Date: February 26, 2008
Source: Covanta Holding Corporation
Covanta Holding Corporation (NYSE: CVA ) reported financial results today for the three and twelve months ended December 31, 2007. Diluted earnings per share was $0.47 in the fourth quarter of 2007, which compares to diluted earnings per share of $0.08 in the prior year comparative period. For the full year 2007, diluted earnings per share was $0.85, up from $0.72 in the prior year.
Fourth Quarter Results
For the three months ended December 31, 2007, operating revenues grew 24 percent to $395 million, up from $318 million in the prior year comparative period. The increase was driven by construction revenues from the Hillsborough County facility expansion, revenue from domestic acquisitions completed in 2007, higher prices for domestic waste disposal services, and increased electricity sales at two facilities located in India.
Net income was $72 million for the quarter, up from $12 million in the prior year comparative period. This increase was impacted by lower interest expense, resulting from the recapitalization completed in early 2007, and a lower effective tax rate, driven primarily by the release of a valuation allowance. Cash Flow Provided by Operating Activities ("Operating Cash Flow") was $98 million in the fourth quarter. Adjusted EBITDA at the Company's principal subsidiary, Covanta Energy Corporation ("Covanta Energy"), was $155 million.
Full-Year 2007 Results
For the twelve months ended December 31, 2007, operating revenues rose 13 percent to $1.43 billion, up from $1.27 billion in 2006. The Company's domestic segment operating revenues grew by 11 percent to $1.25 billion for the year, driven primarily by the Hillsborough County facility expansion, revenue from domestic acquisitions completed in 2007, higher pricing on recycled metal sales, and higher electricity rates. International revenues grew by 29 percent to $177 million primarily due to increased electricity sales at the two facilities in India.
Net income grew 23 percent to $131 million, up from $106 million in 2006. This increase was impacted by lower interest expense and a lower effective tax rate. Operating Cash Flow was $358 million for the year. Covanta Energy's Adjusted EBITDA was $552 million.
The Company incurred $86 million of capital expenditures in 2007, which included $18 million related to the SEMASS fire, $12 million of capital improvements at facilities acquired during the year, and $55 million primarily to maintain existing facilities. In addition, the Company repaid $164 million of project debt and invested $110 million in acquisitions and $11 million in equity interests. In total, the Company reinvested all of its Operating Cash Flow back into the business.
"2007 was a milestone year for Covanta, as we made significant progress towards our strategic goals," said Anthony Orlando, President and Chief Executive Officer of Covanta. "We recapitalized our balance sheet to provide the financial flexibility to seize growth opportunities, successfully integrated several acquisitions to complement our domestic fleet, and we established platforms to expand our energy-from-waste business in Europe and China. In addition, we extended our track record of consistent operational performance, safely converting 15 million tons of waste into clean, renewable energy for our clients, while again generating strong financial results within or above our guidance ranges."
2008 Guidance
The Company is establishing guidance for 2008 for the following key metrics:
-- Adjusted EBITDA of $550 million to $575 million;
-- Diluted earnings per share of $0.90 to $1.00; and
-- Operating Cash Flow in the range of $380 million to $420 million.
For simplicity, guidance for 2008 is now being provided entirely for Covanta Holding Corporation. See the "Discussion of Non-GAAP Financial Measures" which follows the exhibits.
Conference Call Information
Covanta will host a conference call at 8:30 am (Eastern) on Wednesday, February 27, 2008 to discuss its results for the three and twelve months ended December 31, 2007. Prepared remarks will be followed by a question-and-answer session. To participate, please dial 877-419-6590 approximately 10 minutes prior to the scheduled start of the call. If you are calling from outside of the United States, please dial 719-325-4864. The conference call will also be web cast live on the Investor Relations section of the Covanta website at www.covantaholding.com.
A replay of the conference call will be available from 11:30 am (Eastern) on Wednesday, February 27, 2008 through midnight (Eastern) on Wednesday, March 5, 2008. To access the replay, please dial 888-203-1112 or 719-457-0820 and use the replay pass code: 3944084. The web cast will also be archived on www.covantaholding.com.
About Covanta
Covanta Holding Corporation, a New York Stock Exchange listed company, is an internationally recognized owner and operator of energy-from-waste and renewable energy projects. Covanta's energy-from-waste facilities convert municipal solid waste into renewable energy for numerous communities, predominantly in the United States. As a world premier operator of large-scale energy-from-waste facilities, Covanta is proud to offer an environmentally sound solution to communities' solid waste disposal needs. With 37 energy- from-waste facilities worldwide, Covanta uses municipal solid waste as a fuel to generate clean, renewable energy. Covanta's modern energy-from-waste facilities safely and securely convert 15 million tons of waste into more than 8 million megawatt hours of clean renewable electricity each year 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 Item 1A of its Annual Report on Form 10-K for the year ended December 31, 2007, and in 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 Operations
Three Month Ended Twelve Months Ended
December 31, December 31,
2007 2006(A) 2007 2006(A)
(Unaudited) (Audited)
(In thousands, except per share amounts)
Operating revenues
Waste and service
revenues $235,357 $209,660 $864,396 $817,633
Electricity and steam
sales 134,712 104,224 498,877 433,834
Other operating
revenues 25,319 4,045 69,814 17,069
Total operating
revenues 395,388 317,929 1,433,087 1,268,536
Operating expenses
Plant operating
expenses (B) 212,118 189,826 801,560 712,156
Depreciation and
amortization expense 49,951 50,230 196,970 193,217
Net interest expense on
project debt 13,587 14,197 54,579 60,210
General and
administrative
expenses 22,025 19,422 82,729 73,599
Write-down of
assets, net of
insurance
recoveries (B) (4,925) - - -
Other operating
expenses 23,141 1,343 60,639 2,594
Total operating
expenses 315,897 275,018 1,196,477 1,041,776
Operating income 79,491 42,911 236,610 226,760
Other income (expense)
Investment income 1,612 3,969 10,578 11,770
Interest expense (15,108) (26,695) (67,104) (109,507)
Loss on
extinguishment of
debt © - - (32,071) (6,795)
Total other expenses (13,496) (22,726) (88,597) (104,532)
Income before income
tax expense, minority
interests and equity
in net income from
unconsolidated
investments 65,995 20,185 148,013 122,228
Income tax expense 3,374 (8,670) (31,040) (38,465)
Minority interests (3,112) (1,749) (8,656) (6,610)
Equity in net income
from unconsolidated
investments 6,043 2,176 22,196 28,636
Net Income $72,300 $11,942 $130,513 $105,789
Earnings Per Share:
Basic $0.47 $0.08 $0.85 $0.73
Weighted Average Shares 153,096 146,465 152,653 145,663
Diluted $0.47 $0.08 $0.85 $0.72
Weighted Average Shares 154,443 147,983 153,997 147,030
(A) Certain prior period amounts have been reclassified to conform to
current period presentation.
(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 assets destroyed.
The cost of repair or replacement, and business interruption losses,
are insured under the terms of applicable insurance policies, subject
to deductibles. Covanta cannot predict the timing of when it will
receive the proceeds under such policies. During the year ended
December 31, 2007, Covanta recorded insurance recoveries of $17.3
million related to repair and reconstruction, $2.7 million related to
clean-up costs and $2.0 million related to business interruption
losses. 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. Covanta expects the cost of repair or replacement
and business interruption losses it does not recover, representing
deductibles under such policies, will not be material.
© During the first quarter in 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 charge of
approximately $32.1 million, pre-tax, which was comprised of the
write-down of deferred financing costs, tender premiums paid for the
intermediate subsidiary debt, and a call premium paid for a credit
facility refinanced, which was in effect prior to Covanta Energy's new
credit facilities. These amounts were partially offset by the write-
down of unamortized premiums relating to the intermediate subsidiary
debt and a gain associated with the settlement of interest rate swap
agreements.
As a result of amendments to Covanta Energy's financing arrangements
in May 2006, Covanta recognized a loss on extinguishment of debt of
$6.8 million, pre-tax, which was comprised of the write-down of
deferred financing costs and a call premium paid on the
extinguishment.
Covanta Holding Corporation Exhibit 2
Reconciliation of Net Income to Adjusted EBITDA
Twelve Months Ended Full Year
December 31, Estimated
2007 2006 2008
(Unaudited, in thousands)
Net Income - Covanta Holding Corporation $130,513 $105,789 $140,000 -
$155,000
Depreciation and amortization expense 196,970 193,217 206,000
Debt service:
Net interest expense on project debt 54,579 60,210
Interest expense 67,104 109,507
Investment income (10,578) (11,770)
Subtotal debt service 111,105 157,947 95,000 -
92,000
Income tax expense 31,040 38,465 78,000 -
85,000
Other adjustments: (A)
Change in unbilled service receivables 19,403 17,294
Non-cash compensation expense 13,448 6,887
Other 5,975 9,180
Subtotal other adjustments 38,826 33,361 24,000 -
30,000
Write-down of assets, net of insurance
recoveries (B) - -
Loss on extinguishment of debt © 32,071 6,795
Minority interests 8,656 6,610 7,000
Total adjustments 418,668 436,395
Adjusted EBITDA - Covanta Holding
Corporation (D) $549,181 $542,184 $550,000 -
$575,000
(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 assets destroyed.
The cost of repair or replacement, and business interruption losses,
are insured under the terms of applicable insurance policies, subject
to deductibles. Covanta cannot predict the timing of when it will
receive the proceeds under such policies. During the year ended
December 31, 2007, Covanta recorded insurance recoveries of $17.3
million related to repair and reconstruction, $2.7 million related to
clean-up costs and $2.0 million related to business interruption
losses. 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. Covanta expects the cost of repair or replacement
and business interruption losses it does not recover, representing
deductibles under such policies, will not be material.
© During the first quarter in 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 charge of
approximately $32.1 million, pre-tax, which was comprised of the
write-down of deferred financing costs, tender premiums paid for the
intermediate subsidiary debt, and a call premium paid for a credit
facility refinanced, which was in effect prior to Covanta Energy's new
credit facilities. These amounts were partially offset by the write-
down of unamortized premiums relating to the intermediate subsidiary
debt and a gain associated with the settlement of interest rate swap
agreements.
As a result of amendments to Covanta Energy's financing arrangements
in May 2006, Covanta recognized a loss on extinguishment of debt of
$6.8 million, pre-tax, which was comprised of the write-down of
deferred financing costs and a call premium paid on the
extinguishment.
(D) The components of Adjusted EBITDA are as follows:
Twelve Months Ended
December 31,
2007 2006
(Unaudited, in thousands)
Philippine Tax Ruling -
Cumulative Adjustment (1) $ - $ 7,037
Impact of SEMASS fire (2) (3,335) -
All other 552,516 535,147
Adjusted EBITDA - Covanta Holding
Corporation $549,181 $542,184
(1) Covanta is a minority shareholder in the "Quezon Project Company" that
owns the Quezon Power, Inc. ("Quezon") facility in the Philippines. In
June 2006, the Philippine tax authorities issued a ruling clarifying
the deductibility of unrealized foreign exchange losses to the Quezon
Project Company. As a result, the Quezon Project Company recorded a
cumulative deferred income tax benefit which increased Covanta's
equity in net income from unconsolidated investments by $7 million or
5 cents per diluted share. The impact of this ruling, on periods
subsequent to the quarter ended June 30, 2006, is based on the
fluctuations in the value of the Philippine peso versus the US dollar
in those respective periods.
(2) This amount represents plant operating expenses, net of business
interruption insurance recoveries related to the SEMASS fire, but
excludes lost revenue during the restoration of the SEMASS energy-
from-waste facility.
Covanta Energy Corporation Exhibit 3
Reconciliation of Net Income to Adjusted EBITDA
Three Month Ended Twelve Months Ended
December 31, December 31,
2007 2006 2007 2006
(Unaudited, in thousands)
Net Income - Covanta
Holding Corporation $72,300 $11,942 $130,513 $105,789
Less: Net Income - All
Other 21,868 6,468 18,122 7,944
Net Income - Covanta
Energy Corporation 50,432 5,474 112,391 97,845
Depreciation and
amortization expense 49,932 50,188 196,873 193,114
Debt service:
Net interest expense
on project debt 13,587 14,197 54,579 60,210
Interest expense 13,631 26,695 61,652 109,507
Investment income (1,126) (3,154) (5,758) (9,059)
Subtotal debt service 26,092 37,738 110,473 160,658
Income tax expense 21,380 13,800 52,615 42,356
Other adjustments: (A)
Change in unbilled
service receivables 4,125 4,672 19,403 17,294
Non-cash compensation
expense 3,252 2,021 13,018 6,887
Other 1,219 1,254 5,975 9,180
Subtotal other adjustments 8,596 7,947 38,396 33,361
Write-down of assets, net
of insurance recoveries(B) (4,925) - - -
Loss on extinguishment of
debt © - - 32,071 6,795
Minority interests 3,339 2,016 9,499 7,514
Total adjustments 104,414 111,689 439,927 443,798
Adjusted EBITDA - Covanta
Energy Corporation (D) $154,846 $117,163 $552,318 $541,643
(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 assets destroyed.
The cost of repair or replacement, and business interruption losses,
are insured under the terms of applicable insurance policies, subject
to deductibles. Covanta cannot predict the timing of when it will
receive the proceeds under such policies. During the year ended
December 31, 2007, Covanta recorded insurance recoveries of $17.3
million related to repair and reconstruction, $2.7 million related to
clean-up costs and $2.0 million related to business interruption
losses. 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. Covanta expects the cost of repair or replacement
and business interruption losses it does not recover, representing
deductibles under such policies, will not be material.
© During the first quarter in 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 charge of
approximately $32.1 million, pre-tax, which was comprised of the
write-down of deferred financing costs, tender premiums paid for the
intermediate subsidiary debt, and a call premium paid for a credit
facility refinanced, which was in effect prior to Covanta Energy's new
credit facilities. These amounts were partially offset by the write-
down of unamortized premiums relating to the intermediate subsidiary
debt and a gain associated with the settlement of interest rate swap
agreements.
As a result of amendments to Covanta Energy's financing arrangements
in May 2006, Covanta recognized a loss on extinguishment of debt of
$6.8 million, pre-tax, which was comprised of the write-down of
deferred financing costs and a call premium paid on the
extinguishment.
(D) The components of Adjusted EBITDA are as follows:
Twelve Months Ended
December 31,
2007 2006
(Unaudited, in thousands)
Philippine Tax Ruling -
Cumulative Adjustment(1) $ - $ 7,037
Impact of SEMASS fire (2) (3,335) -
All other 555,653 534,606
Adjusted EBITDA - Covanta
Energy Corporation $552,318 $ 541,643
(1) Covanta is a minority shareholder in the "Quezon Project Company" that
owns the Quezon Power, Inc. ("Quezon") facility in the Philippines. In
June 2006, the Philippine tax authorities issued a ruling clarifying
the deductibility of unrealized foreign exchange losses to the Quezon
Project Company. As a result, the Quezon Project Company recorded a
cumulative deferred income tax benefit which increased Covanta's
equity in net income from unconsolidated investments by $7 million or
5 cents per diluted share. The impact of this ruling, on periods
subsequent to the quarter ended June 30, 2006, is based on the
fluctuations in the value of the Philippine peso versus the US dollar
in those respective periods.
(2) This amount represents plant operating expenses, net of business
interruption insurance recoveries related to the SEMASS fire, but
excludes lost revenue during the restoration of the SEMASS energy-
from-waste facility.
Covanta Holding Corporation Exhibit 4
Reconciliation of Cash Flow Provided by Operating Activities to Adjusted
EBITDA
Twelve Months Ended Full Year
December 31, Estimated
2007 2006 2008
(Unaudited, in thousands)
Cash flow provided by operating
activities - Covanta Holding
Corporation $358,098 $311,199 $380,000-$420,000
Debt Service 111,105 157,947 95,000 - 92,000
Amortization of debt premium and
deferred financing costs 11,016 18,648 7,000
Other 68,962 54,390 68,000 - 56,000
Adjusted EBITDA - Covanta
Holding Corporation $549,181 $542,184 $550,000-$575,000
Covanta Energy Corporation
Reconciliation of Cash Flow Provided by Operating Activities to Adjusted
EBITDA
Three Month Ended Twelve Months Ended
December 31, December 31,
2007 2006 2007 2006
(Unaudited, in thousands)
Cash flow provided by
operating activities -
Covanta Energy Corporation $98,172 $79,696 $359,211 $316,366
Debt Service 26,092 37,738 110,473 160,658
Amortization of debt premium
and deferred financing costs 3,566 4,586 12,993 18,648
Other 27,016 (4,857) 69,641 45,971
Adjusted EBITDA - Covanta
Energy Corporation $154,846 $117,163 $552,318 $541,643
Covanta Holding Corporation Exhibit 5
Statements of Cash Flows Selected Data
Three Month Ended Twelve Months Ended Full Year
December 31, December 31, Estimated
2007 2006 2007 2006 2008
(Unaudited, in thousands)
Cash Flow Provided
by Operating
Activities $98,201 $76,220 $358,098 $311,199 $380,000 -
$420,000
Uses of Cash Flow
Provided by
Operating
Activities
Purchase of
property, plant
and equipment (A)
Capital
expenditures
associated with
SEMASS fire
(B) $(2,823) $- $(18,144) $-
Capital
expenditures
associated with
certain
acquisitions
© (8,756) - (12,121) -
All other capital
expenditures
(D) (13,938) (18,574) (55,483) (54,267) ($60,000)
Total purchases
of property,
plant and
equipment $(25,517) $(18,574) $(85,748) $(54,267)
Acquisition of
businesses $(47,210) $- $(110,465) $-
Purchase of equity
interest $(946) $- $(11,199) $-
Acquisition of non-
controlling interest
in subsidiary $- $(27,500) $- $(27,500)
Principal payments
on project debt $(90,774) $(64,483) $(164,167) $(151,095) ($167,000)
(A) Purchase of property, plant and equipment is also referred to as
Capital Expenditures.
(B) During the twelve months ended December 31, 2007, 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 is insured under the
terms of the applicable insurance policy, subject to deductibles.
Covanta cannot predict the timing of when all proceeds under such
policy will be received. During 2007, Covanta received $9.4 million in
insurance proceeds related to property damage and is included as
Property Insurance Proceeds in the investing activities section of
Covanta's statement of cash flows for the twelve months ended December
31, 2007. Covanta expects the cost of repair or replacement not
recovered, representing deductibles under such policy, will not be
material.
© During the twelve months ended December 31, 2007, Capital Expenditures
were incurred at three facilities that Covanta acquired in 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. In total,
Covanta plans to invest between $15 and $20 million in capital
improvements at the biomass facilities, of which between $7 and $12
million remains to be incurred in 2008. 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 primarily to maintain existing facilities.
Covanta Holding Corporation Exhibit 6
Components of Diluted Earnings Per Share
Twelve Months
Three Month Ended Ended
December 31, December 31,
2007 2006 2007 2006
(Unaudited)
Write-down of assets, net of
insurance recoveries and tax (A) $0.02 $- $- $-
Impact of SEMASS fire, net of
insurance recoveries and tax (A) - - (0.01) -
Loss on extinguishment of debt, net
of tax (B) - - (0.12) (0.03)
Philippine Tax Ruling - Cumulative
Adjustment © - - - 0.05
APB 23 - Cumulative Adjustment (D) - - - 0.07
All other 0.45 0.08 0.98 0.63
Diluted Earnings Per Share $0.47 $0.08 $0.85 $0.72
(A) This amount represents plant operating expenses, net of business
interruption insurance recoveries related to the SEMASS fire, but
excludes lost revenue during the restoration of the SEMASS energy-
from- waste facility.
(B) During the first quarter in 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 charge of
approximately $32.1 million, pre-tax, which was comprised of the
write- down of deferred financing costs, tender premiums paid for the
intermediate subsidiary debt, and a call premium paid for a credit
facility refinanced, which was in effect prior to Covanta Energy's new
credit facilities. These amounts were partially offset by the write-
down of unamortized premiums relating to the intermediate subsidiary
debt and a gain associated with the settlement of interest rate swap
agreements.
As a result of amendments to Covanta Energy's financing arrangements
in May 2006, Covanta recognized a loss on extinguishment of debt of
$6.8 million, pre-tax, which was comprised of the write-down of
deferred financing costs and a call premium paid on the
extinguishment.
© Covanta is a minority shareholder in the "Quezon Project Company" that
owns the Quezon Power, Inc. ("Quezon") facility in the Philippines.
In June 2006, the Philippine tax authorities issued a ruling
clarifying the deductibility of unrealized foreign exchange losses to
the Quezon Project Company. As a result, the Quezon Project Company
recorded a cumulative deferred income tax benefit which increased
Covanta's equity in net income from unconsolidated investments by $7
million or 5 cents per diluted share. The impact of this ruling, on
periods subsequent to the quarter ended June 30, 2006, is based on the
fluctuations in the value of the Philippine peso versus the US dollar
in those respective periods.
(D) During the quarter ended June 30, 2006, consistent with its strategy
to pursue international investment opportunities, Covanta adopted the
permanent reinvestment exception under APB 23 with respect to the
earnings of its foreign subsidiaries. Pursuant to this election,
Covanta now considers foreign earnings to be permanently reinvested
and, as a result, Covanta recorded a catch-up, cumulative adjustment
in the second quarter of 2006 of $10 million or 7 cents per diluted
share to reflect the reversal of the deferred taxes that were accrued
over the last two years prior to the election under APB 23.
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, 2007. 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 4.25 to 1.00 (which declines for quarterly periods after September 30, 2008), 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 twelve months ended December 31, 2007 and 2006, reconciled for each such period 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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