Date: February 26, 2009
Source: Covanta Holding Corporation
Covanta Holding Corporation (NYSE: CVA) ("Covanta" or the "Company") reported financial results today for the three and twelve months ended
Fourth Quarter Results
For the three months ended
Operating Cash Flow was
Adjusted EBITDA was
Net income was
Full-Year 2008 Results
For the twelve months ended
Net income grew 7% to
Operating Cash Flow was
The Company used almost all of its Operating Cash Flow to invest in the business and to retire
"Looking ahead, the slow economy will put downward pressure on our key financial metrics, but we are in an excellent position to manage these difficult times. Our balance sheet is solid, we continue to generate substantial free cash flow and we are actively pursuing a good pipeline of growth opportunities. From a legislative perspective, the stimulus bill that became law last week extended production tax credits for renewable energy, including new Energy-from-Waste projects. Hopefully this momentum will carry over to a renewable energy bill that could spur tremendous growth for our industry," added Mr. Orlando.
2009 Guidance
The Company is establishing guidance for 2009 for the following key metrics:
Conference Call Information
Covanta will host a conference call at
A replay of the conference call will be available from
Additional Information
The Company's annual report on Form 10-K will be filed with the Securities and Exchange Commission on
About Covanta
Covanta Holding Corporation (NYSE: CVA), is an internationally recognized owner and operator of large-scale Energy-from-Waste and renewable energy projects and a recipient of the Energy Innovator Award from the U.S. Department of Energy's Office of Energy Efficiency and Renewable Energy. Covanta's 38 Energy-from-Waste facilities provide communities with an environmentally sound solution to their solid waste disposal needs by using that municipal solid waste to generate clean, renewable energy. Annually, Covanta's modern Energy-from-Waste facilities safely and securely convert approximately 16 million tons of waste into more than 8 million megawatt hours of clean renewable electricity and create 10 billion pounds of steam that are sold to a variety of industries. For more information, visit www.covantaholding.com.
Cautionary Note Regarding Forward-Looking Statements
Certain statements in this press release 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 and its subsidiaries, 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, those factors, risks and uncertainties that are described in periodic securities 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 forward-looking statements. Covanta's 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 press release 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.
Covanta Holding Corporation Exhibit 1
Consolidated Statements of Income
Three Months Twelve Months
Ended Ended
December 31, December 31,
------------ ------------
2008 2007 2008 2007
---- ---- ---- ----
(Unaudited) (Unaudited)
(In thousands, except per share amounts)
Operating revenues
Waste and service revenues $235,911 $235,357 $934,527 $864,396
Electricity and steam sales 159,898 134,712 660,616 498,877
Other operating revenues 18,011 25,319 69,110 69,814
------- ------- --------- ---------
Total operating revenues 413,820 395,388 1,664,253 1,433,087
------- ------- --------- ---------
Operating expenses
Plant operating
expenses (A) 256,089 212,118 999,674 801,560
Depreciation and
amortization expense 47,344 49,951 199,488 196,970
Net interest expense on
project debt 12,452 13,587 53,734 54,579
General and administrative
expenses 26,445 22,025 97,016 82,729
Insurance recoveries, net
of write-down of assets (A) (8,325) (4,925) (8,325) -
Other operating expenses 19,227 23,141 66,701 60,639
------- ------- --------- ---------
Total operating expenses 353,232 315,897 1,408,288 1,196,477
------- ------- --------- ---------
Operating income 60,588 79,491 255,965 236,610
------ ------ ------- -------
Other income (expense)
Investment income 1,505 1,612 5,717 10,578
Interest expense (10,928) (15,108) (46,804) (67,104)
Loss on extinguishment of
debt (B) - - - (32,071)
------ ------- ------- -------
Total other expenses (9,423) (13,496) (41,087) (88,597)
------ ------- ------- -------
Income before income tax
expense, minority
interests and equity in
net income from
unconsolidated
investments 51,165 65,995 214,878 148,013
Income tax expense (26,744) 3,374 (92,227) (31,040)
Minority interests 299 (3,112) (6,961) (8,656)
Equity in net income from
unconsolidated investments 5,228 6,043 23,583 22,196
------- ------- -------- --------
Net Income $29,948 $72,300 $139,273 $130,513
======= ======= ======== ========
Earnings Per Share:
Basic $0.20 $0.47 $0.91 $0.85
======= ======= ======= =======
Weighted Average Shares 153,417 153,096 153,345 152,653
======= ======= ======= =======
Diluted $0.19 $0.47 $0.90 $0.85
======= ======= ======= =======
Weighted Average Shares 154,673 154,444 154,732 153,997
======= ======= ======= =======
(A) On March 31, 2007, the SEMASS energy-from-waste facility experienced a
fire in the front-end receiving portion of the facility. Damage was
extensive to this portion of the facility and operations at the
facility were suspended completely for approximately 20 days. As a
result of this loss, Covanta recorded an asset impairment of $17.3
million, pre-tax, during the year ended December 31, 2007, which
represented the net book value of the damaged assets. Insurance
recoveries are recorded as a reduction to the loss related to the
write-down of assets where such recoveries relate to repair and
reconstruction costs, or as a reduction to operating expenses where
such recoveries relate to other costs or business interruption losses.
During the year ended December 31, 2007, Covanta recorded insurance
recoveries and received cash proceeds of $2.7 million related to
clean-up costs. During the years ended 2007 and 2008, Covanta
recorded insurance recoveries of $2.0 million and $5.2 million,
respectively, related to business interruption losses, for which cash
proceeds of $7.2 million were received during the year ended December
31, 2008. During the years ended 2007 and 2008, Covanta recorded
insurance recoveries of $17.3 million and $8.3 million, respectively,
related to repair and reconstruction costs, for which cash proceeds of
$9.4 million and $16.2 million were received during the years ended
December 31, 2007 and 2008, respectively.
(B) During the first quarter of 2007, Covanta completed public offerings
of common stock and 1.00% Senior Convertible Debentures, and Covanta
Energy closed on new credit facilities. In addition, Covanta Energy
completed tender offers for outstanding notes previously issued by its
intermediate subsidiaries. As a result of the recapitalization,
Covanta recognized a loss on extinguishment of debt of approximately
$32.1 million, pre-tax.
Covanta Holding Corporation Exhibit 2
Consolidated Statements of Cash Flows
For the Years Ended December 31,
--------------------------------
2008 2007 2006
--------- --------- ---------
(Unaudited, in thousands)
OPERATING ACTIVITIES:
Net income $139,273 $130,513 $105,789
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization
expense 199,488 196,970 193,217
Revenue contract levelization (586) (555) 3,419
Amortization of long-term debt
deferred financing costs 3,684 3,841 3,858
Amortization of debt premium and
discount (10,707) (14,857) (22,506)
Loss on extinguishment of debt - 32,071 6,795
Provision for doubtful accounts 1,839 1,184 2,251
Stock-based compensation expense 14,750 13,448 6,887
Equity in net income from
unconsolidated investments (23,583) (22,196) (28,636)
Dividends from unconsolidated
investments 19,459 24,250 19,375
Minority interests 6,961 8,656 6,610
Deferred income taxes 70,826 5,869 20,908
Other, net 3,809 (1,801) 6,872
Change in restricted funds held in
trust 29,481 5,493 7,790
Change in operating assets and
liabilities, net of effects of
acquisitions:
Receivables 4,138 (36,084) (8,577)
Unbilled service receivables 14,020 19,403 17,294
Accounts payable and accrued
expenses (38,450) 22,880 2,351
Unpaid losses and loss adjustment
expenses (3,235) (4,984) (8,848)
Other, net (28,560) (20,510) (15,860)
-------- -------- --------
Net cash provided by operating
activities 402,607 363,591 318,989
-------- -------- --------
INVESTING ACTIVITIES:
Acquisition of businesses, net of
cash acquired (73,393) (110,465) -
Proceeds from the sale of
investment securities 20,295 15,057 10,615
Purchase of investment securities (18,577) (622) (774)
Acquisition of non-controlling
interest in subsidiary - - (27,500)
Purchase of equity interest (18,503) (11,199) -
Purchase of property, plant and
equipment (87,920) (85,748) (54,267)
Property insurance proceeds 16,215 9,441 -
Acquisition of land use rights (16,727) - -
Loans issued to client community to
fund certain facility improvements (8,233) - -
Other, net (2,465) 3,626 5,022
--------- --------- --------
Net cash used in investing
activities (189,308) (179,910) (66,904)
--------- --------- --------
FINANCING ACTIVITIES:
Proceeds from the issuance of
common stock, net - 135,757 -
Proceeds from rights offerings, net - - 20,498
Proceeds from the exercise of
options for common stock, net 262 812 1,126
Proceeds from borrowings on
long-term debt - 949,907 97,619
Financings of insurance premiums,
net 1,381 7,927 -
Proceeds from borrowings on project
debt 8,278 3,506 6,868
Proceeds from borrowings on
revolving credit facility - 30,000 -
Principal payments on long-term
debt (6,877) (1,181,130) (140,638)
Principal payments on project debt (187,800) (164,167) (151,095)
Payments of borrowings on revolving
credit facility - (30,000) -
Payments of long-term debt deferred
financing costs - (18,324) (2,129)
Payments of tender premiums on debt
extinguishment - (33,016) (1,952)
Increase in holding company
restricted funds - 6,660 -
Decrease in restricted funds held
in trust 21,575 31,432 31,583
Distributions to minority partners (7,061) (7,699) (9,263)
Other, net - - (37)
--------- --------- ---------
Net cash used in financing
activities (170,242) (268,335) (147,420)
--------- --------- ---------
Effect of exchange rate changes on
cash and cash equivalents (70) 618 221
---------- --------- ---------
Net increase (decrease) in cash and
cash equivalents 42,987 (84,036) 104,886
Cash and cash equivalents at
beginning of period 149,406 233,442 128,556
---------- --------- ---------
Cash and cash equivalents at end of
period $192,393 $149,406 $233,442
========== ========= =========
Cash Paid for Interest and Income
Taxes:
Interest $114,207 $146,677 $205,807
Income taxes $22,979 $24,122 $17,398
Covanta Holding Corporation Exhibit 3
Consolidated Balance Sheets
As of December 31,
---------------------
2008 2007
--------- ---------
(Unaudited, in thousands,
except per share amounts)
ASSETS
Current:
Cash and cash equivalents $192,393 $149,406
Marketable securities available for sale 300 2,495
Restricted funds held in trust 175,093 187,951
Receivables (less allowances of $3,437 and $4,353) 243,791 252,114
Unbilled service receivables 49,468 59,232
Deferred income taxes - 29,873
Prepaid expenses and other current assets 123,214 113,927
--------- ---------
Total Current Assets 784,259 794,998
Property, plant and equipment, net 2,530,035 2,620,507
Investments in fixed maturities at market (cost:
$26,620 and $26,338, respectively) 26,737 26,260
Restricted funds held in trust 149,818 191,913
Unbilled service receivables 44,298 56,685
Waste, service and energy contracts, net 223,397 268,353
Other intangible assets, net 83,331 88,954
Goodwill 195,617 127,027
Investments in investees and joint ventures 102,953 81,248
Other assets 139,544 112,554
---------- ----------
Total Assets $4,279,989 $4,368,499
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
Current portion of long-term debt $6,922 $6,898
Current portion of project debt 198,034 195,625
Accounts payable 24,470 29,916
Deferred revenue 15,202 25,114
Accrued expenses and other current liabilities 215,046 234,000
--------- ---------
Total Current Liabilities 459,674 491,553
Long-term debt 1,005,965 1,012,534
Project debt 880,336 1,084,650
Deferred income taxes 466,468 440,723
Waste and service contracts 114,532 130,464
Other liabilities 165,881 141,740
--------- ---------
Total Liabilities 3,092,856 3,301,664
--------- ---------
Commitments and Contingencies
Minority Interests 35,014 40,773
--------- ---------
Stockholders' Equity:
Preferred stock ($0.10 par value; authorized
10,000 shares; none issued and outstanding) - -
Common stock ($0.10 par value; authorized
250,000 shares; issued 154,797 and 154,281
shares; outstanding 154,280 and 153,922 shares) 15,480 15,428
Additional paid-in capital 776,544 765,287
Accumulated other comprehensive (loss) income (8,205) 16,304
Accumulated earnings 368,352 229,079
Treasury stock, at par (52) (36)
---------- ----------
Total Stockholders' Equity 1,152,119 1,026,062
---------- ----------
Total Liabilities and Stockholders' Equity $4,279,989 $4,368,499
========== ==========
Covanta Holding Corporation Exhibit 4
Reconciliation of Net Income to Adjusted EBITDA
Three Months Twelve Months
Ended Ended
December 31, December 31, Full Year
-------------- -------------- Estimated
2008 2007 2008 2007 2009
---- ---- ---- ---- ----------
(Unaudited, in thousands)
$117,000 -
Net Income $29,948 $72,300 $139,273 $130,513 $141,000
Depreciation and 188,000 -
amortization expense 47,344 49,951 199,488 196,970 194,000
Debt service:
Net interest
expense on
project debt 12,452 13,587 53,734 54,579
Interest expense 10,928 15,108 46,804 67,104
Investment income (1,505) (1,612) (5,717) (10,578)
------ ------ ------ -------
Subtotal debt 84,000 -
service 21,875 27,083 94,821 111,105 79,000
76,000 -
Income tax expense 26,744 (3,374) 92,227 31,040 80,000
Other adjustments: (A)
Change in
unbilled service
receivables 7,319 4,125 14,020 19,403
Non-cash
compensation
expense 3,364 3,322 14,750 13,448
Other 1,773 1,218 12,249 5,975
----- ----- ------ -----
Subtotal other 29,000 -
adjustments 12,456 8,665 41,019 38,826 38,000
Insurance recoveries,
net of write-down of
assets (B) - (4,925) - -
Loss on extinguishment
of debt (C) - - - 32,071
6,000 -
Minority interests (299) 3,112 6,961 8,656 8,000
------- ------ ------- -------
Total adjustments 108,120 80,512 434,516 418,668
------- ------ ------- ------- -----------
$500,000 -
Adjusted EBITDA (D) $138,068 $152,812 $573,789 $549,181 $540,000
======== ======== ======== ======== ===========
(A) These items represent amounts that are non-cash in nature.
(B) On March 31, 2007, the SEMASS Energy-from-Waste facility experienced a
fire in the front-end receiving portion of the facility. Damage was
extensive to this portion of the facility and operations at the
facility were suspended completely for approximately 20 days. As a
result of this loss, Covanta recorded an asset impairment of $17.3
million, pre-tax, during the year ended December 31, 2007, which
represented the net book value of the damaged assets. Insurance
recoveries are recorded as a reduction to the loss related to the
write-down of assets where such recoveries relate to repair and
reconstruction costs, or as a reduction to operating expenses where
such recoveries relate to other costs or business interruption losses.
During the year ended December 31, 2007, Covanta recorded insurance
recoveries and received cash proceeds of $2.7 million related to
clean-up costs. During the years ended 2007 and 2008, Covanta
recorded insurance recoveries of $2.0 million and $5.2 million,
respectively, related to business interruption losses, for which cash
proceeds of $7.2 million were received during the year ended December
31, 2008. During the years ended 2007 and 2008, Covanta recorded
insurance recoveries of $17.3 million and $8.3 million, respectively,
related to repair and reconstruction costs, for which cash proceeds of
$9.4 million and $16.2 million were received during the years ended
December 31, 2007 and 2008, respectively.
(C) During the first quarter of 2007, Covanta completed public offerings
of common stock and 1.00% Senior Convertible Debentures, and Covanta
Energy closed on new credit facilities. In addition, Covanta Energy
completed tender offers for outstanding notes previously issued by its
intermediate subsidiaries. As a result of the recapitalization,
Covanta recognized a loss on extinguishment of debt of approximately
$32.1 million, pre-tax.
(D) The components of Adjusted EBITDA are as follows:
Three Months Ended Twelve Months Ended
December 31, December 31,
------------------ -------------------
2008 2007 2008 2007
----- ------ ----- -------
(Unaudited, in thousands)
Impact of SEMASS fire (1) $8,268 $(785) $13,380 $(3,335)
All other 129,800 153,597 560,409 552,516
------- ------- ------- -------
Adjusted EBITDA $138,068 $152,812 $573,789 $549,181
======== ======== ======== ========
(1) For 2008, this amount primarily includes insurance recoveries for
repair and reconstruction costs, and business interruption losses.
For 2007, this amount represents plant operating expenses related to
the SEMASS fire, but excludes lost revenue during the restoration of
the SEMASS Energy-from-Waste facility.
Covanta Holding Corporation Exhibit 5
Reconciliation of Cash Flow Provided by Operating Activities
to Adjusted EBITDA
Three Months Twelve Months
Ended Ended
December 31, December 31, Full Year
-------------- ------------- Estimated
2008 2007 2008 2007 2009
---- ---- ---- ---- ----------
(Unaudited, in thousands)
Cash flow provided by $325,000 -
operating activities $135,109 $119,267 $402,607 $363,591 $375,000
84,000 -
Debt service 21,875 27,083 94,821 111,105 79,000
Amortization of debt
premium and deferred
financing costs 1,518 3,027 7,023 11,016 7,000
84,000 -
Other (20,434) 3,435 69,338 63,469 79,000
------- ----- ------ ------ ---------
$500,000 -
Adjusted EBITDA $138,068 $152,812 $573,789 $549,181 $540,000
======== ======== ======== ======== ==========
Covanta Holding Corporation Exhibit 6
Statements of Cash Flows Selected Data
Three Months Twelve Months
Ended Ended
December 31, December 31, Full Year
-------------- ----------------- Estimated
2008 2007 2008 2007 2009
---- ---- ---- ---- ----------
(Unaudited, in thousands)
Cash flow
provided by
operating $325,000 -
activities $135,109 $119,267 $402,607 $363,591 $375,000
Uses of cash
flow provided
by operating
activities
Purchase of
property,
plant and
equipment (A)
Capital
expenditures
associated
with SEMASS
fire (B) $(428) $(2,823) $(3,065) $(18,144)
Capital
expenditures
associated
with certain
acquisitions
(C) (2,851) (8,756) (17,126) (12,121)
Capital
expenditures
associated
with
technology
development
(D) (1,610) - (6,742) -
Pre-construction
development
projects (E) (1,208) - (1,208) -
All other
capital
expenditures
(F) (14,523) (13,938) (59,779) (55,483) $(60,000)
------- ------- ------- -------
Total purchases
of property,
plant and
equipment $(20,620) $(25,517) $(87,920) $(85,748)
Acquisition of
businesses,
net of cash
acquired $(53,265) $(47,210) $(73,393) $(110,465)
Purchase of
equity
interests $- $(946) $(18,503) $(11,199)
Principal
payments on
long-term debt $(1,831) $(12,982) $(6,877) $(1,181,130) $(7,000)
Principal
payments on
project debt $(113,469) $(90,774) $(187,800) $(164,167) $(169,000)
(A) Purchase of property, plant and equipment is also referred to as
Capital Expenditures.
(B) Capital Expenditures were incurred that related to the repair and
replacement of assets at the SEMASS Energy-from-Waste facility that
were damaged by a fire on March 31, 2007. The cost of repair or
replacement was insured under the terms of the applicable insurance
policy, subject to deductibles. Settlement of the property damage
insurance claim occurred in December 2008. During the years ended
December 31, 2007 and 2008, Covanta received $9.4 million and $16.2
million, respectively, in insurance proceeds related to property
damage, which is included as Property Insurance Proceeds in the
investing activities section of Covanta's statement of cash flows for
the respective periods.
(C) Capital Expenditures were incurred at four facilities that Covanta
acquired in 2008 and 2007 primarily to improve the productivity or
environmental performance of those facilities. The majority of these
expenditures were incurred at the two California biomass facilities
acquired in July 2007. Covanta invested approximately $8 million
prior to December 31, 2007 and approximately $11.3 million during the
year ended December 31, 2008 in capital improvements in these biomass
facilities. In June 2008, Covanta acquired an Energy-from-Waste
facility in Tulsa, Oklahoma This facility was shut down by the prior
owner in the summer of 2007 and two of the facility's three boilers
were returned to service in November 2008, and Covanta plans to return
its third boiler to service during 2009. During the year ended
December 31, 2008, Covanta invested approximately $5.1 million in
capital improvements to restore the operational performance of the
facility.
Although, in accordance with GAAP, this spending will be recorded as a
component of purchase of property, plant and equipment on Covanta's
statement of cash flows, management considers this spending as a
component of the cost to acquire these businesses since these major
capital improvements are required to achieve desired facility
performance.
(D) Capital Expenditures related to internal development efforts and/or
agreements with multiple partners for the development, testing or
licensing of new technologies related to the transformation of waste
materials into renewable fuels, the generation of alternative energy
methods, and nitrogen oxide (NOx) emission controls.
(E) Covanta has entered into definitive agreements for the development of
a 1,700 metric ton per day Energy-from-Waste project serving the City
of Dublin, Ireland and surrounding communities. The permitting
process is underway and construction is expected to commence in 2009.
During 2008, Covanta incurred capital expenditures related to pre-
construction activities, such as site preparation costs, for this
project.
(F) Capital Expenditures primarily to maintain existing facilities.
Covanta Holding Corporation Exhibit 7
Components of Diluted Earnings Per Share
Three Months Twelve Months
Ended Ended
December 31, December 31,
------------- -------------
2008 2007 2008 2007
------ ----- ----- -----
(Unaudited)
Impact of SEMASS fire and insurance
recoveries, net of write-down of assets
and tax (A) $0.03 $0.02 $0.05 $(0.01)
Loss on extinguishment of debt, net of
tax (B) - - - (0.12)
Net tax impact from Grantor Trust
activity and NOL valuation allowance
changes (C) (0.06) 0.20 (0.10) 0.17
All other 0.22 0.25 0.95 0.81
---- ---- ---- ----
Diluted Earnings Per Share $0.19 $0.47 $0.90 $0.85
===== ===== ===== =====
(A) On March 31, 2007, the SEMASS energy-from-waste facility experienced a
fire in the front-end receiving portion of the facility. Damage was
extensive to this portion of the facility and operations at the
facility were suspended completely for approximately 20 days. As a
result of this loss, Covanta recorded an asset impairment of $17.3
million, pre-tax, during the year ended December 31, 2007, which
represented the net book value of the damaged assets.
During the years ended 2007 and 2008, Covanta recorded insurance
recoveries of $17.3 million and $8.3 million, respectively, related to
repair and reconstruction costs, for which cash proceeds of $9.4
million and $16.2 million were received during the years ended
December 31, 2007 and 2008, respectively.
For 2008, this amount includes insurance recoveries for business
interruption losses of $5.2 million. For 2007, this amount represents
plant operating expenses related to the SEMASS fire, but excludes lost
revenue during the restoration of the SEMASS energy-from-waste
facility.
(B) During the first quarter of 2007, Covanta completed public offerings
of common stock and 1.00% Senior Convertible Debentures, and Covanta
Energy closed on new credit facilities. In addition, Covanta Energy
completed tender offers for outstanding notes previously issued by its
intermediate subsidiaries. As a result of the recapitalization,
Covanta recognized a loss on extinguishment of debt of approximately
$32.1 million, pre-tax.
(C) During the fourth quarter of 2008, Covanta recognized additional tax
liabilities associated with the activity from the wind-down of the
grantor trusts that arose from our predecessor insurance entities.
During 2007 Covanta reduced its valuation allowance by $35.0 million.
The reduction primarily included a $31.4 million fourth quarter
adjustment related to net operating losses ("NOLs") that were due to
expire in 2007. The additional reduction to the valuation allowance of
$3.6 million related to previously unrecognized state NOLs and federal
NOLs for an unconsolidated subsidiary.
Discussion of Non-GAAP Financial Measures
To supplement our results prepared in accordance with United States
generally accepted accounting principles ("GAAP"), we use the measure of
Adjusted EBITDA, which is a non-GAAP measure as defined by the Securities
and Exchange Commission. The non-GAAP financial measure of Adjusted EBITDA
described below, and used in the tables above, is not intended as a
substitute and should not be considered in isolation from measures of
financial performance or liquidity prepared in accordance with GAAP. In
addition, our non-GAAP financial measure may be different from non-GAAP
measures used by other companies, limiting their usefulness for comparison
purposes.
We use a number of different financial measures, both GAAP and non-GAAP,
in assessing the overall performance of our 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 Corporation, 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 business.
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 also use this non-GAAP financial
measure as a significant criterion of performance-based components of
employee compensation.
Adjusted EBITDA should not be considered as an alternative to net income
or an alternative to 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.
Adjusted EBITDA
The calculation of Adjusted EBITDA is based on the definition in Covanta
Energy's credit facilities, 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 ours,
measured on a consolidated basis.
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 December 31, 2008. 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.
These financial covenants are measured on a trailing four quarter period
basis and the material covenants are as follows:
- maximum Covanta Energy leverage ratio of 4.00 to 1.00 (which
declines for quarterly periods after September 30, 2009), which
measures Covanta Energy's Consolidated Adjusted Debt, (which is the
principal amount of its consolidated debt less certain restricted
funds dedicated to repayment of project debt principal and
construction costs) to its Adjusted EBITDA; and
- minimum Covanta Energy interest coverage ratio of 3.00 to 1.00,
which measures Covanta Energy's Adjusted EBITDA to its consolidated
interest expense plus certain interest expense of ours, to the
extent paid by Covanta Energy.
In order to provide a meaningful basis for comparison, we are providing
information with respect to our Adjusted EBITDA for the three and twelve
months ended December 31, 2008 and 2007, reconciled for each such periods
to net income and cash flow provided by operating activities, which are
believed to be the most directly comparable measures under GAAP.
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