(1,464
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,464
|
)
|
Cash dividend declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,959
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,959
|
)
|
Common stock repurchased
|
|
|
|
|
|
|
|
|
|
|
(18,400
|
)
|
|
|
|
|
|
|
(35,649
|
)
|
|
|
3,228
|
|
|
|
(322
|
)
|
|
|
|
|
|
|
(54,371
|
)
|
Repurchase of equity related to Debenture tender offer
|
|
|
|
|
|
|
|
|
|
|
(71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(71
|
)
|
Unvested restricted shares forfeited
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
Shares issued in non-vested stock award
|
|
|
694
|
|
|
|
69
|
|
|
|
(69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends for vested stock awards
|
|
|
|
|
|
|
|
|
|
|
821
|
|
|
|
|
|
|
|
(821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares repurchased for tax withholdings for vested stock awards
|
|
|
|
|
|
|
|
|
|
|
(1,237
|
)
|
|
|
|
|
|
|
(2,389
|
)
|
|
|
217
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
(3,648
|
)
|
Elimination due to sale of controlling interests in subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,274
|
)
|
|
|
(18,274
|
)
|
Distributions to partners of noncontrolling interests in
subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,534
|
)
|
|
|
(1,534
|
)
|
Comprehensive income, net of income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133,493
|
|
|
|
|
|
|
|
|
|
|
|
1,900
|
|
|
|
135,393
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(102
|
)
|
|
|
7,292
|
|
Pension and other postretirement plan unrecognized net loss, net
of income tax benefit of $66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(100
|
)
|
Net unrealized loss on derivatives, net of income tax benefit of
$53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(81
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(81
|
)
|
Net unrealized gain on securities, net of income tax expense of
$66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,314
|
|
|
|
133,493
|
|
|
|
|
|
|
|
|
|
|
|
1,798
|
|
|
|
142,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2011
|
|
|
157,541
|
|
|
$
|
15,754
|
|
|
$
|
877,523
|
|
|
$
|
12,547
|
|
|
$
|
297,766
|
|
|
|
10,407
|
|
|
$
|
(1,041
|
)
|
|
$
|
14,763
|
|
|
$
|
1,217,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Covanta Holding Corporation
Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Treasury Stock
|
|
|
Interests in
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income
|
|
|
Earnings
|
|
|
Shares
|
|
|
Amount
|
|
|
Subsidiaries
|
|
|
Total
|
|
|
|
(Unaudited, in thousands)
|
|
|
Balance as of December 31, 2009
|
|
|
155,615
|
|
|
$
|
15,562
|
|
|
$
|
916,423
|
|
|
$
|
7,443
|
|
|
$
|
443,646
|
|
|
|
679
|
|
|
$
|
(68
|
)
|
|
$
|
34,163
|
|
|
$
|
1,417,169
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
3,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,500
|
|
Unvested restricted shares forfeited
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
48
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
Exercise of options to purchase common stock
|
|
|
37
|
|
|
|
3
|
|
|
|
275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
278
|
|
Shares issued in non-vested stock award
|
|
|
726
|
|
|
|
73
|
|
|
|
(73
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of noncontrolling interests in subsidiaries
|
|
|
|
|
|
|
|
|
|
|
(1,284
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(716
|
)
|
|
|
(2,000
|
)
|
Distributions to partners of noncontrolling interests in
subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,054
|
)
|
|
|
(3,054
|
)
|
Comprehensive income, net of income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,233
|
)
|
|
|
|
|
|
|
|
|
|
|
2,500
|
|
|
|
(4,733
|
)
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,391
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
965
|
|
|
|
(426
|
)
|
Pension and other postretirement plan unrecognized net loss, net
of income tax benefit of $29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(74
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(74
|
)
|
Net unrealized gain on securities, net of income tax expense of
$70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,289
|
)
|
|
|
(7,233
|
)
|
|
|
|
|
|
|
|
|
|
|
3,465
|
|
|
|
(5,057
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2010
|
|
|
156,378
|
|
|
$
|
15,638
|
|
|
$
|
918,846
|
|
|
$
|
6,154
|
|
|
$
|
436,413
|
|
|
|
727
|
|
|
$
|
(73
|
)
|
|
$
|
33,858
|
|
|
$
|
1,410,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed
consolidated financial statements.
7
NOTE 1.
ORGANIZATION AND BASIS OF PRESENTATION
The terms we, our, ours,
us and Company refer to Covanta Holding
Corporation and its subsidiaries; the term Covanta
Energy refers to our subsidiary Covanta Energy Corporation
and its subsidiaries.
Organization
We are one of the worlds largest owners and operators of
infrastructure for the conversion of waste to energy (known as
energy-from-waste or EfW), as well as
other waste disposal and renewable energy production businesses.
Energy-from-waste serves two key markets as both a sustainable
waste disposal solution that is environmentally superior to
landfilling and as a source of clean energy that reduces overall
greenhouse gas emissions and is considered renewable under the
laws of many states and under federal law. Our facilities are
critical infrastructure assets that allow our customers, which
are principally municipal entities, to provide an essential
public service.
We operate
and/or have
ownership positions in 44 energy-from-waste facilities, which
are primarily located in North America, and 18 additional energy
generation facilities, including other renewable energy
production facilities in North America (wood biomass, landfill
gas and hydroelectric) and independent power production
(IPP) facilities in Asia. We hold equity interests
in energy-from-waste facilities in China and Italy. We also
operate waste management infrastructure that is complementary to
our core EfW business.
We have one reportable segment which is Americas and is
comprised of waste and energy services operations primarily in
the United States and Canada. For additional information, see
Note 6. Financial Information by Business Segments.
In 2010, we adopted a plan to sell our interests in our fossil
fuel independent power production facilities in the Philippines,
India, and Bangladesh. During the first quarter of 2011, we
completed the sale of our interests in a 510 megawatt
(MW) (gross) coal-fired electric power generation
facility in the Philippines (Quezon) and we
completed the sale of our majority equity interests in a
106 MW (gross) heavy fuel-oil fired electric power
generation facilities in Tamil Nadu, India
(Samalpatti). In April 2011, we signed an agreement
to sell our majority equity interests in our 106 MW (gross)
heavy fuel-oil fired electric power generation facility also in
Tamil Nadu, India (Madurai). The remaining asset
held for sale is our equity interest in a barge-mounted
126 MW (gross) diesel/natural gas-fired electric power
generation facility located near Haripur, Bangladesh. See
Note 4. Assets Held for Sale and Dispositions and
Note 15. Subsequent Event for additional information.
Basis of
Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with United States
generally accepted accounting principles (GAAP) and
with the instructions to
Form 10-Q
and Article 10 of
Regulation S-X.
Accordingly, they do not include all information and footnotes
required by GAAP for complete financial statements. In the
opinion of management, all adjustments (including normal
recurring accruals) considered necessary for fair presentation
have been included in our financial statements. All intra-entity
accounts and transactions have been eliminated. Operating
results for the interim period are not necessarily indicative of
the results that may be expected for the fiscal year ended
December 31, 2011. This
Form 10-Q
should be read in conjunction with the Audited Consolidated
Financial Statements and accompanying Notes in our Annual Report
on
Form 10-K
for the year ended December 31, 2010
(Form 10-K).
We use the equity method to account for our investments for
which we have the ability to exercise significant influence over
the operating and financial policies of the investee.
Consolidated net income includes our proportionate share of the
net income or loss of these companies. Such amounts are
classified as equity in net income from unconsolidated
investments in our condensed consolidated financial
statements. Investments in companies in which we do not have the
ability to exercise significant influence are carried at the
lower of cost or estimated realizable value. We monitor
investments for
other-than-temporary
declines in value and make reductions when appropriate.
Reclassifications
As more fully described in Note 4. Assets Held for Sale and
Dispositions, during the fourth quarter of 2010, the operations
of our fossil fuel independent power production facilities held
for sale met the criteria to be classified as
8
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
discontinued operations. The assets and liabilities associated
with these businesses are presented in our condensed
consolidated balance sheets as Current Assets Held for
Sale and Current Liabilities Held for Sale.
The results of operations of these businesses are included in
the condensed consolidated statements of operations as
Income from discontinued operations, net of tax. The
cash flows of these businesses are also presented separately in
our condensed consolidated statements of cash flows. All
corresponding prior year periods presented in our condensed
consolidated financial statements and accompanying notes have
been reclassified to reflect the discontinued operations
presentation.
During the first quarter of 2011, we corrected our presentation
of the condensed consolidated balance sheet at December 31,
2010 to adjust a portion of the excess of purchase price over
par value for treasury stock transactions from additional
paid-in capital to retained earnings. We have adjusted
approximately $66 million to retained earnings from
additional paid-in capital as of December 31, 2010. This
change had no impact on total equity.
NOTE 2.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2011, the Financial Accounting Standards Board issued
an accounting standard related to disclosures about the
classification of certain loan modifications as troubled debt
restructurings. The standard provides additional clarification
in determining whether a creditor has granted a concession and
whether a debtor is experiencing financial difficulties for
purposes of determining whether a restructuring constitutes a
troubled debt restructuring. We are required to adopt this
standard effective June 15, 2011, although earlier
application is permitted. This standard must be applied
retrospectively to restructurings occurring on or after the
beginning of the year. We do not expect this accounting standard
to have an impact on our condensed consolidated financial
statements.
NOTE 3.
ACQUISITIONS AND BUSINESS DEVELOPMENT
Our growth strategy includes the acquisition of waste and energy
related businesses located in markets with significant growth
opportunities and the development of new projects and expansion
of existing projects. We will also consider acquiring or
developing new technologies and businesses that are
complementary with our existing renewable energy and waste
services business. The results of operations reflect the period
of ownership of the acquired businesses and business development
projects. The acquisitions in the section below are not material
to our condensed consolidated financial statements individually
or in the aggregate and therefore, disclosures of pro forma
financial information have not been presented.
Acquisitions
and Business Development
Fairfax County Energy-from-Waste Facility
In August 2010, the service fee contract with Fairfax County was
extended from 2011 to 2016 pursuant to a unilateral option held
by the County. The terms of the contract remain unchanged under
the extension; however, the project debt on the facility was
repaid in February 2011, and since Fairfax County had previously
paid debt service as a component of the service fee during the
term of the original contract, the County will effectively
retain the benefit of the debt repayment during the 5 year
extension period. In March 2011, the county announced its
desire to proceed to negotiate a long-term extension to the
contract rather than exercise a fair market value purchase
option it holds under the existing agreement. The parties are
currently working to complete the contract extension.
Huntington Energy-from-Waste Facility
In March 2010, we acquired a nominal limited partnership
interest held by a third party in Covanta Huntington Limited
Partnership, our subsidiary which owns and operates an
energy-from-waste facility in Huntington, New York, for cash
consideration of $2.0 million.
Dade Energy-from-Waste Business
In February 2010, we completed a transaction with Veolia
Environmental Services North America Corp. in which we paid cash
consideration of $128.3 million for an energy-from-waste
business located in Florida. The operation acquired included a
long-term operating contract with the respective municipal
client.
9
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
NOTE 4.
ASSETS HELD FOR SALE AND DISPOSITIONS
In 2010, we adopted a plan to sell our interests in our fossil
fuel independent power production facilities in the Philippines,
India, and Bangladesh.
During the first quarter of 2011, we completed the sale of our
majority equity interests in a 106 MW (gross) heavy
fuel-oil fired electric power generation facilities in Tamil
Nadu, India (Samalpatti) and we completed the sale
of our interests in a 510 MW (gross) coal-fired electric
power generation facility in the Philippines
(Quezon). The Quezon assets sold consisted of our
entire interest in Covanta Philippines Operating, Inc., which
provided operation and maintenance services to the facility, as
well as our 26% ownership interest in the project company,
Quezon Power, Inc. We received a combined total of cash proceeds
of approximately $225 million, net of transaction costs.
In April 2011, we signed an agreement with Samayanallur Power
Investments Private Limited (SPI) to sell our
interests in the 106 MW (gross) heavy fuel-oil fired
electric power generation facility in Tamil Nadu, India
(Madurai). See Note 15. Subsequent Event for
additional information. The remaining asset held for sale is our
equity interest in a barge-mounted 126 MW (gross)
diesel/natural gas-fired electric power generation facility
located near Haripur, Bangladesh.
The assets and liabilities associated with these businesses are
presented in our condensed consolidated balance sheets as
Current Assets Held for Sale and Current
Liabilities Held for Sale. The results of operations of
these businesses are included in the condensed consolidated
statements of operations as Income from discontinued
operations, net of tax. The cash flows of these businesses
are also presented separately in our condensed consolidated
statements of cash flows. All corresponding prior year periods
presented in our condensed consolidated financial statements and
accompanying notes have been reclassified to reflect the
discontinued operations presentation.
The following table summarizes the operating results of the
discontinued operations for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Revenues
|
|
$
|
46,170
|
|
|
$
|
49,102
|
|
Operating expenses, including net gain on disposal of assets
held for sale and loss on assets held for sale
(A)
|
|
$
|
99,043
|
|
|
$
|
(42,750
|
)
|
Income before income tax expense and equity in net income from
unconsolidated investments
|
|
$
|
145,604
|
|
|
$
|
6,713
|
|
Equity in net income from unconsolidated investments
|
|
$
|
5,530
|
|
|
$
|
5,012
|
|
Income from discontinued operations, net of income tax expense
of $2,193 and $2,007, respectively
|
|
$
|
148,942
|
|
|
$
|
9,718
|
|
|
|
|
|
(A)
|
During the first quarter of 2011, we recorded a net after-tax
gain on disposal of assets held for sale of $135.6 million.
We recorded a loss on assets held for sale of $7.8 million
in 2010.
|
10
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
The following table sets forth the assets and liabilities of the
asset held for sale included in the condensed consolidated
balance sheets as of the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Cash and cash equivalents
|
|
$
|
1,135
|
|
|
$
|
14,207
|
|
Restricted funds held in trust
|
|
|
16,675
|
|
|
|
18,966
|
|
Accounts receivable
|
|
|
21,019
|
|
|
|
19,479
|
|
Prepaid expenses and other assets
|
|
|
18,293
|
|
|
|
26,326
|
|
Property, plant and equipment
|
|
|
9,481
|
|
|
|
30,206
|
|
Investments in investees and joint ventures
|
|
|
21,819
|
|
|
|
81,322
|
|
Other long-term assets
|
|
|
57
|
|
|
|
451
|
|
|
|
|
|
|
|
|
|
|
Assets held for sale
|
|
$
|
88,479
|
|
|
$
|
190,957
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
11,589
|
|
|
$
|
2,976
|
|
Accrued expenses and other
|
|
|
1,477
|
|
|
|
11,547
|
|
Project debt
|
|
|
9,224
|
|
|
|
15,555
|
|
Other noncurrent liabilities
|
|
|
5,091
|
|
|
|
4,188
|
|
|
|
|
|
|
|
|
|
|
Liabilities held for sale
|
|
$
|
27,381
|
|
|
$
|
34,266
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 5.
|
EARNINGS
PER SHARE
|
Per share data is based on the weighted average number of
outstanding shares of our common stock, par value $0.10 per
share, during the relevant period. Basic earnings per share are
calculated using only the weighted average number of outstanding
shares of common stock. Diluted earnings per share computations,
as calculated under the treasury stock method, include the
weighted average number of shares of additional outstanding
common stock issuable for stock options, restricted stock
awards, restricted stock units and warrants whether or not
currently exercisable. Diluted earnings per share for all the
periods presented does not include securities if their effect
was anti-dilutive (in thousands, except per share amounts).
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Net loss from continuing operations
|
|
$
|
(13,641
|
)
|
|
$
|
(16,013
|
)
|
Net income from discontinued operations
|
|
|
147,134
|
|
|
|
8,780
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Covanta Holding Corporation
|
|
$
|
133,493
|
|
|
$
|
(7,233
|
)
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Weighted average basic common shares outstanding
|
|
|
146,859
|
|
|
|
153,894
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.09
|
)
|
|
$
|
(0.10
|
)
|
Discontinued operations
|
|
|
1.00
|
|
|
|
0.05
|
|
|
|
|
|
|
|
|
|
|
Covanta Holding Corporation
|
|
$
|
0.91
|
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
11
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Weighted average basic common shares outstanding
|
|
|
146,859
|
|
|
|
153,894
|
|
Dilutive effect of stock options
|
|
|
|
|
|
|
|
|
Dilutive effect of restricted stock
|
|
|
|
|
|
|
|
|
Dilutive effect of convertible debentures
|
|
|
|
|
|
|
|
|
Dilutive effect of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding
|
|
|
146,859
|
|
|
|
153,894
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.09
|
)
|
|
$
|
(0.10
|
)
|
Discontinued operations
|
|
|
1.00
|
|
|
|
0.05
|
|
|
|
|
|
|
|
|
|
|
Covanta Holding Corporation
|
|
$
|
0.91
|
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
Securities excluded from the weighted average dilutive common
shares outstanding because their inclusion would have been
antidilutive:
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
2,141
|
|
|
|
2,583
|
|
|
|
|
|
|
|
|
|
|
Restricted stock
|
|
|
1,469
|
|
|
|
1,327
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units
|
|
|
968
|
|
|
|
986
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
27,226
|
|
|
|
24,803
|
|
|
|
|
|
|
|
|
|
|
In 2007, we issued 1.00% Senior Convertible Debentures due
2027 (the Debentures). The Debentures are
convertible under certain circumstances if the closing sale
price of our common stock exceeds a specified conversion price
before February 1, 2025. The conversion rate for the
Debentures is 38.9883 shares of our common stock per $1,000
principal amount of Debentures, which is equivalent to a
conversion price of $25.65 per share. As of March 31, 2011,
the Debentures did not have a dilutive effect on earnings per
share because the average market price during the periods
presented was below the strike price.
In 2009, we entered into privately negotiated warrant
transactions in connection with the issuance of 3.25% Cash
Convertible Senior Notes due 2014 (the
3.25% Notes). These warrants could have a
dilutive effect to the extent that the price of our common stock
exceeds the applicable strike price of $23.45. As of
March 31, 2011, the warrants did not have a dilutive effect
on earnings per share because the average market price during
the periods presented was below the strike price.
|
|
NOTE 6.
|
FINANCIAL
INFORMATION BY BUSINESS SEGMENTS
|
We have one reportable segment, Americas, which is comprised of
waste and energy services operations primarily in the United
States and Canada. The results of our reportable segment is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
All Other (1)
|
|
|
Total
|
|
|
Three Months Ended March 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
366,561
|
|
|
$
|
10,209
|
|
|
$
|
376,770
|
|
Depreciation and amortization expense
|
|
|
46,907
|
|
|
|
458
|
|
|
|
47,365
|
|
Operating income (loss)
|
|
|
6,532
|
|
|
|
(8,174
|
)
|
|
|
(1,642
|
)
|
Three Months Ended March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
357,287
|
|
|
$
|
10,406
|
|
|
$
|
367,693
|
|
Depreciation and amortization expense
|
|
|
48,021
|
|
|
|
417
|
|
|
|
48,438
|
|
Operating income (loss)
|
|
|
1,727
|
|
|
|
(6,108
|
)
|
|
|
(4,381
|
)
|
|
|
|
(1) |
|
All other is comprised of the financial results of our insurance
subsidiaries operations and our remaining international
assets that are not classified as assets held for sale. See Note
4. Assets Held for Sale and Dispositions. |
12
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
|
|
NOTE 7.
|
CHANGES
IN CAPITALIZATION
|
Long-Term
Debt
Long-term debt is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
7.25% Senior Notes due 2020
|
|
$
|
400,000
|
|
|
$
|
400,000
|
|
|
|
|
|
|
|
|
|
|
3.25% Cash Convertible Senior Notes due 2014
|
|
|
460,000
|
|
|
|
460,000
|
|
Debt discount related to Cash Convertible Senior Notes
|
|
|
(85,552
|
)
|
|
|
(91,212
|
)
|
Cash conversion option derivative at fair value
|
|
|
105,482
|
|
|
|
115,994
|
|
|
|
|
|
|
|
|
|
|
3.25% Cash Convertible Senior Notes, net
|
|
|
479,930
|
|
|
|
484,782
|
|
|
|
|
|
|
|
|
|
|
1.00% Senior Convertible Debentures due 2027
|
|
|
51,362
|
|
|
|
57,289
|
|
Debt discount related to Convertible Debentures
|
|
|
(2,588
|
)
|
|
|
(3,720
|
)
|
|
|
|
|
|
|
|
|
|
1.00% Senior Convertible Debentures, net
|
|
|
48,774
|
|
|
|
53,569
|
|
|
|
|
|
|
|
|
|
|
Term Loan Facility due 2014
|
|
|
624,000
|
|
|
|
625,625
|
|
Other long-term debt
|
|
|
364
|
|
|
|
435
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,553,068
|
|
|
|
1,564,411
|
|
Less: current portion
|
|
|
(55,489
|
)
|
|
|
(6,710
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
1,497,579
|
|
|
$
|
1,557,701
|
|
|
|
|
|
|
|
|
|
|
Credit
Facilities
We have credit facilities which are comprised of a
$300 million revolving credit facility (the Revolving
Credit Facility), a $320 million funded letter of
credit facility (the Funded L/C Facility), and a
$650 million term loan (the Term Loan Facility)
(collectively referred to as the Credit Facilities).
As of March 31, 2011, we had available credit for liquidity
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Outstanding Letters
|
|
|
|
|
Available
|
|
|
|
of Credit as of
|
|
Available as of
|
|
|
Under Facility
|
|
Maturing
|
|
March 31, 2011
|
|
March 31, 2011
|
|
Revolving Credit Facility (1)
|
|
$
|
300,000
|
|
|
|
2013
|
|
|
$
|
|
|
|
$
|
300,000
|
|
Funded L/C Facility
|
|
$
|
320,000
|
|
|
|
2014
|
|
|
$
|
286,239
|
|
|
$
|
33,761
|
|
|
|
|
(1) |
|
Up to $200 million of which may be utilized for letters of
credit. |
7.25% Senior
Notes due 2020 (the 7.25% Notes)
For specific criteria related to redemption features of the
7.25% Notes, refer to Note 12 of the Notes to
Consolidated Financial Statements in our
Form 10-K.
3.25%
Cash Convertible Senior Notes due 2014 (the
3.25% Notes)
Under limited circumstances, the 3.25% Notes are
convertible by the holders thereof into cash only, based on a
conversion rate of 59.1871 shares of our common stock per
$1,000 principal amount of 3.25% Notes (which represents a
conversion price of approximately $16.90 per share) subject to
certain customary adjustments as provided in the indenture for
the 3.25% Notes. We will not deliver common stock (or any
other securities) upon conversion under any circumstances.
For specific criteria related to contingent interest, conversion
or redemption features of the 3.25% Notes and details
related to the cash conversion option, cash convertible note
hedge and warrants related to the 3.25% Notes, refer to
Note 12 of the Notes to Consolidated Financial Statements
in our
Form 10-K.
For details related to the fair value for the contingent
interest feature, cash conversion option, and cash convertible
note hedge related to the 3.25% Notes, see Note 13.
Derivative Instruments.
13
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
1.00% Senior
Convertible Debentures due 2027 (the
Debentures)
In November 2010, we commenced a tender offer to purchase for
cash any and all of our outstanding 1.00% Senior
Convertible Debentures due 2027. We offered to purchase the
Debentures at a purchase price of $990 for each $1,000 principal
amount of Debentures. During the three months ended
March 31, 2011, an additional $5.9 million of the
Debentures were purchased. As of March 31, 2011, there were
$51.4 million aggregate principal amount of the Debentures
outstanding. We may purchase Debentures that remained
outstanding following termination or expiration of the tender
offer in the open market, in privately negotiated transactions,
through tender offers, exchange offers, by redemption or
otherwise.
Under limited circumstances, prior to February 1, 2025, the
Debentures are convertible by the holders into cash and shares
of our common stock, if any, based on a conversion rate of
38.9883 shares of our common stock per $1,000 principal
amount of Debentures, (which represents a conversion price of
approximately $25.65 per share) or 2,002,517 issuable shares. As
of March 31, 2011, if the Debentures were converted, no
shares would have been issued since the trading price of our
common stock was below the conversion price of the Debentures.
For specific criteria related to contingent interest, conversion
or redemption features of the Debentures, refer to Note 12
of the Notes to Consolidated Financial Statements in our
Form 10-K.
For details related to the fair value for the contingent
interest feature related to the Debentures, see Note 13.
Derivative Instruments.
Debt
Discount for the 3.25% Notes and the Debentures
The debt discount related to the 3.25% Notes and the
Debentures is accreted over their respective terms and
recognized as non-cash convertible debt related expense. The
following table details the amount of the accretion of debt
discount as of March 31, 2011 included or expected to be
included in our condensed consolidated financial statements for
each of the periods indicated (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
2011
|
|
2012
|
|
2013
|
|
2014
|
|
3.25% Cash Convertible Senior Notes due 2014
|
|
$
|
17.9
|
|
|
$
|
26.0
|
|
|
$
|
28.8
|
|
|
$
|
12.9
|
|
1.00% Senior Convertible Debentures due 2027 (1)
|
|
$
|
2.3
|
|
|
$
|
0.3
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
(1) |
|
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. 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.
For purposes of this chart, we have assumed that the Debentures
will be repurchased pursuant to the holders option on
February 1, 2012. |
Loss on
Extinguishment of Debt
During the first quarter of 2011, we recorded a loss on
extinguishment of debt of $0.4 million, pre-tax, related to
the additional $5.9 million of the outstanding Debentures
purchased under the tender offer. The loss on extinguishment of
debt was comprised of the difference between the fair value and
carrying value of the liability component of the Debentures
tendered.
Equity
During the three months ended March 31, 2011, we granted
694,762 restricted stock awards. For information related to
stock-based award plans, see Note 11. Stock-Based
Compensation.
During the three months ended March 31, 2011, we
repurchased 216,605 shares of our common stock in
connection with tax withholdings for vested stock awards.
14
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
On March 14, 2011, the Board of Directors approved a
regular cash dividend of $0.075 per share. The dividend was paid
on April 12, 2011 to stockholders of record as of the close
of business on March 30, 2011. In addition, pursuant to our
Equity Plan, holders of unvested restricted stock awards
received a dividend in the form of additional restricted stock
awards with the same vesting conditions as the underlying shares
of restricted stock to which they relate.
On March 14, 2011, the Board of Directors approved an
additional $50 million of share repurchase authorization,
bringing the total authorized amount to $200 million. Under
the program, common stock repurchases may be made in the open
market, in privately negotiated transactions from time to time,
or by other available methods, at managements discretion
in accordance with applicable federal securities laws. The
timing and amounts of any repurchases will depend on many
factors, including our capital structure, the market price of
our common stock and overall market conditions. During the three
months ended March 31, 2011, we repurchased
3.2 million shares of our common stock at a weighted
average cost of $16.84 per share for an aggregate amount of
approximately $54.4 million. As of March 31, 2011, the
amount remaining under our currently authorized share repurchase
program was $50.4 million.
We record our interim tax provision based upon our estimated
annual effective tax rate and account for the tax effects of
discrete events in the period in which they occur. We file a
federal consolidated income tax return with our eligible
subsidiaries. Our federal consolidated income tax return also
includes the taxable results of certain grantor trusts described
below.
We currently estimate our annual effective tax rate for the year
ending December 31, 2011 to be approximately 42.6%. We
review the annual effective tax rate on a quarterly basis as
projections are revised and laws are enacted. The effective
income tax rate was 42.2% and 43.0% for the three months ended
March 31, 2011 and 2010, respectively. The liability for
uncertain tax positions, exclusive of interest and penalties,
was $130.1 million as of both March 31, 2011 and
December 31, 2010. Included in the balance of unrecognized
tax benefits as of March 31, 2011 are potential benefits of
$130.1 million that, if recognized, would impact the
effective tax rate. Acquisition related reserves and some other
reserves in the liability for uncertain tax positions may
decrease by approximately $18.1 million in the next twelve
months with respect to the expiration of statutes, and the
release of restricted funds relating to Covanta Energy
pre-emergence tax matters, all of which may impact the tax
provision.
For the three months ended March 31, 2011 and 2010, we
recognized expenses of $0.5 million and a benefit of
$1.7 million, respectively, of interest and penalties on
uncertain tax positions. As of March 31, 2011 and
December 31, 2010, we had accrued interest and penalties
associated with liabilities for unrecognized tax positions of
$7.8 million and $7.3 million, respectively. We
continue to reflect interest accrued on uncertain tax positions
and penalties as part of the tax provision.
In the ordinary course of our business, the Internal Revenue
Service (IRS) and state tax authorities will
periodically audit our federal and state tax returns. As issues
are examined by the IRS and state auditors, we may decide to
adjust the existing liability for uncertain tax positions for
issues that were not deemed an exposure at the time we adopted
accounting standards related to the accounting for uncertainty
in income taxes. Accordingly, we will continue to monitor the
results of audits and adjust the liability as needed. Federal
income tax returns for Covanta Energy are closed for the years
through 2003. However, to the extent net operating loss
carryforwards (NOLs) are utilized from earlier
years, federal income tax returns for Covanta Holding
Corporation, formerly known as Danielson Holding Corporation,
are still open. State income tax returns are generally subject
to examination for a period of three to five years after the
filing of the respective return. The state impact of any federal
changes remains subject to examination by various states for a
period of up to one year after formal notification to the
states. We have various state income tax returns in the process
of examination, administrative appeals or litigation.
Our NOLs predominantly arose from our predecessor insurance
entities (which were subsidiaries of our predecessor, formerly
named Mission Insurance Group, Inc., Mission). These
Mission insurance entities have been in state insolvency
proceedings in California and Missouri since the late
1980s. The amount of NOLs available to us will be reduced
by any taxable income or increased by any taxable losses
generated by current members of our consolidated tax group,
which include grantor trusts associated with the Mission
insurance entities.
15
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
While we cannot predict what amounts, if any, may be includable
in taxable income as a result of the final administration of
these grantor trusts, substantial actions toward such final
administration have been taken and we believe that neither
arrangements with the California Commissioner nor the final
administration by the Missouri Director will result in a
material reduction in available NOLs.
We had consolidated federal NOLs estimated to be approximately
$396.9 million for federal income tax purposes as of
December 31, 2010, based on the tax returns as filed. The
federal NOLs will expire in various amounts from
December 31, 2023 through December 31, 2030, if not
used. In addition to the consolidated federal NOLs, as of
December 31, 2010, we had state NOL carryforwards of
approximately $188.8 million, which expire between 2011 and
2027, capital loss carryforwards of $0.2 million expiring
in 2013, and additional federal credit carryforwards, including
production tax credits and minimum tax credits, of
$45.6 million. These deferred tax assets are offset by a
valuation allowance of approximately $19.9 million.
For further information, refer to Note 17. Income Taxes of
the Notes to the Consolidated Financial Statements in our
Form 10-K.
|
|
NOTE 9.
|
SUPPLEMENTARY
INFORMATION
|
Operating
Costs
Pass
through costs
Pass through costs are costs for which we receive a direct
contractually committed reimbursement from the municipal client
which sponsors an energy-from-waste project. These costs
generally include utility charges, insurance premiums, ash
residue transportation and disposal and certain chemical costs.
These costs are recorded net of municipal client reimbursements
in our condensed consolidated financial statements. Total pass
through costs were $23.1 million and $20.5 million for
the three months ended March 31, 2011 and 2010,
respectively.
Other
operating expenses
The components of other operating expenses are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Construction costs
|
|
$
|
26,105
|
|
|
$
|
20,485
|
|
Insurance subsidiary operating expenses
(1)
|
|
|
3,881
|
|
|
|
4,070
|
|
Foreign exchange loss (gain)
|
|
|
9
|
|
|
|
(989
|
)
|
Other
|
|
|
(2,662
|
)
|
|
|
(38
|
)
|
|
|
|
|
|
|
|
|
|
Total other operating expenses
|
|
$
|
27,333
|
|
|
$
|
23,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Insurance subsidiary operating expenses are primarily comprised
of incurred but not reported loss reserves, loss adjustment
expenses and policy acquisition costs. |
Amortization
of waste, service and energy contracts
Our waste, service and energy contracts are intangible assets
and liabilities relating to long-term operating contracts at
acquired facilities and are recorded upon acquisition at their
estimated fair market values based upon discounted cash flows.
Intangible assets and liabilities are amortized using the
straight line method over their remaining useful lives. The
following table details the amount of the actual/estimated
amortization expense and contra-expense associated with these
16
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
intangible assets and liabilities as of March 31, 2011
included or expected to be included in our condensed
consolidated statement of income for each of the years indicated
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
Waste, Service and
|
|
|
Waste and Service
|
|
|
|
Energy Contracts
|
|
|
Contracts
|
|
|
|
(Amortization Expense)
|
|
|
(Contra-Expense)
|
|
|
Three Months ended March 31, 2011
|
|
$
|
9,938
|
|
|
$
|
(3,101
|
)
|
|
|
|
|
|
|
|
|
|
Remainder of 2011
|
|
$
|
27,973
|
|
|
$
|
(9,307
|
)
|
2012
|
|
|
35,770
|
|
|
|
(12,412
|
)
|
2013
|
|
|
32,201
|
|
|
|
(12,390
|
)
|
2014
|
|
|
29,305
|
|
|
|
(12,500
|
)
|
2015
|
|
|
25,952
|
|
|
|
(8,187
|
)
|
2016
|
|
|
23,313
|
|
|
|
(7,906
|
)
|
Thereafter
|
|
|
289,156
|
|
|
|
(22,829
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
463,670
|
|
|
$
|
(85,531
|
)
|
|
|
|
|
|
|
|
|
|
Non-Cash
Convertible Debt Related Expense
The components of non-cash convertible debt related expense are
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Debt discount accretion related to the 3.25% Notes
|
|
$
|
5,660
|
|
|
$
|
5,116
|
|
Debt discount accretion related to the Debentures
|
|
|
775
|
|
|
|
5,054
|
|
Fair value changes related to the cash convertible note hedge
|
|
|
9,237
|
|
|
|
36,896
|
|
Fair value changes related to the cash conversion option
derivative
|
|
|
(10,512
|
)
|
|
|
(38,819
|
)
|
|
|
|
|
|
|
|
|
|
Total non-cash convertible debt related expense
|
|
$
|
5,160
|
|
|
$
|
8,247
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 10.
|
BENEFIT
OBLIGATIONS
|
Pension
and Other Benefit Obligations
The components of net periodic (credit) benefit costs are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Post-Retirement
|
|
|
|
Pension Benefits
|
|
|
Benefits
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
Interest cost
|
|
$
|
1,112
|
|
|
$
|
1,056
|
|
|
$
|
83
|
|
|
$
|
119
|
|
Expected return on plan assets
|
|
|
(1,302
|
)
|
|
|
(1,237
|
)
|
|
|
|
|
|
|
|
|
Amortization of net prior service cost
|
|
|
(82
|
)
|
|
|
(82
|
)
|
|
|
|
|
|
|
|
|
Amortization of actuarial gain
|
|
|
(7
|
)
|
|
|
(15
|
)
|
|
|
(76
|
)
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit (credit) cost
|
|
$
|
(279
|
)
|
|
$
|
(278
|
)
|
|
$
|
7
|
|
|
$
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined
Contribution Plans
Substantially all of our employees in the United States are
eligible to participate in defined contribution plans we
sponsor. Our costs related to defined contribution plans were
$3.6 million and $4.9 million for the three months
ended March 31, 2011 and 2010, respectively.
|
|
NOTE 11.
|
STOCK-BASED
COMPENSATION
|
During the three months ended March 31, 2011, we awarded
certain employees 694,762 restricted stock awards. The
restricted stock awards will be expensed over the requisite
service period, subject to an assumed 12% average forfeiture
rate. The terms of the restricted stock awards include vesting
provisions based solely on continued service. If the service
criteria are satisfied, the restricted stock awards vest during
March of 2012, 2013 and 2014.
17
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
On March 14, 2011, the Board of Directors approved a
regular cash dividend of $0.075 per share. The dividend was paid
on April 12, 2011 to stockholders of record as of the close
of business on March 30, 2011. In addition, pursuant to our
Equity Plan, holders of unvested shares of restricted stock
received a dividend in the form of additional restricted stock
awards with the same vesting conditions as the underlying shares
of restricted stock to which they relate.
Compensation expense related to our stock-based awards totaled
$4.6 million and $3.5 million during the three months
ended March 31, 2011 and 2010, respectively.
As of March 31, 2011, we had approximately
$16.4 million, $4.8 million and $0.8 million of
unrecognized compensation expense related to our unvested
restricted stock, unvested restricted stock units, and unvested
stock options, respectively. We expect this compensation expense
to be recognized over a weighted average period of approximately
1 year for our unvested restricted stock awards,
approximately 2 years for our unvested RSUs and
approximately 1 year for our unvested stock options.
|
|
NOTE 12.
|
FINANCIAL
INSTRUMENTS
|
Fair
Value Measurements
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments:
|
|
|
|
|
For cash and cash equivalents, restricted funds, and marketable
securities, the carrying value of these amounts is a reasonable
estimate of their fair value. The fair value of restricted funds
held in trust is based on quoted market prices of the
investments held by the trustee.
|
|
|
Fair values for long-term debt and project debt are determined
using quoted market prices.
|
|
|
The fair value of the Note Hedge and the Cash Conversion Option
are determined using an option pricing model based on observable
inputs such as implied volatility, risk free rate, and other
factors. The fair value of the Note Hedge is adjusted to reflect
counterparty risk of non-performance, and is based on the
counterpartys credit spread in the credit derivatives
market. The contingent interest features related to the
Debentures and the 3.25% Notes are valued quarterly using
the present value of expected cash flow models incorporating the
probabilities of the contingent events occurring.
|
The estimated fair value amounts have been determined using
available market information and appropriate valuation
methodologies. However, considerable judgment is necessarily
required in interpreting market data to develop estimates of
fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that we would realize in a
current market exchange. The fair-value estimates presented
herein are based on pertinent information available to us as of
March 31, 2011. However, such amounts have not been
comprehensively revalued for purposes of these financial
statements since March 31, 2011, and current estimates of
fair value may differ significantly from the amounts presented
herein.
18
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
The following table presents information about the fair value
measurement of our assets and liabilities as of March 31,
2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
Significant
|
|
|
|
As of March 31, 2011
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Unobservable
|
|
Financial Instruments Recorded at Fair Value
|
|
Carrying
|
|
|
Estimated
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Inputs
|
|
on a Recurring Basis:
|
|
Amount
|
|
|
Fair Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
(In thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank deposits and certificates of deposit
|
|
$
|
320,989
|
|
|
$
|
320,989
|
|
|
$
|
320,989
|
|
|
$
|
|
|
|
$
|
|
|
Money market funds
|
|
|
5,608
|
|
|
|
5,608
|
|
|
|
5,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents:
|
|
|
326,597
|
|
|
|
326,597
|
|
|
|
326,597
|
|
|
|
|
|
|
|
|
|
Restricted funds held in trust:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank deposits and certificates of deposit
|
|
|
3,630
|
|
|
|
3,630
|
|
|
|
3,630
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
122,985
|
|
|
|
122,985
|
|
|
|
122,985
|
|
|
|
|
|
|
|
|
|
U.S. Treasury/Agency obligations (a)
|
|
|
16,137
|
|
|
|
16,137
|
|
|
|
16,137
|
|
|
|
|
|
|
|
|
|
State and municipal obligations
|
|
|
8,718
|
|
|
|
8,718
|
|
|
|
8,718
|
|
|
|
|
|
|
|
|
|
Commercial paper/Guaranteed investment contracts/Repurchase
agreements
|
|
|
52,857
|
|
|
|
52,901
|
|
|
|
52,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restricted funds held in trust:
|
|
|
204,327
|
|
|
|
204,371
|
|
|
|
204,371
|
|
|
|
|
|
|
|
|
|
Restricted funds other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank deposits and certificates of deposit (b)
|
|
|
21,726
|
|
|
|
21,726
|
|
|
|
21,726
|
|
|
|
|
|
|
|
|
|
Money market funds (c)
|
|
|
14,654
|
|
|
|
14,654
|
|
|
|
14,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restricted funds other:
|
|
|
36,380
|
|
|
|
36,380
|
|
|
|
36,380
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual and bond funds (b)
|
|
|
1,972
|
|
|
|
1,923
|
|
|
|
1,923
|
|
|
|
|
|
|
|
|
|
Investments available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury/Agency obligations (d)
|
|
|
5,797
|
|
|
|
5,797
|
|
|
|
5,797
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities (d)
|
|
|
5,792
|
|
|
|
5,792
|
|
|
|
5,792
|
|
|
|
|
|
|
|
|
|
Other government obligations (d)
|
|
|
4,484
|
|
|
|
4,484
|
|
|
|
4,484
|
|
|
|
|
|
|
|
|
|
Corporate investments (d)
|
|
|
12,596
|
|
|
|
12,596
|
|
|
|
12,596
|
|
|
|
|
|
|
|
|
|
Equity securities (c)
|
|
|
1,355
|
|
|
|
1,355
|
|
|
|
1,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments:
|
|
|
31,996
|
|
|
|
31,947
|
|
|
|
31,947
|
|
|
|
|
|
|
|
|
|
Derivative Asset Note Hedge
|
|
|
103,163
|
|
|
|
103,163
|
|
|
|
|
|
|
|
103,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets:
|
|
$
|
702,463
|
|
|
$
|
702,458
|
|
|
$
|
599,295
|
|
|
$
|
103,163
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liability Energy Hedges
|
|
$
|
571
|
|
|
$
|
571
|
|
|
$
|
|
|
|
$
|
571
|
|
|
$
|
|
|
Derivative Liability Cash Conversion Option
|
|
|
105,482
|
|
|
|
105,482
|
|
|
|
|
|
|
|
105,482
|
|
|
|
|
|
Derivative Liabilities Contingent interest features
of the Notes and Debentures
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities:
|
|
$
|
106,053
|
|
|
$
|
106,053
|
|
|
$
|
|
|
|
$
|
106,053
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Instruments
Recorded at Carrying Amount:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivables (e)
|
|
$
|
261,128
|
|
|
$
|
261,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt (excluding Cash Conversion Option)
|
|
$
|
1,447,586
|
|
|
$
|
1,519,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Project debt
|
|
$
|
730,396
|
|
|
$
|
747,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The U.S. Treasury/Agency obligations in restricted funds held in
trust are primarily comprised of Federal Home Loan Mortgage
Corporation securities at fair value. |
(b) |
|
Included in other noncurrent assets in the condensed
consolidated balance sheets. |
(c) |
|
Included in prepaid expenses and other current assets in the
condensed consolidated balance sheets. |
(d) |
|
Included in investments in fixed maturities at market in the
condensed consolidated balance sheets. |
(e) |
|
Includes $24.1 million of noncurrent receivables in other
noncurrent assets in the condensed consolidated balance sheets. |
19
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
The following table presents information about the fair value
measurement of our assets and liabilities as of
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
As of December 31, 2010
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
Financial Instruments Recorded at Fair Value
|
|
Carrying
|
|
|
Estimated
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
on a Recurring Basis:
|
|
Amount
|
|
|
Fair Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
(In thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank deposits and certificates of deposit
|
|
$
|
48,165
|
|
|
$
|
48,165
|
|
|
$
|
48,165
|
|
|
$
|
|
|
|
$
|
|
|
Money market funds
|
|
|
78,274
|
|
|
|
78,274
|
|
|
|
78,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents:
|
|
|
126,439
|
|
|
|
126,439
|
|
|
|
126,439
|
|
|
|
|
|
|
|
|
|
Restricted funds held in trust:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank deposits and certificates of deposit
|
|
|
3,892
|
|
|
|
3,885
|
|
|
|
3,885
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
117,183
|
|
|
|
117,183
|
|
|
|
117,183
|
|
|
|
|
|
|
|
|
|
U.S. Treasury/Agency obligations (a)
|
|
|
56,340
|
|
|
|
56,335
|
|
|
|
56,335
|
|
|
|
|
|
|
|
|
|
State and municipal obligations
|
|
|
7,144
|
|
|
|
7,144
|
|
|
|
7,144
|
|
|
|
|
|
|
|
|
|
Commercial paper/Guaranteed investment contracts/Repurchase
agreements
|
|
|
48,433
|
|
|
|
48,698
|
|
|
|
48,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restricted funds held in trust:
|
|
|
232,992
|
|
|
|
233,245
|
|
|
|
233,245
|
|
|
|
|
|
|
|
|
|
Restricted funds other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank deposits and certificates of deposit (b)
|
|
|
21,721
|
|
|
|
21,721
|
|
|
|
21,721
|
|
|
|
|
|
|
|
|
|
Money market funds (c)
|
|
|
10,876
|
|
|
|
10,876
|
|
|
|
10,876
|
|
|
|
|
|
|
|
|
|
U.S. Treasury/Agency obligations (c)
|
|
|
499
|
|
|
|
499
|
|
|
|
499
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities (c)
|
|
|
1,382
|
|
|
|
1,382
|
|
|
|
1,382
|
|
|
|
|
|
|
|
|
|
Other government obligations (c)
|
|
|
991
|
|
|
|
991
|
|
|
|
991
|
|
|
|
|
|
|
|
|
|
Corporate investments (c)
|
|
|
509
|
|
|
|
509
|
|
|
|
509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restricted funds other:
|
|
|
35,978
|
|
|
|
35,978
|
|
|
|
35,978
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual and bond funds (b)
|
|
|
2,328
|
|
|
|
2,602
|
|
|
|
2,602
|
|
|
|
|
|
|
|
|
|
Investments available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury/Agency obligations (d)
|
|
|
6,069
|
|
|
|
6,069
|
|
|
|
6,069
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities (d)
|
|
|
4,470
|
|
|
|
4,470
|
|
|
|
4,470
|
|
|
|
|
|
|
|
|
|
Other government obligations (d)
|
|
|
2,375
|
|
|
|
2,375
|
|
|
|
2,375
|
|
|
|
|
|
|
|
|
|
Corporate investments (d)
|
|
|
16,108
|
|
|
|
16,108
|
|
|
|
16,108
|
|
|
|
|
|
|
|
|
|
Equity securities (c)
|
|
|
1,284
|
|
|
|
1,284
|
|
|
|
1,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments:
|
|
|
32,634
|
|
|
|
32,908
|
|
|
|
32,908
|
|
|
|
|
|
|
|
|
|
Derivative Asset Note Hedge
|
|
|
112,400
|
|
|
|
112,400
|
|
|
|
|
|
|
|
112,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets:
|
|
$
|
540,443
|
|
|
$
|
540,970
|
|
|
$
|
428,570
|
|
|
$
|
112,400
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liability Energy Hedges
|
|
$
|
436
|
|
|
$
|
436
|
|
|
$
|
|
|
|
$
|
436
|
|
|
$
|
|
|
Derivative Liability Cash Conversion Option
|
|
|
115,994
|
|
|
|
115,994
|
|
|
|
|
|
|
|
115,994
|
|
|
|
|
|
Derivative Liabilities Contingent interest features
of the 3.25% Notes and Debentures
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities:
|
|
$
|
116,430
|
|
|
$
|
116,430
|
|
|
$
|
|
|
|
$
|
116,430
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Instruments
Recorded at Carrying Amount:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivables (e)
|
|
$
|
292,752
|
|
|
$
|
292,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt (excluding Cash Conversion Option)
|
|
$
|
1,448,417
|
|
|
$
|
1,497,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Project debt
|
|
$
|
803,303
|
|
|
$
|
823,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
|
|
|
(a) |
|
The U.S. Treasury/Agency obligations in restricted funds held in
trust are primarily comprised of Federal Home Loan Mortgage
Corporation securities at fair value. |
(b) |
|
Included in other noncurrent assets in the condensed
consolidated balance sheets. |
(c) |
|
Included in prepaid expenses and other current assets in the
condensed consolidated balance sheets. |
(d) |
|
Included in investments in fixed maturities at market in the
condensed consolidated balance sheets. |
(e) |
|
Includes $24.9 million of noncurrent receivables in other
noncurrent assets in the condensed consolidated balance sheets. |
Investments
Our insurance subsidiaries fixed maturity debt and equity
securities portfolio are classified as
available-for-sale
and are carried at fair value. Equity securities that are traded
on a national securities exchange are stated at the last
reported sales price on the day of valuation. Debt securities
values are determined by third party matrix pricing based on the
last days trading activity. Changes in fair values are credited
or charged directly to Accumulated Other Comprehensive Income
(AOCI) in the condensed consolidated statements of
equity as unrealized gains or losses, respectively. Investment
gains or losses realized on the sale of securities are
determined using the specific identification method. Realized
gains and losses are recognized in the condensed consolidated
statements of income based on the amortized cost of fixed
maturities and the cost basis for equity securities on the date
of trade, subject to any previous adjustments for
other-than-temporary
declines.
Other-than-temporary
declines in fair value are recorded as realized losses in the
condensed consolidated statements of income to the extent they
relate to credit losses, and to AOCI to the extent they are
related to other factors. The cost basis of the security is also
reduced. We consider the following factors in determining
whether declines in the fair value of securities are
other-than-temporary:
|
|
|
|
|
the significance of the decline in fair value compared to the
cost basis;
|
|
|
the time period during which there has been a significant
decline in fair value;
|
|
|
whether the unrealized loss is credit-driven or a result of
changes in market interest rates;
|
|
|
a fundamental analysis of the business prospects and financial
condition of the issuer; and
|
|
|
our ability and intent to hold the investment for a period of
time sufficient to allow for any anticipated recovery in fair
value.
|
Other investments, such as investments in companies in which we
do not have the ability to exercise significant influence, are
carried at the lower of cost or estimated realizable value.
21
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
The cost or amortized cost, unrealized gains, unrealized losses
and the fair value of our investments categorized by type of
security, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2011
|
|
|
As of December 31, 2010
|
|
|
|
Cost or
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gain
|
|
|
Loss
|
|
|
Value
|
|
|
Cost
|
|
|
Gain
|
|
|
Loss
|
|
|
Value
|
|
|
Current investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Equity securities insurance business
|
|
|
993
|
|
|
|
373
|
|
|
|
11
|
|
|
|
1,355
|
|
|
|
993
|
|
|
|
302
|
|
|
|
11
|
|
|
|
1,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current investments
|
|
$
|
993
|
|
|
$
|
373
|
|
|
$
|
11
|
|
|
$
|
1,355
|
|
|
$
|
993
|
|
|
$
|
302
|
|
|
$
|
11
|
|
|
$
|
1,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities insurance business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
|
$
|
306
|
|
|
$
|
|
|
|
$
|
6
|
|
|
$
|
300
|
|
|
$
|
307
|
|
|
$
|
|
|
|
$
|
4
|
|
|
$
|
303
|
|
U.S. government agencies
|
|
|
5,470
|
|
|
|
51
|
|
|
|
24
|
|
|
|
5,497
|
|
|
|
5,713
|
|
|
|
72
|
|
|
|
19
|
|
|
|
5,766
|
|
Residential mortgage-backed securities
|
|
|
5,751
|
|
|
|
84
|
|
|
|
43
|
|
|
|
5,792
|
|
|
|
4,417
|
|
|
|
92
|
|
|
|
39
|
|
|
|
4,470
|
|
Other government obligations
|
|
|
4,444
|
|
|
|
141
|
|
|
|
101
|
|
|
|
4,484
|
|
|
|
2,331
|
|
|
|
87
|
|
|
|
43
|
|
|
|
2,375
|
|
Corporate investments
|
|
|
12,140
|
|
|
|
472
|
|
|
|
16
|
|
|
|
12,596
|
|
|
|
15,769
|
|
|
|
454
|
|
|
|
115
|
|
|
|
16,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities insurance business
|
|
|
28,111
|
|
|
|
748
|
|
|
|
190
|
|
|
|
28,669
|
|
|
|
28,537
|
|
|
|
705
|
|
|
|
220
|
|
|
|
29,022
|
|
Mutual and bond funds
|
|
|
1,972
|
|
|
|
|
|
|
|
49
|
|
|
|
1,923
|
|
|
|
2,328
|
|
|
|
274
|
|
|
|
|
|
|
|
2,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent investments
|
|
$
|
30,083
|
|
|
$
|
748
|
|
|
$
|
239
|
|
|
$
|
30,592
|
|
|
$
|
30,865
|
|
|
$
|
979
|
|
|
$
|
220
|
|
|
$
|
31,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth a summary of temporarily impaired
investments held by our insurance subsidiary (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2011
|
|
|
As of December 31, 2010
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
Description of Investments
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
U.S. Treasury and other direct U.S. Government obligations
|
|
$
|
2,584
|
|
|
$
|
30
|
|
|
$
|
1,215
|
|
|
$
|
23
|
|
Federal agency mortgage-backed securities
|
|
|
3,665
|
|
|
|
43
|
|
|
|
2,070
|
|
|
|
39
|
|
Other government obligations
|
|
|
2,502
|
|
|
|
101
|
|
|
|
936
|
|
|
|
43
|
|
Corporate bonds
|
|
|
2,091
|
|
|
|
16
|
|
|
|
3,266
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
10,842
|
|
|
|
190
|
|
|
|
7,487
|
|
|
|
220
|
|
Equity securities
|
|
|
143
|
|
|
|
11
|
|
|
|
167
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired investments
|
|
$
|
10,985
|
|
|
$
|
201
|
|
|
$
|
7,654
|
|
|
$
|
231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The number of U.S. Treasury and federal agency obligations,
mortgage-backed securities, other government obligations, and
corporate bonds temporarily impaired are 6, 6, 6, and 7,
respectively. As of March 31, 2011, all of the temporarily
impaired fixed maturity investments had maturities greater than
12 months.
Our fixed maturities held by our insurance subsidiary include
mortgage-backed securities and collateralized mortgage
obligations, collectively (MBS) representing 20.2%,
and 15.4% of the total fixed maturities as of March 31,
2011 and December 31, 2010, respectively. Our MBS holdings
are issued by the Federal National Mortgage Association, the
Federal Home Loan Mortgage Corporation, or the Government
National Mortgage Association all of which are rated
AAA by Moodys Investors Services. MBS and
callable bonds, in contrast to other bonds, are more sensitive
to market value declines in a rising interest rate environment
than to market value increases in a declining interest rate
environment.
22
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
The expected maturities of fixed maturity securities, by
amortized cost and fair value are shown below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2011
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
One year or less
|
|
$
|
5,824
|
|
|
$
|
5,860
|
|
Over one year to five years
|
|
|
17,465
|
|
|
|
18,086
|
|
Over five years to ten years
|
|
|
4,822
|
|
|
|
4,723
|
|
More than ten years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
$
|
28,111
|
|
|
$
|
28,669
|
|
|
|
|
|
|
|
|
|
|
The following reflects the change in net unrealized gain on
securities included as a separate component of AOCI in the
condensed consolidated statements of equity (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Fixed maturities, net
|
|
$
|
73
|
|
|
$
|
1
|
|
Equity securities, net
|
|
|
72
|
|
|
|
26
|
|
Mutual and bond funds
|
|
|
(49
|
)
|
|
|
129
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized gain on
available-for-sale
securities
|
|
|
96
|
|
|
|
156
|
|
Money market funds restricted
|
|
|
5
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized gain on securities
|
|
$
|
101
|
|
|
$
|
176
|
|
|
|
|
|
|
|
|
|
|
The components of net unrealized gain on securities consist of
the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
|
|
Months
|
|
|
|
Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Net unrealized holding gain arising during the period
|
|
$
|
96
|
|
|
$
|
156
|
|
Reclassification adjustment for net realized losses included in
net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain on
available-for-sale
securities
|
|
|
96
|
|
|
|
156
|
|
Net unrealized holding gain arising during the
period restricted
|
|
|
5
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain on securities
|
|
$
|
101
|
|
|
$
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 13.
|
DERIVATIVE
INSTRUMENTS
|
The following disclosures summarize the fair value of derivative
instruments not designated as hedging instruments in the
condensed consolidated balance sheets and the effect of changes
in fair value related to those derivative instruments not
designated as hedging instruments on the condensed consolidated
statements of income.
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments Not Designated
|
|
|
|
Fair Value as of
|
|
As Hedging Instruments
|
|
Balance Sheet Location
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
(In thousands)
|
|
|
Asset Derivatives:
|
|
|
|
|
|
|
|
|
|
|
Note Hedge
|
|
Other noncurrent assets
|
|
$
|
103,163
|
|
|
$
|
112,400
|
|
Liability Derivatives:
|
|
|
|
|
|
|
|
|
|
|
Cash Conversion Option
|
|
Long-term debt
|
|
$
|
105,482
|
|
|
$
|
115,994
|
|
Contingent interest features of the Debentures and
3.25% Notes
|
|
Other noncurrent liabilities
|
|
$
|
0
|
|
|
$
|
0
|
|
23
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain or (Loss)
|
|
|
|
|
|
Recognized In Income
|
|
|
|
|
|
on Derivative
|
|
Effect on Income of
|
|
Location of Gain or (Loss)
|
|
For the Three Months Ended
|
|
Derivative Instruments Not Designated
|
|
Recognized in Income on
|
|
March 31,
|
|
As Hedging Instruments
|
|
Derivatives
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Note Hedge
|
|
Non-cash convertible debt related expense
|
|
$
|
(9,237
|
)
|
|
$
|
(36,896
|
)
|
Cash Conversion Option
|
|
Non-cash convertible debt related expense
|
|
|
10,512
|
|
|
|
38,818
|
|
Contingent interest features of the 3.25% Notes and
Debentures
|
|
Non-cash convertible debt related expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect on income of derivative instruments not designated as
hedging instruments
|
|
|
|
$
|
1,275
|
|
|
$
|
1,922
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Conversion Option, Note Hedge and Contingent Interest features
related to the 3.25% Cash Convertible Senior Notes
The Cash Conversion Option is a derivative instrument which is
recorded at fair value quarterly with any change in fair value
being recognized in our condensed consolidated statements of
income as non-cash convertible debt related expense. The Note
Hedge is accounted for as a derivative instrument and as such,
is recorded at fair value quarterly with any change in fair
value being recognized in our condensed consolidated statements
of income as non-cash convertible debt related expense.
We expect the gain or loss associated with changes to the
valuation of the Note Hedge to substantially offset the gain or
loss associated with changes to the valuation of the Cash
Conversion Option. However, they will not be completely
offsetting as a result of changes in the credit valuation
adjustment related to the Note Hedge. Our most significant
credit exposure arises from the Note Hedge. The fair value of
the Note Hedge reflects the maximum loss that would be incurred
should the Option Counterparties fail to perform according to
the terms of the Note Hedge agreement. For specific details
related to the Cash Conversion Option, Note Hedge and contingent
interest features of the 3.25% Notes, refer to Note 12
of the Notes to Consolidated Financial Statements in our
Form 10-K.
Contingent
Interest feature of the 1.00% Senior Convertible
Debentures
The contingent interest feature in the Debentures is an embedded
derivative instrument. The first contingent cash interest
payment period would not commence until February 1, 2012,
and the fair value for the embedded derivative was zero as of
March 31, 2011. For specific criteria related to the
contingent interest features of the Debentures, refer to
Note 12 of the Notes to Consolidated Financial Statements
in our
Form 10-K.
Energy
Price Risk
Following the expiration of certain long-term energy sales
contracts, we may have exposure to market risk, and therefore
revenue fluctuations, in energy markets. We may enter into
contractual arrangements that will mitigate our exposure to this
volatility through a variety of hedging techniques. Our efforts
in this regard will involve only mitigation of price volatility
for the energy we produce, and will not involve speculative
energy trading. Consequently, we have entered into swap
agreements with various financial institutions to hedge our
exposure to market risk. As of March 31, 2011, the fair
value of the energy derivatives of $0.6 million, pre-tax,
was recorded as a current liability and as a component of AOCI.
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NOTE 14.
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COMMITMENTS
AND CONTINGENCIES
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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 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.
24
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
Environmental
Matters
Our operations are subject to environmental regulatory laws and
environmental remediation laws. Although our operations are
occasionally subject to proceedings and orders pertaining to
emissions into the environment and other environmental
violations, which may result in fines, penalties, damages or
other sanctions, we believe that we are in substantial
compliance with existing environmental laws and regulations.
We may be identified, along with other entities, as being among
parties potentially responsible for contribution to costs
associated with the correction and remediation of environmental
conditions at disposal sites subject to federal
and/or
analogous state laws. In certain instances, we may be exposed to
joint and several liabilities for remedial action or damages.
Our liability in connection with such environmental claims will
depend on many factors, including our volumetric share of waste,
the total cost of remediation, and the financial viability of
other companies that also sent waste to a given site and, in the
case of divested operations, its contractual arrangement with
the purchaser of such operations.
The potential costs related to the matters described below and
the possible impact on future operations are uncertain due in
part to the complexity of governmental laws and regulations and
their interpretations, the varying costs and effectiveness of
cleanup technologies, the uncertain level of insurance or other
types of recovery and the questionable level of our
responsibility. Although the ultimate outcome and expense of any
litigation, including environmental remediation, is uncertain,
we believe that the following proceedings will not have a
material adverse effect on our condensed consolidated financial
position or results of operations.
Wallingford Matter. In 2010, compliance stack
testing indicated that one of the three combustion units at the
Wallingford energy-from-waste facility had exceeded the permit
limit for dioxin/furan emissions. We promptly shut down the
affected combustion unit and self-reported the test results to
the Connecticut Department of Environmental Protection
(CTDEP). On August 18, 2010, the Connecticut
Office of the Attorney General (AG), on behalf of
the CTDEP, commenced an enforcement action in Connecticut
Superior Court (Hartford) with respect to the results of the
compliance stack testing. We are working cooperatively with the
CTDEP and AG to reach agreement on a restart and test program to
demonstrate that the affected combustion unit has been returned
to compliance. It is not possible at this time to predict the
outcome or to estimate our ultimate liability in the matter;
however, we believe this proceeding and related suspension in
operation will not have a material adverse effect on our
condensed consolidated financial position or results of
operations.
Lower Passaic River Matter. In August 2004, the
United States Environmental Protection Agency (EPA)
notified Covanta Essex Company (Essex) that it was a
potentially responsible party (PRP) for Superfund
response actions in the Lower Passaic River Study Area, referred
to as LPRSA, a 17 mile stretch of river in
northern New Jersey. Essex is one of 71 PRPs named thus far that
have joined the LPRSA PRP group, which is undertaking a Remedial
Investigation/Feasibility Study (Study) of the LPRSA
under EPA oversight. Essexs share of the Study costs to
date are not material to its financial position and results of
operations; however, the Study costs are exclusive of any LPRSA
remedial costs or natural resource damages that may ultimately
be assessed against PRPs. In February 2009, Essex and over 300
other PRPs were named as third-party defendants in a suit
brought by the State of New Jersey Department of Environmental
Protection (NJDEP) in New Jersey Superior Court of
Essex County against Occidental Chemical Corporation and certain
related entities (Occidental) with respect to
alleged contamination of the LPRSA by Occidental. The Occidental
third-party complaint seeks contribution with respect to any
award to NJDEP of damages against Occidental in the matter.
Considering the history of industrial and other discharges into
the LPRSA from other sources, including named PRPs, Essex
believes any releases to the LPRSA from its facility to be de
minimis; however, it is not possible at this time to predict
that outcome or to estimate Essexs ultimate liability in
the matter, including for LPRSA remedial costs
and/or
natural resource damages
and/or
contribution claims made by Occidental
and/or other
PRPs.
25
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
Other
Matters
Other commitments as of March 31, 2011 were as follows (in
thousands):
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Commitments Expiring by Period
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Less Than
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More Than
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Total
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One Year
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One Year
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Letters of credit
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$
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286,239
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$
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8,270
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$
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277,969
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Surety bonds
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85,889
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85,889
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Total other commitments net
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$
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372,128
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$
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8,270
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$
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363,858
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The letters of credit were issued under various credit
facilities (primarily the Funded L/C Facility) to secure our
performance under various contractual undertakings related to
our domestic and international projects or to secure obligations
under our insurance program. Each letter of credit relating to a
project is required to be maintained in effect for the period
specified in related project contracts, and generally may be
drawn if it is not renewed prior to expiration of that period.
We believe that we will be able to fully perform under our
contracts to which these existing letters of credit relate, and
that it is unlikely that letters of credit would be drawn
because of a default of our performance obligations. If any of
these letters of credit were to be drawn by the beneficiary, the
amount drawn would be immediately repayable by us to the issuing
bank. If we do not immediately repay such amounts drawn under
these letters of credit, unreimbursed amounts would be treated
under the Credit Facilities as additional term loans in the case
of letters of credit issued under the Funded L/C Facility, or as
revolving loans in the case of letters of credit issued under
the Revolving Credit Facility.
The surety bonds listed on the table above relate primarily to
performance obligations ($74.8 million) and support for
closure obligations of various energy projects when such
projects cease operating ($11.1 million). Were these bonds
to be drawn upon, we would have a contractual obligation to
indemnify the surety company.
We have certain contingent obligations related to the
7.25% Notes and the 3.25% Notes. These arise as
follows:
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holders may require us to repurchase their 7.25% Notes and
their 3.25% Notes if a fundamental change occurs; and
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holders may exercise their conversion rights upon the occurrence
of certain events, which would require us to pay the conversion
settlement amount in cash.
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We have certain contingent obligations related to the
Debentures. These arise as follows:
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holders may require us to repurchase their Debentures on
February 1, 2012, February 1, 2017 and
February 1, 2022;
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holders may require us to repurchase their Debentures if a
fundamental change occurs; and
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holders may exercise their conversion rights upon the occurrence
of certain events, which would require us to pay the conversion
settlement amount in cash
and/or our
common stock.
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For specific criteria related to contingent interest, conversion
or redemption features of the Debentures, the 7.25% Notes
and the 3.25% Notes, refer to Note 12 of the Notes to
Consolidated Financial Statements in our
Form 10-K.
We have issued or are party to guarantees and related
contractual support obligations undertaken pursuant to
agreements to construct and operate waste and energy facilities.
For some projects, such performance guarantees include
obligations to repay certain financial obligations if the
project revenues are insufficient to do so, or to obtain or
guarantee financing for a project. With respect to our
businesses, we have issued guarantees to municipal clients and
other parties that our subsidiaries will perform in accordance
with contractual terms, including, where required, the payment
of damages or other obligations. Additionally, damages payable
under such guarantees for our energy-from-waste facilities could
expose us to recourse liability on project debt. If we must
perform under one or more of such guarantees, our liability for
damages upon contract termination would be reduced by funds held
in trust and proceeds from sales of the facilities securing the
project debt and is presently not estimable. Depending upon the
circumstances giving rise to such damages, the contractual terms
of the applicable contracts, and the contract
counterpartys choice of remedy at the time a
26
COVANTA
HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Concluded)
claim against a guarantee is made, the amounts owed pursuant to
one or more of such guarantees could be greater than our
then-available sources of funds. To date, we have not incurred
material liabilities under such guarantees.
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NOTE 15.
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SUBSEQUENT
EVENT
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On April 13, 2011, we signed an agreement with Samayanallur
Power Investments Private Limited (SPI) to sell our
interests in the 106 MW (gross) heavy fuel-oil fired
electric power generation facility in Tamil Nadu, India
(Madurai). The Madurai assets being sold include our
entire interest in Covanta Madurai Operating Private Limited,
which provides operation and maintenance services to the
facility, as well as our approximately 77% ownership interest in
the project company, Madurai Power Corporation Private Ltd. This
transaction is expected to close in the next several months,
subject to customary approvals and closing conditions and to
SPIs obtaining financing.
27
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Item 2.
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MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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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 following
discussion addresses our financial condition as of
March 31, 2011 and our results of operations for the three
months ended March 31, 2011, compared with the same periods
last year. It should be read in conjunction with our Audited
Consolidated Financial Statements and Notes thereto for the year
ended December 31, 2010 and Managements Discussion
and Analysis of Financial Condition and Results of Operations
included in our
Form 10-K
for the year ended December 31, 2010
(Form 10-K),
to which the reader is directed for additional information.
The preparation of interim financial statements necessarily
relies heavily on estimates. Due to the use of estimates and
certain other factors, such as the seasonal nature of our waste
and energy services business, as well as competitive and other
market conditions, we do not believe that interim results of
operations are indicative of full year results of operations.
The preparation of financial statements requires management to
make estimates and assumptions that affect the reported amounts
and classification of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ
materially from those estimates.
OVERVIEW
We are one of the worlds largest owners and operators of
infrastructure for the conversion of waste to energy (known as
energy-from-waste or EfW), as well as
other waste disposal and renewable energy production businesses.
Energy-from-waste serves two key markets as both a sustainable
waste disposal solution that is environmentally superior to
landfilling and as a source of clean energy that reduces overall
greenhouse gas emissions and is considered renewable under the
laws of many states and under federal law. Our facilities are
critical infrastructure assets that allow our customers, which
are principally municipal entities, to provide an essential
public service.
We operate
and/or have
ownership positions in 44 energy-from-waste facilities, which
are primarily located in North America, and 18 additional energy
generation facilities, including other renewable energy
production facilities in North America (wood biomass, landfill
gas and hydroelectric) and independent power production
(IPP) facilities in Asia. We also operate waste
management infrastructure that is complementary to our core EfW
business. We have one reportable segment which is Americas and
we are organized as a holding company and conduct all of our
operations through subsidiaries which are engaged predominantly
in the businesses of waste and energy services.
We also hold equity interests in energy-from-waste facilities in
China and Italy. We are pursuing additional growth opportunities
in parts of Europe, where the market demand, regulatory
environment or other factors encourage technologies such as
energy-from-waste to reduce dependence on landfilling for waste
disposal and fossil fuels for energy production in order to
reduce greenhouse gas emissions. We are focusing primarily on
the United Kingdom where we continue to pursue several billion
dollars worth of energy-from-waste development opportunities.
In 2010, we adopted a plan to sell our interests in our fossil
fuel independent power production facilities in the Philippines,
India, and Bangladesh. During the first quarter of 2011, we
completed the sale of our interests in a 510 megawatt
(MW) (gross) coal-fired electric power generation
facility in the Philippines (Quezon) and we
completed the sale of our majority equity interests in a
106 MW (gross) heavy fuel-oil fired electric power
generation facilities in Tamil Nadu, India
(Samalpatti). In April 2011, we signed an agreement
to sell our majority equity interests in our 106 MW (gross)
heavy fuel-oil fired electric power generation facility also in
Tamil Nadu, India (Madurai). The remaining asset
held for sale is our equity interest in a barge-mounted
126 MW (gross) diesel/natural gas-fired electric power
generation facility located near Haripur, Bangladesh. For
additional information, see Assets Held for Sale below.
We plan to allocate capital to maximize shareholder value by
investing in high value core business development projects and
strategic acquisitions when available, and by returning surplus
capital to shareholders. On March 14, 2011, the Board of
Directors approved a regular cash dividend of $0.075 per share.
The dividend was paid on April 12, 2011 to stockholders of
record as of the close of business on March 30, 2011. On
March 14, 2011, the Board of Directors approved an
additional $50 million of share repurchase authorization,
bringing the total authorized amount to $200 million.
During the three months ended March 31, 2011, we
repurchased 3.2 million shares of our common stock at a
weighted average
28
cost of $16.84 per share for an aggregate amount of
approximately $54.4 million. For additional information,
see Liquidity and Capital Resources below.
Strategy
Our mission is to be the leading energy-from-waste company in
the world, which we intend to pursue through the following key
strategies:
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Maximize the value of our existing portfolio. We
intend to maximize the long-term value of our existing portfolio
by continuing to operate at our historic production levels,
maintaining our facilities in optimal condition through our
ongoing maintenance programs, managing our expenses, extending
or replacing waste and service contracts upon their expiration,
seeking incremental revenue opportunities with our existing
assets, relationships or technologies and expanding facility
capacity where appropriate.
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Grow in selected attractive markets. We seek to grow
our portfolio primarily through the development of new
facilities and acquisitions where we believe that market and
regulatory conditions will enable us to invest our capital at
attractive risk-adjusted rates of return. We are currently
focusing on development opportunities in the U.S., Canada and
Europe, which we consider to be our core markets. We believe
that there are numerous attractive opportunities in the United
Kingdom in particular, where national policies, such as a
substantial tax on landfill use, are intended to achieve
compliance with the EU Landfill Directive.
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We believe that our approach to development opportunities is
highly-disciplined, both with regard to our required rates of
return and the manner in which potential new projects will be
structured and financed. In general, prior to the commencement
of construction of a new facility, we intend to enter into
long-term contracts with municipal
and/or
commercial customers for a substantial portion of the disposal
capacity and obtain non-recourse project financing for a
majority of the capital investment. We intend to finance new
projects in a prudent manner, minimizing the impact on our
balance sheet and credit profile at the parent company level
where possible.
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Develop and commercialize new technology. We believe
that our efforts to protect and expand our business will be
enhanced by the development of additional technologies in such
fields as emission controls, residue disposal, alternative waste
treatment processes, and combustion controls. We have advanced
our research and development efforts in these areas, and have
developed and have patents pending for major advances in
controlling nitrogen oxide
(NOx)
emissions and have a patent for a proprietary process to improve
the handling of the residue from our energy-from-waste
facilities. We have also entered into various agreements with
multiple partners to invest in the development, testing or
licensing of new technologies related to the transformation of
waste materials into renewable fuels or the generation of
energy, as well as improved environmental performance.
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Advocate for public policy favorable to
energy-from-waste. We seek to educate policymakers
about the environmental and economic benefits of
energy-from-waste and advocate for policies that appropriately
reflect these benefits. Energy-from-waste is a highly regulated
business, and as such we believe that it is critically important
for us, as an industry leader, to play an active role in the
debates surrounding potential policy developments that could
impact our business.
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We are actively engaged in the current discussion among policy
makers in the United States regarding the benefits of
energy-from-waste and the reduction of our dependence on
landfilling for waste disposal and fossil fuels for energy.
Given the recent economic slowdown and related unemployment,
policy makers are focused on themes of economic stimulus, job
creation, and energy security. We believe that the construction
and permanent jobs created by additional energy-from-waste
development represent the type of green jobs that
are consistent with this focus.
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Allocate capital efficiently. We plan to allocate
capital to maximize shareholder value by investing in high value
core business development projects and strategic acquisitions
when available, and by returning surplus capital to shareholders.
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Factors
Affecting Business Conditions and Financial
Results
Economic - During 2008 and 2009, the economic
slowdown reduced demand for goods and services generally, which
reduced overall volumes of waste requiring disposal and the
pricing at which we can attract waste to fill
29
available capacity. We receive the majority of our revenue under
short- and long-term contracts, with little or no exposure to
price volatility, but with adjustments intended to reflect
changes in our costs. Where our revenue is received under other
arrangements and depending upon the revenue source, we have
varying amounts of exposure to price volatility.
The largest component of our revenue is waste revenue, which has
generally been subject to less price volatility than our revenue
derived from the sale of energy and metals. However, the
downturn in economic activity has reduced waste generation rates
in the northeast U.S. which subsequently caused market
waste disposal prices to modestly decline. Furthermore, global
demand and pricing of certain commodities, such as the scrap
metals we recycle from our energy-from-waste facilities has been
materially affected by economic activity. Pricing for recycled
metals reached historically high levels during 2008, declined
materially during 2009 and has rebounded substantially during
2010 and 2011.
At the same time, the declines in U.S. natural gas prices
have pushed electricity and steam pricing lower generally, which
causes lower revenue for the portion of the energy we sell which
is not under fixed-price contracts. During 2008, pricing for
energy reached historically high levels and has subsequently
declined materially during both 2009 and 2010. During 2011,
pricing for energy has modestly increased.
The downturn in economic activity has also affected many
municipalities and public authorities, some of which are our
customers. Many local and central governments are seeking to
reduce expenses in order to address declining tax revenues. We
work closely with these municipal customers, with many of whom
weve shared a long-term relationship, to effectively
counter some of these economic challenges.
Market Pricing for Waste, Energy and Metal -
Global and regional economy activity, as well as
technological advances, regulations and a variety of other
factors, will affect market supply and demand and therefore
prices for waste disposal services, energy (including
electricity and steam) and other commodities such as ferrous and
non-ferrous metals. As market prices for waste disposal,
electricity, steam and recycled metal rise it benefits our
existing business as well as our prospects for growth through
expansions or new development. Conversely, market price declines
for these services and commodities will adversely affect both
our existing business and growth prospects.
Seasonal - Our quarterly operating income
within the same fiscal year, typically differs substantially due
to seasonal factors, primarily as a result of the timing of
scheduled plant maintenance. We typically conduct scheduled
maintenance periodically each year, which requires that
individual boiler
and/or
turbine units temporarily cease operations. During these
scheduled maintenance periods, we incur material repair and
maintenance expenses and receive less revenue until the boiler
and/or
turbine units resume operations. This scheduled maintenance
typically occurs during periods of off-peak electric demand
and/or lower
waste volumes, which are our first, second and fourth fiscal
quarters. The first quarter scheduled maintenance period is
typically the most extensive, with the second and fourth
quarters historically being at similar levels. Given these
factors, we typically experience our lowest operating income
from our projects during our first quarter of each year and our
highest operating income during the third quarter of each year.
In addition, at certain of our project subsidiaries,
distributions of excess earnings (above and beyond monthly
operation and maintenance service payments) are subject to
periodic tests of project debt service coverage or requirements
to maintain minimum working capital balances. While these
distributions occur throughout the year based upon the specific
terms of the relevant project debt arrangements, they are
typically highest in the fourth quarter. Our net cash provided
by operating activities exhibits seasonal fluctuations as a
result of the timing of these distributions, including a benefit
in the fourth quarter compared to the first nine months of the
year.
Other Factors Affecting Performance We
have historically performed our operating obligations without
experiencing material unexpected service interruptions or
incurring material increases in costs. In addition, with respect
to many of our contracts, we generally have limited our exposure
for risks not within our control. For additional information
about such risks and damages that we may owe for unexcused
operating performance failures, see Item 1A. Risk
Factors. In monitoring and assessing the ongoing operating
and financial performance of our businesses, we focus on certain
key factors: tons of waste processed, electricity and steam
sold, and boiler availability.
30
Business
Segment
We have one reportable segment which is Americas and is
comprised of waste and energy services operations primarily in
the United States and Canada.
The Americas segment is comprised primarily of energy-from-waste
projects. For all of these projects, we earn revenue from two
primary sources: fees charged for operating projects or
processing waste received and payments for electricity and steam
sales. We also operate, and in some cases have ownership
interests in, transfer stations and landfills which generate
revenue from waste and ash disposal fees or operating fees. In
addition, we own and in some cases operate, other renewable
energy projects primarily in the United States which generate
electricity from wood waste (biomass), landfill gas and
hydroelectric resources. The electricity from these other
renewable energy projects is sold to utilities. We may receive
additional revenue from construction activity during periods
when we are constructing new facilities or expanding existing
facilities.
Contract
Structures
We currently operate energy-from-waste projects in
16 states and Canada. Most of our energy-from-waste
projects were developed and structured contractually as part of
competitive procurement processes conducted by municipal
entities. As a result, many of these projects have common
features. However, each service agreement is different
reflecting the specific needs and concerns of a client
community, applicable regulatory requirements and other factors.
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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For the energy-from-waste projects we own, financing is
generally accomplished through tax-exempt and taxable revenue
bonds issued by or on behalf of the client community. For these
facilities, the bond proceeds are loaned 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
condensed consolidated financial statements. Generally, project
debt is secured by the projects revenue, 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.
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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 damages charged
to us or, if the breach is substantial, continuing and
unremedied, termination of the applicable agreement. These
damages could include amounts sufficient to repay project debt
(as reduced by amounts held in trust
and/or
proceeds from sales of facilities securing project debt) and as
such, these contingent obligations cannot readily be quantified.
We have issued performance guarantees to our client communities
and, in some cases other parties, which guarantee that our
project subsidiaries will perform in accordance with contractual
terms including, where required, the payment of such damages. If
one or more contracts were terminated for our default, these
contractual damages may be material to our cash flow and
financial condition. To date, we have not incurred material
liabilities under such performance guarantees.
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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, regardless of whether the full amount of waste is
actually delivered. Client communities have consistently met
their commitment to deliver the stated quantity of waste. Where
a Service Fee structure exists, portions of the service fee
escalate to reflect indices for inflation, and 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
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31
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resulting from unforeseen circumstances, subject to specified
limits. At three publicly-owned facilities we operate, our
client community may terminate the operating contract under
limited circumstances without cause.
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Our returns are expected to be stable if we do not incur
material unexpected operation and maintenance costs or other
expenses. In addition, most of our energy-from-waste project
contracts are structured so that contract counterparties
generally bear, or share in, the costs associated with events or
circumstances not within our control, such as uninsured force
majeure events and changes in legal requirements. The stability
of our revenues and returns could be affected by our ability to
continue to enforce these obligations. Also, at some of our
energy-from-waste facilities, commodity price risk is mitigated
by passing through commodity costs to contract counterparties.
With respect to our other renewable energy projects, such
structural features generally do not exist because either we
operate and maintain such facilities for our own account or we
do so on a cost-plus basis rather than a fixed-fee basis.
|
|
|
|
We receive the majority of our revenue under short- and
long-term contracts, with little or no exposure to price
volatility, but with adjustments intended to reflect changes in
our costs. Where our revenue is received under other
arrangements and depending upon the revenue source, we have
varying amounts of exposure to price volatility. The largest
component of our revenue is waste revenue, which has generally
been subject to less price volatility than our revenue derived
from the sale of energy and metals. During 2008, pricing for
energy reached historically high levels and has subsequently
declined materially during both 2009 and 2010. During 2011,
pricing for energy has modestly increased. Similarly, pricing
for recycled metals reached historically high levels during
2008, declined materially during 2009 and has rebounded
substantially during 2010 and 2011. At some of our renewable
energy projects, our operating subsidiaries purchase fuel in the
open markets which exposes us to fuel price risk.
|
|
|
|
We generally sell the energy output from our projects to local
utilities pursuant to long-term contracts. At several of our
energy-from-waste projects, we sell energy output under
short-term contracts or on a spot-basis to our customers.
|
Contracted
and Merchant Capacity
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 will also 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 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 may enter into contractual arrangements that will
mitigate our exposure to revenue fluctuations in energy markets
through a variety of hedging techniques.
To date, we have been successful in extending a majority of 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. See Growth and Development discussion below for
additional information. 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 overall cash flow and profitability for
the next several years.
As we seek to enter into extended or new contracts, we expect
that medium- and long-term contracts for waste supply, at least
for a substantial portion of facility capacity, will be
available on acceptable terms in the marketplace. We also expect
that medium- and long-term contracts for sales of energy will be
less available than in the past. As a result, following the
expiration of these long-term contracts, we expect to have on a
relative basis more exposure to market risk, and therefore
revenue fluctuations, in energy markets than in waste markets.
32
In conjunction with our U.S. energy-from-waste business, we
also own
and/or
operate 13 transfer stations, two ashfills 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. We provide waste
procurement services to our waste disposal and transfer station
facilities which have available capacity to receive waste. With
these services, we seek to maximize our revenue and ensure that
our energy-from-waste facilities are being utilized most
efficiently, taking into account maintenance schedules and
operating restrictions that may exist from time to time at each
facility. We also provide 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 ash residue management for our
energy-from-waste projects.
Growth
and Development
We are focusing our efforts on operating our existing business
and pursuing strategic growth opportunities through development
and acquisitions with the goal of maximizing long-term
stockholder return. We anticipate that a part of our future
growth will come from investing in or acquiring additional
energy-from-waste, waste disposal and renewable energy
production businesses. We are pursuing additional growth
opportunities particularly in locations where the market demand,
regulatory environment or other factors encourage technologies
such as energy-from-waste to reduce dependence on landfilling
for waste disposal and fossil fuels for energy production in
order to reduce greenhouse gas emissions. We are focusing on the
United Kingdom, Ireland, Canada and the United States. Our
growth opportunities include: new energy-from-waste and other
renewable energy projects, existing project expansions, contract
extensions, acquisitions, and businesses ancillary to our
existing business, such as additional waste transfer,
transportation, processing and disposal businesses. We also
intend to maintain a focus on research and development of
technologies that we believe will enhance our competitive
position, and offer new technical solutions to waste and energy
problems that augment and complement our business.
We have a growth pipeline and continue to pursue several billion
dollars worth of energy-from-waste development opportunities.
However, much remains to be done and there is substantial
uncertainty relating to the bidding and permitting process for
each project opportunity. If, and when, these development
efforts are successful, we plan to invest in these projects to
achieve an attractive return on capital particularly when
leveraged with project debt which we intend to utilize for all
of our development projects.
The following is a discussion of acquisitions and business
development for 2011 and 2010. See Item 1. Financial
Statements Note 3. Acquisitions and Business
Development for additional information.
CONTRACT
EXTENSIONS
Fairfax
County Energy-from-Waste Facility
In August 2010, the service fee contract with Fairfax County was
extended from 2011 to 2016 pursuant to a unilateral option held
by the County. The terms of the contract remain unchanged under
the extension; however, the project debt on the facility was
repaid in February 2011, and since Fairfax County had previously
paid debt service as a component of the service fee during the
term of the original contract, the County will effectively
retain the benefit of the debt repayment during the 5 year
extension period. In March 2011, the County announced its desire
to proceed to negotiate a long term extension to the contract
rather than exercise a fair market value purchase option it
holds under the existing agreement. The parties are currently
working to complete the contract extension.
ACQUISITIONS
Dade
Energy-from-Waste Business
In February 2010, we completed a transaction with Veolia
Environmental Services North America Corp. (Veolia)
in which we paid cash consideration of $128.3 million for
an energy-from-waste business located in Florida. The operations
acquired included a long-term operating contract with the
respective municipal client.
33
PROJECTS
UNDER ADVANCED DEVELOPMENT OR CONSTRUCTION
Americas
Durham-York
Energy-from-Waste Facility
In 2009, we were selected as the preferred vendor for the
design, construction and operation of a municipally-owned
140,000
tonne-per-year
greenfield energy-from-waste facility to be built in Clarington,
Ontario, located in Durham Region, Canada. After receiving the
Environmental Assessment from the Provincial Ministry of the
Environment, we executed a project agreement with the Regions of
Durham and York to design, build and operate the facility which
will process waste from these Regions. The fixed construction
contract price for the project is approximately
C$247 million. The project will be funded and owned by the
Durham and York Regions. Covanta is in the process of obtaining
the required permits and authorizations, and construction is
expected to commence late in 2011 after these final
authorizations are received. After successful construction, we
will operate the facility under a 20 year contract.
Honolulu
Energy-from-Waste Facility
We operate and maintain the energy-from-waste facility located
in and owned by the City and County of Honolulu, Hawaii. In
December 2009, we entered into agreements with the City and
County of Honolulu to expand the facilitys waste
processing capacity from 2,160 tons per day (tpd) to
3,060 tpd and to increase gross electricity capacity from
57 MW to 90 MW. The agreements also extend the
contract term by 20 years. The $302 million expansion
project is a fixed-price construction contract which is funded
and owned by the City and County of Honolulu. Construction
commenced at the end of 2009.
Other
China
Joint Ventures and Energy-from-Waste Facilities
We currently own 85% of the Taixing Covanta Yanjiang
Cogeneration Co., Ltd. which, in 2009, entered into a
25 year concession agreement and waste supply agreements to
build, own and operate a 350 metric tpd energy-from-waste
facility for Taixing Municipality, in Jiangsu Province,
Peoples Republic of China. The project, which will be
built on the site of our existing coal-fired facility in
Taixing, will supply steam to an adjacent industrial park under
short-term arrangements. We will continue to operate our
existing coal-fired facility. The project company has obtained
Rmb 163 million in project financing which, together with
available cash from existing operations will fund construction
costs. Construction commenced in late 2009.
In 2008, we and Chongqing Iron & Steel Company (Group)
Ltd. entered into an agreement to build, own, and operate an
1,800 metric tpd energy-from-waste facility for Chengdu
Municipality in Sichuan Province, Peoples Republic of
China. We also executed a 25 year waste concession
agreement for this project. In connection with this project, we
acquired a 49% equity interest in the project company.
Construction of the facility has commenced and the project
company has obtained Rmb 480 million in project financing,
of which 49% is guaranteed by us and 51% is guaranteed by
Chongqing Iron & Steel Company (Group) Ltd. until the
project has been constructed and for one year after operations
commence.
ASSETS
HELD FOR SALE
In 2010, we adopted a plan to sell our interests in our fossil
fuel independent power production facilities in the Philippines,
India, and Bangladesh.
During the first quarter of 2011, we completed the sale of our
majority equity interests in a 106 MW (gross) heavy
fuel-oil fired electric power generation facilities in Tamil
Nadu, India (Samalpatti) and we completed the sale
of our interests in a 510 MW (gross) coal-fired electric
power generation facility in the Philippines
(Quezon). The Quezon assets sold consisted of our
entire interest in Covanta Philippines Operating, Inc., which
provided operation and maintenance services to the facility, as
well as our 26% ownership interest in the project company,
Quezon Power, Inc. We received a combined total of cash proceeds
of approximately $225 million, net of transaction costs.
In April 2011, we signed an agreement with Samayanallur Power
Investments Private Limited (SPI) to sell our
interests in the 106 MW (gross) heavy fuel-oil fired
electric power generation facility in Tamil Nadu, India
(Madurai). The Madurai assets being sold include our
entire interest in Covanta Madurai Operating Private Limited,
which provides operation and maintenance services to the
facility, as well as our approximately 77% ownership interest in
the project
34
company, Madurai Power Corporation Private Ltd. This transaction
is expected to close in the next several months, subject to
customary approvals and closing conditions and to SPIs
obtaining financing.
The remaining asset held for sale is our equity interest in a
barge-mounted 126 MW (gross) diesel/natural gas-fired
electric power generation facility located near Haripur,
Bangladesh.
The assets and liabilities associated with these businesses are
presented in our condensed consolidated balance sheets as
Current Assets Held for Sale and Current
Liabilities Held for Sale. The results of operations of
these businesses are included in the condensed consolidated
statements of operations as Income (loss) earnings from
discontinued operations, net of tax. The cash flows of
these businesses are also presented separately in our condensed
consolidated statements of cash flows. All corresponding prior
year periods presented in our condensed consolidated financial
statements and accompanying notes have been reclassified to
reflect the discontinued operations presentation. See
Item 8. Financial Statements And Supplementary
Data Note 4. Assets Held for Sale and
Dispositions for additional information.
RESULTS
OF OPERATIONS
The comparability of the information provided below with respect
to our revenues, expenses and certain other items for the
periods presented was affected by several factors. As outlined
above under Overview Growth and
Development, our acquisition and business development
initiatives resulted in various additional projects which
increased comparative revenues and expenses. These factors must
be taken into account in developing meaningful comparisons
between the periods compared below.
RESULTS
OF OPERATIONS Three Months Ended March 31, 2011
vs. Three Months Ended March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
Increase
|
|
|
|
March 31,
|
|
|
(Decrease)
|
|
|
|
2011
|
|
|
2010
|
|
|
2011 vs 2010
|
|
|
|
(Unaudited, in thousands)
|
|
|
CONSOLIDATED RESULTS OF OPERATIONS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
$
|
376,770
|
|
|
$
|
367,693
|
|
|
$
|
9,077
|
|
Total operating expenses
|
|
|
378,412
|
|
|
|
372,074
|
|
|
|
6,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(1,642
|
)
|
|
|
(4,381
|
)
|
|
|
(2,739
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
261
|
|
|
|
223
|
|
|
|
38
|
|
Interest expense
|
|
|
(16,761
|
)
|
|
|
(10,586
|
)
|
|
|
6,175
|
|
Non-cash convertible debt related expense
|
|
|
(5,160
|
)
|
|
|
(8,247
|
)
|
|
|
(3,087
|
)
|
Loss on extinguishment of debt
|
|
|
(356
|
)
|
|
|
|
|
|
|
356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
(22,016
|
)
|
|
|
(18,610
|
)
|
|
|
3,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income tax benefit and
equity in net income (loss) from unconsolidated investments
|
|
|
(23,658
|
)
|
|
|
(22,991
|
)
|
|
|
667
|
|
Income tax benefit
|
|
|
9,986
|
|
|
|
9,882
|
|
|
|
104
|
|
Equity in net income (loss) from unconsolidated investments
|
|
|
123
|
|
|
|
(1,342
|
)
|
|
|
1,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(13,549
|
)
|
|
|
(14,451
|
)
|
|
|
(902
|
)
|
Income from discontinued operations (including net gain on
disposal of assets held for sale of $135,601 in 2011), net of
taxes of $2,193 and $2,007, respectively
|
|
|
148,942
|
|
|
|
9,718
|
|
|
|
139,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
|
135,393
|
|
|
|
(4,733
|
)
|
|
|
140,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net income from continuing operations attributable to
noncontrolling interests in subsidiaries
|
|
|
(92
|
)
|
|
|
(1,562
|
)
|
|
|
(1,470
|
)
|
Less: Net income from discontinued operations attributable to
noncontrolling interests in subsidiaries
|
|
|
(1,808
|
)
|
|
|
(938
|
)
|
|
|
870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net income attributable to noncontrolling interests in
subsidiaries
|
|
|
(1,900
|
)
|
|
|
(2,500
|
)
|
|
|
(600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) ATTRIBUTABLE TO COVANTA HOLDING CORPORATION
|
|
$
|
133,493
|
|
|
$
|
(7,233
|
)
|
|
|
140,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Attributable to Covanta Holding Corporation stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(13,641
|
)
|
|
$
|
(16,013
|
)
|
|
|
2,372
|
|
Discontinued operations, net of tax expense
|
|
|
147,134
|
|
|
|
8,780
|
|
|
|
138,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Covanta Holding Corporation
|
|
$
|
133,493
|
|
|
$
|
(7,233
|
)
|
|
|
140,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
Increase
|
|
|
|
March 31,
|
|
|
(Decrease)
|
|
|
|
2011
|
|
|
2010
|
|
|
2011 vs 2010
|
|
|
|
(Unaudited, in thousands)
|
|
|
Earnings (Loss) Per Share Attributable to Covanta Holding
Corporation stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.09
|
)
|
|
$
|
(0.10
|
)
|
|
|
0. 01
|
|
Discontinued operations
|
|
|
1.00
|
|
|
|
0.05
|
|
|
|
0. 95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Covanta Holding Corporation
|
|
$
|
0.91
|
|
|
$
|
(0.05
|
)
|
|
|
0. 96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares
|
|
|
146,859
|
|
|
|
153,894
|
|
|
|
(7,035
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.09
|
)
|
|
$
|
(0.10
|
)
|
|
|
0. 01
|
|
Discontinued operations
|
|
|
1.00
|
|
|
|
0.05
|
|
|
|
0. 95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Covanta Holding Corporation
|
|
$
|
0.91
|
|
|
$
|
(0.05
|
)
|
|
|
0. 96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares
|
|
|
146,859
|
|
|
|
153,894
|
|
|
|
(7,035
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Dividend Declared Per Share
|
|
$
|
0.075
|
|
|
$
|
|
|
|
|
0.075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Earnings Per Share Non-GAAP:
(A)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.11
|
)
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
See Supplementary Financial Information Adjusted
Earnings Per Share (Non-GAAP Discussion) |
The following general discussions should be read in conjunction
with the above table, the condensed consolidated financial
statements, the notes to the condensed consolidated financial
statements and other financial information appearing and
referred to elsewhere in this report. Additional detail relating
to changes in operating revenues and operating expenses, and the
quantification of specific factors affecting or causing such
changes, is provided in the segment discussion below.
Consolidated
Results of Operations Comparison of Results for the
Three Months Ended March 31, 2011 vs. Results for the Three
Months Ended March 31, 2010
Operating revenues increased by $9.1 million primarily due
to increased recycled metal revenues due to higher market
prices; improved revenues from service fee contract escalations;
a full quarter operating the Dade facility; and increased
construction revenue due to the Honolulu expansion project.
These increases were offset by the impact of lower electricity
and steam sales due to lower pricing and lower production
related to some biomass facilities being economically dispatched
off-line.
Operating expenses increased by $6.3 million primarily due
to normal cost escalations, a full quarter operating the Dade
facility, higher fuel related costs and increased construction
expense related to the Honolulu expansion project. These
increases were partially offset by lower costs related to some
biomass facilities being economically dispatched off-line and
higher alternative fuel tax credits.
Operating loss decreased by $2.7 million primarily due to
higher recycled metal revenues.
Interest expense increased by $6.2 million primarily due to
the issuance of the 7.25% Senior Notes which were issued in
December 2010, offset by lower interest expense for the
Debentures, the majority of which were tendered during the
fourth quarter of 2010. Non-cash convertible debt related
expense decreased by $3.1 million primarily due to lower
amortization of the debt discount for the Debentures and the net
changes to the valuation of the derivatives associated with the
3.25% Cash Convertible Senior Notes.
The income tax benefit was flat for the comparative period which
is reflective of the minimal change in pre-tax loss from
continuing operations. We currently estimate our annual
effective tax rate for the year ending December 31, 2011 to
be approximately 42.6%. We review the annual effective tax rate
on a quarterly basis as projections are revised and laws are
enacted. The effective income tax rate was 42.2% and 43.0% for
the three months ended March 31, 2011 and 2010,
respectively.
On March 14, 2011, the Board of Directors approved a
regular cash dividend of $0.075 per share. The dividend was paid
on April 12, 2011 to stockholders of record as of the close
of business on March 30, 2011. On March 14, 2011, the
Board of Directors approved an additional $50 million of
share repurchase authorization, bringing the total authorized
amount to
36
$200 million. During the three months ended March 31,
2011, we repurchased 3.2 million shares of our common stock
at a weighted average cost of $16.84 per share for an aggregate
amount of approximately $54.4 million. For additional
information, see Liquidity below.
Americas
Segment Results of Operations Comparison of Results
for the Three Months Ended March 31, 2011 vs. Results for
the Three Months Ended March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
Increase
|
|
|
|
March 31,
|
|
|
(Decrease)
|
|
|
|
2011
|
|
|
2010
|
|
|
2011 vs 2010
|
|
|
|
(Unaudited, in thousands)
|
|
|
Waste and service revenues
|
|
$
|
250,917
|
|
|
$
|
241,063
|
|
|
$
|
9,854
|
|
Electricity and steam sales
|
|
|
88,431
|
|
|
|
95,409
|
|
|
|
(6,978
|
)
|
Other operating revenues
|
|
|
27,213
|
|
|
|
20,815
|
|
|
|
6,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
366,561
|
|
|
|
357,287
|
|
|
|
9,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plant operating expenses
|
|
|
263,709
|
|
|
|
257,182
|
|
|
|
6,527
|
|
Other operating expenses
|
|
|
23,425
|
|
|
|
20,614
|
|
|
|
2,811
|
|
General and administrative expenses
|
|
|
18,025
|
|
|
|
19,461
|
|
|
|
(1,436
|
)
|
Depreciation and amortization expense
|
|
|
46,907
|
|
|
|
48,021
|
|
|
|
(1,114
|
)
|
Net interest expense on project debt
|
|
|
7,963
|
|
|
|
10,282
|
|
|
|
(2,319
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
360,029
|
|
|
|
355,560
|
|
|
|
4,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
6,532
|
|
|
$
|
1,727
|
|
|
|
4,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenues
Operating revenues for the Americas segment increased by
$9.3 million.
|
|
|
|
|
Revenues increased by $5.9 million primarily due to
increases in service fee contract escalations, a full quarter
operating the Dade facility and tip fee price increases.
|
|
|
Recycled metal revenues increased by $4.0 million primarily
due to higher pricing. Historically, we have experienced
volatile prices for recycled metal which has affected our
recycled metal revenue as reflected in the table below (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
Quarters Ended
|
|
Total Recycled Metal Revenues
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
March 31,
|
|
$
|
16.6
|
|
|
$
|
12.6
|
|
|
$
|
5.2
|
|
June 30,
|
|
|
|
|
|
|
14.8
|
|
|
|
5.8
|
|
September 30,
|
|
|
|
|
|
|
13.3
|
|
|
|
9.1
|
|
December 31,
|
|
|
|
|
|
|
13.9
|
|
|
|
9.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total for the Year Ended December 31,
|
|
$
|
N/A
|
|
|
$
|
54.6
|
|
|
$
|
29.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electricity and steam sales decreased by $7.0 million due
to lower production of which $5 million related to
economically dispatching some of our biomass facilities and
lower pricing.
|
|
|
Other operating revenues increased primarily due to increased
construction revenue related to the Honolulu expansion project.
|
Operating
Expenses
Plant operating expenses increased by $6.5 million
primarily due to normal cost escalations, a full quarter
operating the Dade facility and higher fuel related costs,
partially offset by lower costs of which $5 million related
to some biomass facilities being economically dispatched
off-line and higher alternative fuel tax credits.
Other operating expenses increased primarily due to increased
construction expense related to the Honolulu expansion project.
General and administrative expenses decreased primarily due to
lower growth spending.
Net interest expense on project debt decreased due to lower
project debt balances.
37
Operating
Income
Operating income increased by $4.8 million primarily due to
higher recycled metal revenues.
Supplementary
Financial Information Adjusted Earnings Per Share
(Adjusted EPS)
(Non-GAAP Discussion)
We use a number of different financial measures, both United
States generally accepted accounting principles
(GAAP) and non-GAAP, in assessing the overall
performance of our business. To supplement our results prepared
in accordance with GAAP, we use the measure of Adjusted EPS,
which is a non-GAAP measure as defined by the Securities and
Exchange Commission (SEC). The non-GAAP financial
measure of Adjusted EPS is not intended as a substitute or as an
alternative to diluted earnings (loss) per share as an indicator
of our performance or any other measure of performance derived
in accordance with GAAP. In addition, our non-GAAP financial
measures may be different from non-GAAP measures used by other
companies, limiting their usefulness for comparison purposes.
Adjusted EPS excludes certain income and expense items that are
not representative of our ongoing business and operations, which
are included in the calculation of diluted earnings (loss) per
share in accordance with GAAP. The following items are not
all-inclusive, but are examples of reconciling items in prior
comparative and future periods. They would include write-down of
assets, the effect of derivative instruments not designated as
hedging instruments, significant gains or losses from the
disposition of businesses, gains and losses on assets held for
sale, transaction-related costs, income and loss on the
extinguishment of debt and other significant items that would
not be representative of our ongoing business.
We use the non-GAAP measure of Adjusted EPS to enhance the
usefulness of our financial information by providing a measure
which management internally uses to assess and evaluate the
overall performance and highlight trends in the ongoing business.
In order to provide a meaningful basis for comparison, we are
providing information with respect to our Adjusted EPS for the
three months ended March 31, 2011 and 2010, reconciled for
each such period to diluted earnings (loss) per share from
continuing operations, which is believed to be the most directly
comparable measure under GAAP (in thousands, except per share
amounts and percentages):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Diluted Loss Per Share from Continuing Operations
|
|
|
$ (0.09
|
)
|
|
$
|
(0.10
|
)
|
Reconciling Items
(A)
|
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
Adjusted EPS
|
|
$
|
(0.10
|
)
|
|
$
|
(0.11
|
)
|
|
|
|
|
|
|
|
|
|
(A) Additional information is provided in the
Reconciling Items table below.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
Reconciling Items
|
|
2011
|
|
|
2010
|
|
Loss on extinguishment of debt
|
|
$
|
356
|
|
|
$
|
|
|
Effect on income of derivative instruments not designated as
hedging instruments
|
|
|
(1,275
|
)
|
|
|
(1,923
|
)
|
Transaction-related costs
|
|
|
|
|
|
|
235
|
|
|
|
|
|
|
|
|
|
|
Total reconciling items, pre-tax
|
|
|
(919
|
)
|
|
|
(1,688
|
)
|
Income tax impact
|
|
|
372
|
|
|
|
633
|
|
Grantor trust activity
|
|
|
(522
|
)
|
|
|
(410
|
)
|
|
|
|
|
|
|
|
|
|
Total reconciling items, net of tax
|
|
$
|
(1,069
|
)
|
|
$
|
(1,465
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Loss Per Share Impact
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
Weighted Average Diluted Shares Outstanding
|
|
|
146,859
|
|
|
|
153,894
|
|
|
|
|
|
|
|
|
|
|
Supplementary
Financial Information Adjusted EBITDA
(Non-GAAP Discussion)
To supplement our results prepared in accordance with GAAP, we
use the measure of Adjusted EBITDA, which is a non-GAAP measure
as defined by the SEC. This non-GAAP financial measure is
described below, and is not intended as a substitute and should
not be considered in isolation from measures of financial
performance prepared in accordance with
38
GAAP. In addition, our use of non-GAAP financial measures may be
different from non-GAAP measures used by other companies,
limiting their usefulness for comparison purposes. The
presentation of Adjusted EBITDA is intended to enhance the
usefulness of our financial information by providing a measure
which management internally uses to assess and evaluate the
overall performance of its business and those of possible
acquisition candidates, and highlight trends in the overall
business.
We use Adjusted EBITDA to provide further information that is
useful to an understanding of the financial covenants contained
in the credit facilities of our most significant subsidiary,
Covanta Energy, through which we conduct our core waste and
energy services business, and as additional ways of viewing
aspects of its operations that, when viewed with the GAAP
results and the accompanying reconciliations to corresponding
GAAP financial measures, provide a more complete understanding
of our core business. The calculation of Adjusted EBITDA is
based on the definition in Covanta Energys credit
facilities as described below under Liquidity and Capital
Resources, which we have guaranteed. Adjusted EBITDA is
defined as earnings before interest, taxes, depreciation and
amortization, as adjusted for additional items subtracted from
or added to net income. Because our business is substantially
comprised of that of Covanta Energy, our financial performance
is substantially similar to that of Covanta Energy. For this
reason, and in order to avoid use of multiple financial measures
which are not all from the same entity, the calculation of
Adjusted EBITDA and other financial measures presented herein
are measured on a consolidated basis for continuing operations.
Under these credit facilities, Covanta Energy is required to
satisfy certain financial covenants, including certain ratios of
which Adjusted EBITDA is an important component. Compliance with
such financial covenants is expected to be the principal
limiting factor which will affect our ability to engage in a
broad range of activities in furtherance of our business,
including making certain investments, acquiring businesses and
incurring additional debt. Covanta Energy was in compliance with
these covenants as of March 31, 2011. Failure to comply
with such financial covenants could result in a default under
these credit facilities, which default would have a material
adverse affect on our financial condition and liquidity.
Adjusted EBITDA should not be considered as an alternative to
net income or cash flow provided by operating activities as
indicators of our performance or liquidity or any other measures
of performance or liquidity derived in accordance with GAAP.
In order to provide a meaningful basis for comparison, we are
providing information with respect to our Adjusted EBITDA for
the three months ended March 31, 2011 and 2010, reconciled
for each such period to net loss from continuing operations and
cash flow provided by operating activities from continuing
operations, which are believed to be the most directly
comparable measures under GAAP.
The following is a reconciliation of net income to Continuing
Operations - Adjusted EBITDA (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2010
|
|
Net Loss Attributable to Covanta Holding Corporation
Continuing Operations
|
|
$
|
(13,641
|
)
|
|
$
|
(16,013
|
)
|
Depreciation and amortization expense
|
|
|
47,365
|
|
|
|
48,438
|
|
Debt service:
|
|
|
|
|
|
|
|
|
Net interest expense on project debt
|
|
|
7,963
|
|
|
|
10,282
|
|
Interest expense
|
|
|
16,761
|
|
|
|
10,586
|
|
Non-cash convertible debt related expense
|
|
|
5,160
|
|
|
|
8,247
|
|
Investment income
|
|
|
(261
|
)
|
|
|
(223
|
)
|
|
|
|
|
|
|
|
|
|
Subtotal debt service
|
|
|
29,623
|
|
|
|
28,892
|
|
Income tax benefit
|
|
|
(9,986
|
)
|
|
|
(9,882
|
)
|
Net income attributable to noncontrolling interests in
subsidiaries
|
|
|
92
|
|
|
|
1,562
|
|
Loss on extinguishment of debt
|
|
|
356
|
|
|
|
|
|
Other adjustments:
|
|
|
|
|
|
|
|
|
Debt service billing in excess of revenue recognized
(A)
|
|
|
11,265
|
|
|
|
10,803
|
|
Non-cash compensation expense
|
|
|
4,569
|
|
|
|
3,500
|
|
Transaction-related costs
(B)
|
|
|
|
|
|
|
235
|
|
Other non-cash expenses
(C)
|
|
|
1,639
|
|
|
|
1,137
|
|
|
|
|
|
|
|
|
|
|
Subtotal other adjustments
|
|
|
17,473
|
|
|
|
15,675
|
|
Total adjustments
|
|
|
84,923
|
|
|
|
84,685
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations - Adjusted EBITDA
|
|
$
|
71,282
|
|
|
$
|
68,672
|
|
|
|
|
|
|
|
|
|
|
39
|
|
|
(A) |
|
Formally labeled Decrease in Unbilled Service
Receivables. This amount represents a true-up between
(a) revenue recognized in the period for client payments of
project debt principal under service fee contract structures,
which is accounted for on a straight-line basis over the term of
the project debt, and (b) actual billings to clients for
debt principal payments in the period. As result of this
adjustment, Adjusted EBITDA reflects the actual amounts billed
to clients for debt service principal, not the straight-lined
revenue as recognized. |
|
(B) |
|
In 2010, this amount relates primarily to transaction costs
associated with the acquisition of Veolia energy-from-waste
businesses. |
|
(C) |
|
Includes certain non-cash items that are added back under the
definition of Adjusted EBITDA in Covanta Energys credit
agreement. |
The following is a reconciliation of cash flow provided by
operating activities from continuing operations to Adjusted
EBITDA (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2010
|
|
Cash flow provided by operating activities from continuing
operations
|
|
$
|
93,448
|
|
|
$
|
115,679
|
|
|
|
|
|
|
|
|
|
|
Debt service
|
|
|
29,623
|
|
|
|
28,892
|
|
|
|
|
|
|
|
|
|
|
Change in working capital
|
|
|
(71,186
|
)
|
|
|
(88,767
|
)
|
Change in restricted funds held in trust
|
|
|
14,748
|
|
|
|
12,027
|
|
Non-cash convertible debt related expense
|
|
|
(5,160
|
)
|
|
|
(8,247
|
)
|
Amortization of debt premium and deferred financing costs
|
|
|
(134
|
)
|
|
|
169
|
|
Equity in net income from unconsolidated investments
|
|
|
123
|
|
|
|
(1,342
|
)
|
Dividends from unconsolidated investments
|
|
|
(4,410
|
)
|
|
|
(447
|
)
|
Current tax provision
|
|
|
(534
|
)
|
|
|
(1,341
|
)
|
Other
|
|
|
14,764
|
|
|
|
12,049
|
|
|
|
|
|
|
|
|
|
|
Sub-total:
|
|
|
(51,789
|
)
|
|
|
(75,899
|
)
|
|
|
|
|
|
|
|
|
|
Continuing Operations - Adjusted EBITDA
|
|
$
|
71,282
|
|
|
$
|
68,672
|
|
|
|
|
|
|
|
|
|
|
For additional discussion related to managements use of
non-GAAP measures, see Liquidity and Capital
Resources Supplementary Financial
Information Free Cash Flow
(Non-GAAP Discussion) below.
LIQUIDITY
AND CAPITAL RESOURCES
We generate substantial cash flow from our ongoing business,
which we believe will allow us to meet our liquidity needs. As
of March 31, 2011, in addition to our ongoing cash flow, we
had access to several sources of liquidity, as discussed in
Available Sources of Liquidity below, including our
existing cash on hand of $326.6 million and the undrawn and
available capacity of $300 million of our Revolving Credit
Facility. In addition, we had restricted cash of
$204.3 million, of which $111.2 million was designated
for future payment of project debt principal.
We derive our cash flows principally from our operations, which
allow us to satisfy project debt covenants and payments and
distribute cash. We typically receive cash distributions from
our Americas segment projects on either a monthly or quarterly
basis, whereas a material portion of cash from our international
projects is received semi-annually, during the second and fourth
quarters. The frequency and predictability of our receipt of
cash from projects differs, depending upon various factors,
including whether restrictions on distributions exist in
applicable project debt arrangements, whether a project is
domestic or international, and whether a project has been able
to operate at historical levels of production.
Our primary future cash requirements will be to fund capital
expenditures to maintain our existing businesses, make debt
service payments, grow our business through acquisitions and
business development, and return surplus capital to
shareholders. We will also seek to enhance our cash flow from
renewals or replacement of existing contracts, from new
contracts to expand existing facilities or operate additional
facilities and by investing in new projects. Our business is
capital intensive because it is based upon building and
operating municipal solid waste processing and energy generating
projects. In order to provide meaningful growth through
development, we must be able to invest our funds, obtain equity
and/or debt
financing, and provide support to our operating subsidiaries.
The timing and scale of our investment activity in growth
opportunities is often unpredictable and uneven. We plan to
allocate capital to maximize shareholder value by
40
investing in high value core business development projects and
strategic acquisitions when available, and by returning surplus
capital to shareholders. See Overview Growth and
Development above.
On March 14, 2011, the Board of Directors approved a
regular cash dividend of $0.075 per share. The dividend was paid
on April 12, 2011 to stockholders of record as of the close
of business on March 30, 2011. In addition, pursuant to our
Equity Plan, holders of unvested shares of restricted stock
received a dividend in the form of additional restricted stock
awards with the same vesting conditions as the underlying shares
of restricted stock to which they relate.
On March 14, 2011, the Board of Directors approved an
additional $50 million of share repurchase authorization,
bringing the total authorized amount to $200 million. Under
the program, common stock repurchases may be made in the open
market, in privately negotiated transactions from time to time,
or by other available methods, at managements discretion
in accordance with applicable federal securities laws. The
timing and amounts of any repurchases will depend on many
factors, including our capital structure, the market price of
our common stock and overall market conditions. During the three
months ended March 31, 2011, we repurchased
3.2 million shares of our common stock at a weighted
average cost of $16.84 per share for an aggregate amount of
approximately $54.4 million. As of March 31, 2011, the
amount remaining under our currently authorized share repurchase
program was $50.4 million.
Sources
and Uses of Cash Flow from Continuing Operations for the Three
Months Ended March 31, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Increase
|
|
|
|
Ended March 31,
|
|
|
(Decrease)
|
|
|
|
2011
|
|
|
2010
|
|
|
2011 vs 2010
|
|
|
|
(Unaudited, in thousands)
|
|
Net cash provided by operating activities
|
|
$
|
93,448
|
|
|
$
|
115,679
|
|
|
$
|
(22,231
|
)
|
Net cash used in investing activities
|
|
|
(33,836
|
)
|
|
|
(184,193
|
)
|
|
|
(150,357
|
)
|
Net cash used in financing activities
|
|
|
(93,960
|
)
|
|
|
(32,695
|
)
|
|
|
61,265
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
1,506
|
|
|
|
(331
|
)
|
|
|
1,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
$
|
(32,842
|
)
|
|
$
|
(101,540
|
)
|
|
|
(68,698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities from continuing
operations for the three months ended March 31, 2011 was
$93.4 million, a decrease of $22.2 million from the
prior year period. The decrease was primarily due to the timing
of working capital.
Net cash used in investing activities from continuing operations
for the three months ended March 31, 2011 was
$33.8 million, a decrease of $150.4 million from the
prior year period. The decrease was primarily comprised of lower
cash outflows of $128.3 million related to the acquisition
of the Dade energy-from-waste facility in the first quarter of
2010.
Net cash used in financing activities from continuing operations
for the three months ended March 31, 2011 was
$94.0 million, a net change of $61.3 million. Net cash
used in financing activities from continuing operations for the
three months ended March 31, 2011 was primarily due to the
repurchase of common stock of $54.4 million and
$5.9 million paid to purchase outstanding Debentures in
connection with the tender offer.
Supplementary
Financial Information Free Cash Flow
(Non-GAAP Discussion)
To supplement our results prepared in accordance with GAAP, we
use the measure of Free Cash Flow, which is a non-GAAP measure
as defined by the SEC. This non-GAAP financial measure is not
intended as a substitute and should not be considered in
isolation from measures of liquidity prepared in accordance with
GAAP. In addition, our use of Free Cash Flow may be different
from similarly identified non-GAAP measures used by other
companies, limiting their usefulness for comparison purposes.
The presentation of Free Cash Flow is intended to enhance the
usefulness of our financial information by providing measures
which management internally uses to assess and evaluate the
overall performance of its business and those of possible
acquisition candidates, and highlight trends in the overall
business.
We use the non-GAAP measure of Free Cash Flow as a criterion of
liquidity and performance-based components of employee
compensation. Free Cash Flow is defined as cash flow provided by
operating activities from continuing operations less maintenance
capital expenditures, which are capital expenditures primarily
to maintain our existing facilities. We use the non-GAAP measure
of Free Cash Flow as a criterion of liquidity and
performance-based components of employee compensation. We use
Free Cash Flow as a measure of liquidity to determine amounts we
can reinvest in our businesses, such as amounts available to
make acquisitions, invest in construction of new projects or
41
make principal payments on debt. For additional discussion
related to managements use of non-GAAP measures, see
Results of Operations Supplementary Financial
Information Adjusted EBITDA
(Non-GAAP Discussion) above.
In order to provide a meaningful basis for comparison, we are
providing information with respect to our Free Cash Flow for the
three months ended March 31, 2011 and 2010, reconciled for
each such periods to cash flow provided by operating activities
from continuing operations, which we believe to be the most
directly comparable measure under GAAP.
The following is a summary of Free Cash Flow and its primary
uses (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2010
|
|
Cash flow provided by operating activities of continuing
operations
|
|
$
|
93,448
|
|
|
$
|
115,679
|
|
Less: Maintenance capital expenditures (A)
|
|
|
(27,197
|
)
|
|
|
(32,539
|
)
|
|
|
|
|
|
|
|
|
|
Continuing Operations Free Cash Flow
|
|
$
|
66,251
|
|
|
$
|
83,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Uses of Continuing Operations Free Cash Flow
|
|
|
|
|
|
|
|
|
Free Cash Flow (Continuing Operations)
|
|
$
|
66,251
|
|
|
$
|
83,140
|
|
Net cash used for scheduled principal payments of project debt
(B)
|
|
|
(30,812
|
)
|
|
|
(31,724
|
)
|
Net cash used for scheduled principal payments of long-term debt
|
|
|
(1,695
|
)
|
|
|
(1,857
|
)
|
Distributions to partners of noncontrolling interests in
subsidiaries
|
|
|
(1,534
|
)
|
|
|
(1,402
|
)
|
|
|
|
|
|
|
|
|
|
Free cash flow available after scheduled payments:
|
|
$
|
32,210
|
|
|
$
|
48,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Sources and Uses Cash
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
Acquisition of businesses, net of cash acquired
|
|
$
|
|
|
|
$
|
(128,254
|
)
|
Non-maintenance capital expenditures
|
|
|
(11,095
|
)
|
|
|
(5,378
|
)
|
Acquisition of noncontrolling interests in subsidiary
|
|
|
|
|
|
|
(2,000
|
)
|
Other investment activities, net (C)
|
|
|
4,456
|
|
|
|
(16,021
|
)
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
(6,639
|
)
|
|
$
|
(151,653
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return of capital to stockholders:
|
|
|
|
|
|
|
|
|
Common stock repurchased
|
|
$
|
(54,371
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Total return of capital to stockholders
|
|
$
|
(54,371
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital raising activities:
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of project debt
|
|
$
|
2,169
|
|
|
$
|
|
|
Other financing activities, net
|
|
|
(1,741
|
)
|
|
|
5,487
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from capital raising activities
|
|
$
|
428
|
|
|
$
|
5,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optional debt repayments:
|
|
|
|
|
|
|
|
|
Optional repayment of corporate debt
|
|
$
|
(5,883
|
)
|
|
$
|
|
|
Fees incurred for debt redemption
|
|
|
(93
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total optional debt repayments
|
|
$
|
(5,976
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowing activities:
|
|
|
|
|
|
|
|
|
Financing of insurance premiums, net
|
|
$
|
|
|
|
$
|
(3,200
|
)
|
|
|
|
|
|
|
|
|
|
Short-term borrowing activities, net
|
|
$
|
|
|
|
$
|
(3,200
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
$
|
1,506
|
|
|
$
|
(331
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents from continuing
operations
|
|
$
|
(32,842
|
)
|
|
$
|
(101,540
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Purchases of property, plant and equipment is also referred to
as capital expenditures. Capital expenditures that primarily
maintain existing facilities are classified as maintenance
capital expenditures. The following table provides the
components of total purchases of property, plant and equipment: |
|
|
|
|
|
|
|
|
|
Maintenance capital expenditures
|
|
$
|
(27,197
|
)
|
|
$
|
(32,539
|
)
|
Capital expenditures associated with project
construction/development
|
|
|
(2,682
|
)
|
|
|
(2,862
|
)
|
Capital expenditures associated with technology development
|
|
|
(2,150
|
)
|
|
|
(1,720
|
)
|
Capital expenditures - other
|
|
|
(6,263
|
)
|
|
|
(796
|
)
|
|
|
|
|
|
|
|
|
|
Total purchases of property, plant and equipment
|
|
$
|
(38,292
|
)
|
|
$
|
(37,917
|
)
|
|
|
|
|
|
|
|
|
|
42
|
|
|
(B) |
|
Calculated as follows: |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2010
|
|
Total principal payments on project debt
|
|
$
|
(74,471
|
)
|
|
$
|
(43,107
|
)
|
Decrease in related restricted funds held in trust
|
|
|
43,659
|
|
|
|
11,383
|
|
|
|
|
|
|
|
|
|
|
Net cash used for principal payments on project debt
|
|
$
|
(30,812
|
)
|
|
$
|
(31,724
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(C) |
|
For the three months ended March 31, 2011 and 2010, other
investing activities was primarily comprised of net payments
from the purchase/sale of investment securities and business
development expenses. |
Available
Sources of Liquidity
Cash
and Cash Equivalents
Cash and cash equivalents include all cash balances and highly
liquid investments having maturities of three months or less
from the date of purchase. These short-term investments are
stated at cost, which approximates market value. As of
March 31, 2011, we had unrestricted cash and cash
equivalents of $326.6 million (of which approximately
$290.4 million and $8.8 million was held by our
international and insurance subsidiaries, respectively). Of the
cash balance held internationally, we plan to repatriate at
least $100 million in a tax efficient manner and hold
remaining funds off-shore with the intention of reinvesting them
into the international business.
Short-Term
Liquidity
We have credit facilities which are comprised of a
$300 million revolving credit facility (the Revolving
Credit Facility), a $320 million funded letter of
credit facility (the Funded L/C Facility), and a
$650 million term loan (the Term Loan Facility)
(collectively referred to as the Credit Facilities).
As of March 31, 2011, we had available credit for liquidity
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
Outstanding Letters
|
|
|
|
|
|
|
Available
|
|
|
|
|
|
of Credit as of
|
|
|
Available as of
|
|
|
|
Under Facility
|
|
|
Maturing
|
|
|
March 31, 2011
|
|
|
March 31, 2011
|
|
|
Revolving Credit Facility(1)
|
|
$
|
300,000
|
|
|
|
2013
|
|
|
$
|
|
|
|
$
|
300,000
|
|
Funded L/C Facility
|
|
$
|
320,000
|
|
|
|
2014
|
|
|
$
|
286,239
|
|
|
$
|
33,761
|
|
|
|
|
(1) |
|
Up to $200 million of which may be utilized for letters of
credit. |
Credit
Agreement Financial Covenants
The loan documentation under the Credit Facilities contains
customary affirmative and negative covenants and financial
covenants as discussed in Note 12. Long-Term Debt of the
Notes to the Consolidated Financial Statements included in our
Form 10-K.
As of March 31, 2011, we were in compliance with the
covenants under the Credit Facilities. The maximum Covanta
Energy capital expenditures that can be incurred in 2011 to
maintain existing operating businesses is approximately
$230 million as of March 31, 2011.
43
Long-Term
Debt
Long-term debt is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
7.25% Senior Notes due 2020
|
|
$
|
400,000
|
|
|
$
|
400,000
|
|
|
|
|
|
|
|
|
|
|
3.25% Cash Convertible Senior Notes due 2014
|
|
|
460,000
|
|
|
|
460,000
|
|
Debt discount related to Cash Convertible Senior Notes
|
|
|
(85,552
|
)
|
|
|
(91,212
|
)
|
Cash conversion option derivative at fair value
|
|
|
105,482
|
|
|
|
115,994
|
|
|
|
|
|
|
|
|
|
|
3.25% Cash Convertible Senior Notes, net
|
|
|
479,930
|
|
|
|
484,782
|
|
|
|
|
|
|
|
|
|
|
1.00% Senior Convertible Debentures due 2027
|
|
|
51,362
|
|
|
|
57,289
|
|
Debt discount related to Convertible Debentures
|
|
|
(2,588
|
)
|
|
|
(3,720
|
)
|
|
|
|
|
|
|
|
|
|
1.00% Senior Convertible Debentures, net
|
|
|
48,774
|
|
|
|
53,569
|
|
|
|
|
|
|
|
|
|
|
Term Loan Facility due 2014
|
|
|
624,000
|
|
|
|
625,625
|
|
Other long-term debt
|
|
|
364
|
|
|
|
435
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,553,068
|
|
|
|
1,564,411
|
|
Less: current portion
|
|
|
(55,489
|
)
|
|
|
(6,710
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
1,497,579
|
|
|
$
|
1,557,701
|
|
|
|
|
|
|
|
|
|
|
7.25% Senior
Notes due 2020 (the 7.25% Notes)
For specific criteria related to redemption features of the
7.25% Notes, refer to Note 12 of the Notes to
Consolidated Financial Statements in our
Form 10-K.
3.25%
Cash Convertible Senior Notes due 2014 (the
3.25% Notes)
Under limited circumstances, the 3.25% Notes are
convertible by the holders thereof into cash only, based on a
conversion rate of 59.1871 shares of our common stock per
$1,000 principal amount of 3.25% Notes (which represents a
conversion price of approximately $16.90 per share) subject to
certain customary adjustments as provided in the indenture for
the 3.25% Notes. We will not deliver common stock (or any
other securities) upon conversion under any circumstances.
For specific criteria related to contingent interest, conversion
or redemption features of the 3.25% Notes and details
related to the cash conversion option, cash convertible note
hedge and warrants related to the 3.25% Notes, refer to
Note 12 of the Notes to Consolidated Financial Statements
in our
Form 10-K.
For details related to the fair value for the contingent
interest feature, cash conversion option, and cash convertible
note hedge related to the 3.25% Notes, see Note 13.
Derivative Instruments.
1.00% Senior
Convertible Debentures due 2027 (the
Debentures)
In November 2010, we commenced a tender offer to purchase for
cash any and all of our outstanding 1.00% Senior
Convertible Debentures due 2027. We offered to purchase the
Debentures at a purchase price of $990 for each $1,000 principal
amount of Debentures. During the three months ended
March 31, 2011, an additional $5.9 million of the
Debentures were purchased for which we recorded a loss on
extinguishment of debt of $0.4 million, pre-tax. The loss
on extinguishment of debt was comprised of the difference
between the fair value and carrying value of the liability
component of the Debentures tendered. As of March 31, 2011,
there were $51.4 million aggregate principal amount of the
Debentures outstanding. We may purchase Debentures that remained
outstanding following termination or expiration of the tender
offer in the open market, in privately negotiated transactions,
through tender offers, exchange offers, by redemption or
otherwise.
Under limited circumstances, prior to February 1, 2025, the
Debentures are convertible by the holders into cash and shares
of our common stock, if any, based on a conversion rate of
38.9883 shares of our common stock per $1,000 principal
amount of Debentures, (which represents a conversion price of
approximately $25.65 per share) or 2,002,517 issuable
shares. As of March 31, 2011, if the Debentures were
converted, no shares would have been issued since the trading
price of our common stock was below the conversion price of the
Debentures.
44
For specific criteria related to contingent interest, conversion
or redemption features of the Debentures, refer to Note 12
of the Notes to Consolidated Financial Statements in our
Form 10-K.
For details related to the fair value for the contingent
interest feature related to the Debentures, see Item 1.
Financial Statements Note 13. Derivative
Instruments.
Project
Debt
Americas
Project Debt
Financing for the energy-from-waste projects is generally
accomplished through tax-exempt and taxable municipal revenue
bonds issued by or on behalf of the municipal client. For such
facilities that are owned by a subsidiary of ours, the municipal
issuers of the bond loans the bond proceeds to our subsidiary to
pay for facility construction. For such facilities,
project-related debt is included as Project debt
(short- and long-term) in our condensed consolidated financial
statements. Generally, such project debt is secured by the
revenues generated by the project and other project assets
including the related facility. The only potential recourse to
us with respect to project debt arises under the operating
performance guarantees described below under Other
Commitments. Certain subsidiaries had recourse liability for
project debt which is recourse to our subsidiary Covanta ARC
LLC, but is non-recourse to us, which as of March 31, 2011
aggregated to $208.5 million.
Project
Debt - Other
Financing for projects in which we have an ownership or
operating interest is generally accomplished through commercial
loans from local lenders or financing arranged through
international banks, bonds issued to institutional investors and
from multilateral lending institutions based in the United
States. Such debt is generally secured by the revenues generated
by the project and other project assets and is without recourse
to us. In most projects, the instruments defining the rights of
debt holders generally provide that the project subsidiary may
not make distributions to its parent until periodic debt service
obligations are satisfied and other financial covenants are
complied with.
Restricted
Funds Held in Trust
Restricted funds held in trust are primarily amounts received by
third-party trustees relating to certain projects we own which
may be used only for specified purposes. We generally do not
control these accounts. They primarily include debt service
reserves for payment of principal and interest on project debt,
and deposits of revenues received with respect to projects prior
to their disbursement, as provided in the relevant indenture or
other agreements. Such funds are invested principally in money
market funds, bank deposits and certificates of deposit, United
States treasury bills and notes, and United States government
agency securities. Restricted fund balances are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
|
Current
|
|
|
Noncurrent
|
|
|
Current
|
|
|
Noncurrent
|
|
Debt service funds - principal
|
|
$
|
38,733
|
|
|
$
|
72,446
|
|
|
$
|
84,569
|
|
|
$
|
72,396
|
|
Debt service funds - interest
|
|
|
7,229
|
|
|
|
|
|
|
|
5,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt service funds
|
|
|
45,962
|
|
|
|
72,446
|
|
|
|
90,338
|
|
|
|
72,396
|
|
Revenue funds
|
|
|
24,844
|
|
|
|
|
|
|
|
17,522
|
|
|
|
|
|
Other funds
|
|
|
25,941
|
|
|
|
35,134
|
|
|
|
17,708
|
|
|
|
35,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
96,747
|
|
|
$
|
107,580
|
|
|
$
|
125,568
|
|
|
$
|
107,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the $204.3 million in total restricted funds as of
March 31, 2011, approximately $111.2 million was
designated for future payment of project debt principal.
Capital
Requirements
Our projected contractual obligations are consistent with
amounts disclosed in our Annual Report on
Form 10-K
for the year ended December 31, 2010. We believe that when
combined with our other sources of liquidity, including our
existing cash on hand and the Revolving Credit Facility, we will
generate sufficient cash over at least the next twelve months to
meet operational needs, make capital expenditures, invest in the
business and service debt due.
45
Other
Commitments
Other commitments as of March 31, 2011 were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments Expiring by Period
|
|
|
|
|
|
|
Less Than
|
|
|
More Than
|
|
|
|
Total
|
|
|
One Year
|
|
|
One Year
|
|
Letters of credit
|
|
$
|
286,239
|
|
|
$
|
8,270
|
|
|
$
|
277,969
|
|
Surety bonds
|
|
|
85,889
|
|
|
|
|
|
|
|
85,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other commitments net
|
|
$
|
372,128
|
|
|
$
|
8,270
|
|
|
$
|
363,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The letters of credit were issued under various credit
facilities (primarily the Funded L/C Facility) to secure our
performance under various contractual undertakings related to
our projects, or to secure obligations under our insurance
program. Each letter of credit relating to a project is required
to be maintained in effect for the period specified in related
project contracts, and generally may be drawn if it is not
renewed prior to expiration of that period.
We believe that we will be able to fully perform under our
contracts to which these existing letters of credit relate, and
that it is unlikely that letters of credit would be drawn
because of a default of our performance obligations. If any of
these letters of credit were to be drawn by the beneficiary, the
amount drawn would be immediately repayable by us to the issuing
bank. If we do not immediately repay such amounts drawn under
these letters of credit, unreimbursed amounts would be treated
under the Credit Facilities as additional term loans in the case
of letters of credit issued under the Funded L/C Facility, or as
revolving loans in the case of letters of credit issued under
the Revolving Credit Facility.
The surety bonds listed on the table above relate primarily to
performance obligations ($74.8 million) and support for
closure obligations of various energy projects when such
projects cease operating ($11.1 million). Were these bonds
to be drawn upon, we would have a contractual obligation to
indemnify the surety company.
We have certain contingent obligations related to the
7.25% Notes and the 3.25% Notes. These arise as
follows:
|
|
|
|
|
holders may require us to repurchase their 7.25% Notes and
their 3.25% Notes if a fundamental change occurs; and
|
|
|
holders may exercise their conversion rights upon the occurrence
of certain events, which would require us to pay the conversion
settlement amount in cash.
|
We have certain contingent obligations related to the
Debentures. These arise as follows:
|
|
|
|
|
holders may require us to repurchase their Debentures on
February 1, 2012, February 1, 2017 and
February 1, 2022;
|
|
|
holders may require us to repurchase their Debentures if a
fundamental change occurs; and
|
|
|
holders may exercise their conversion rights upon the occurrence
of certain events, which would require us to pay the conversion
settlement amount in cash
and/or our
common stock.
|
For specific criteria related to contingent interest, conversion
or redemption features of the Debentures, refer to Note 12
of the Notes to Consolidated Financial Statements in our
Form 10-K
for the year ended December 31, 2010.
We have issued or are party to guarantees and related
contractual support obligations undertaken pursuant to
agreements to construct and operate waste and energy facilities.
For some projects, such performance guarantees include
obligations to repay certain financial obligations if the
project revenues are insufficient to do so, or to obtain or
guarantee financing for a project. With respect to our
businesses, we have issued guarantees to municipal clients and
other parties that our subsidiaries will perform in accordance
with contractual terms, including, where required, the payment
of damages or other obligations. Additionally, damages payable
under such guarantees for our energy-from-waste facilities could
expose us to recourse liability on project debt. If we must
perform under one or more of such guarantees, our liability for
damages upon contract termination would be reduced by funds held
in trust and proceeds from sales of the facilities securing the
project debt and is presently not estimable. Depending upon the
circumstances giving rise to such damages, the contractual terms
of the applicable contracts, and the contract
counterpartys choice of remedy at the time a claim against
a guarantee is made, the amounts owed pursuant to one or more of
such guarantees could be greater than our then-available sources
of funds. To date, we have not incurred material liabilities
under such guarantees.
46
Recent
Accounting Pronouncements
See Note 2. Recent Accounting Pronouncements of the Notes
to the Condensed Consolidated Financial Statements for
information related to new accounting pronouncements.
Discussion
of Critical Accounting Policies and Estimates
In preparing our condensed consolidated financial statements in
accordance with United States generally accepted accounting
principles, we are required to use judgment in making estimates
and assumptions that affect the amounts reported in our
financial statements and related Notes. We base our estimates on
historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. These
estimates form the basis for making judgments about the carrying
value of assets and liabilities that are not readily apparent
from other sources. Many of our critical accounting policies are
subject to significant judgments and uncertainties which could
potentially result in materially different results under
different conditions and assumptions. Future events rarely
develop exactly as forecast, and the best estimates routinely
require adjustment. Management believes there have been no
material changes during the three months ended March 31,
2011 to the items discussed in Discussion of Critical Accounting
Policies in Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations of our
Annual Report on
Form 10-K
for the year ended December 31, 2010.
|
|
Item 3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
In the normal course of business, our subsidiaries are party to
financial instruments that are subject to market risks arising
from changes in commodity prices, interest rates, foreign
currency exchange rates, and derivative instruments. Our use of
derivative instruments is very limited and we do not enter into
derivative instruments for trading purposes.
There have been no material changes during the three months
ended March 31, 2011 to the items discussed in
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk in our Annual Report on
Form 10-K
for the year ended December 31, 2010. For details related
to fair value estimates for the Cash Conversion Option, Note
Hedge and contingent interest as of March 31, 2011, refer
to Item 1. Financial Statements
Note 12. Financial Instruments and Note 13.
Derivative Instruments.
|
|
Item 4.
|
CONTROLS
AND PROCEDURES
|
Our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, has evaluated the
effectiveness of Covantas disclosure controls and
procedures, as required by
Rule 13a-15(b)
and
15d-15(b)
under the Securities Exchange Act of 1934 (the Exchange
Act) as of March 31, 2011. Our disclosure controls
and procedures are designed to reasonably assure that
information required to be disclosed by us in reports we file or
submit under the Exchange Act is accumulated and communicated to
our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions
regarding disclosure and is recorded, processed, summarized and
reported within the time periods specified in the Securities and
Exchange Commissions rules and forms.
Our Chief Executive Officer and Chief Financial Officer have
concluded that, based on their reviews, our disclosure controls
and procedures are effective to provide such reasonable
assurance.
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 consider
the benefits of controls relative to their costs. Inherent
limitations within a control system include the realities that
judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by unauthorized
override of the control. While the design of any system of
controls is to provide reasonable assurance of the effectiveness
of disclosure controls, such design is also based in part upon
certain assumptions about the likelihood of future events, and
such assumptions, while reasonable, may not take into account
all potential future conditions. Accordingly, because of the
inherent limitations in a cost effective control system,
misstatements due to error or fraud may occur and may not be
prevented or detected.
47
Changes
in Internal Control over Financial Reporting
There has not been any change in our system of internal control
over financial reporting during the fiscal quarter ended
March 31, 2011 that has materially affected, or is
reasonably likely to materially affect, internal control over
financial reporting.
PART II
OTHER INFORMATION
|
|
Item 1.
|
LEGAL
PROCEEDINGS
|
See Note 14. Commitments and Contingencies of the Notes to
the Condensed Consolidated Financial Statements.
There have been no material changes during the three months
ended March 31, 2011 to the risk factors discussed in
Item 1A. Risk Factors in our Annual Report on
Form 10-K
for the year ended December 31, 2010.
|
|
Item 2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
None.
|
|
Item 3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
None.
|
|
Item 4.
|
REMOVED
AND RESERVED
|
None
|
|
Item 5.
|
OTHER
INFORMATION
|
(a) None.
(b) Not applicable.
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
31.1
|
|
Certification pursuant to Section 302 of Sarbanes-Oxley Act
of 2002 by the Chief Executive Officer.
|
31.2
|
|
Certification pursuant to Section 302 of Sarbanes-Oxley Act
of 2002 by the Chief Financial Officer.
|
32
|
|
Certification of periodic financial report pursuant to
Section 906 of Sarbanes-Oxley Act of 2002 by the Chief
Executive Officer and Chief Financial Officer.
|
Exhibit 101.INS:
|
|
XBRL Instance Document*
|
Exhibit 101.SCH:
|
|
XBRL Taxonomy Extension Schema*
|
Exhibit 101.CAL:
|
|
XBRL Taxonomy Extension Calculation Linkbase*
|
Exhibit 101.DEF:
|
|
XBRL Taxonomy Extension Definition Document*
|
Exhibit 101.LAB:
|
|
XBRL Taxonomy Extension Labels Linkbase*
|
Exhibit 101.PRE:
|
|
XBRL Taxonomy Extension Presentation Linkbase*
|
|
|
|
* |
|
XBRL information is furnished, not filed. |
48
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
COVANTA HOLDING CORPORATION
(Registrant)
Sanjiv Khattri
Executive Vice President and Chief Financial Officer
Thomas E. Bucks
Vice President and Chief Accounting Officer
Date: April 20, 2011
49