Covanta announces financial restructuring resulting from strategic review

FAIRFIELD, N.J. (BUSINESS WIRE) Covanta Energy Corporation announced a financial restructuring plan resulting from its comprehensive review of strategic alternatives. As the first element of that plan, the Company has filed a voluntary petition for Chapter 11 reorganization with the U.S. Bankruptcy Court in the Southern District of New York. The Company’s core energy and water facilities will continue to operate in the normal course of business and will be unaffected by the filing.

Results of Strategic Review

Today’s announcement represents the culmination of the strategic review conducted by the Company’s Board and management, with outside financial advisers, which was announced in December 2001. As a result of that review, the Company:

* Determined that reorganization under Chapter 11 represents the most viable venue to reorganize the Company’s capital structure, complete the disposition of its remaining non-core entertainment and aviation assets, and protect the value of the Energy and Water franchise;

* Entered into a non-binding Letter of Intent with the investment firm of Kohlberg Kravis Roberts & Co. (KKR) for a $225 million equity investment under which a KKR affiliate would acquire the Company upon emergence from Chapter 11; and

* Announced a strategic restructuring program to focus on the U.S. energy and water market, expedite the disposition of non-core assets and, as a result, reduce overhead costs.

In connection with the filing, Covanta obtained a commitment for $463 million of debtor-in-possession (D-I-P) financing from its current bank group. This financing, subject to approval by the Bankruptcy Court, will cover all of the Company’s ongoing cash needs and help ensure the continuation of the Company’s Letters of Credit, which are used to support the performance and payment obligations of its core energy and water facilities.

Scott G. Mackin, Covanta President and Chief Executive Officer, stated, “We have painstakingly reviewed and pursued all options outside of a Chapter 11 filing for quite some time now. Our core businesses – Waste to Energy, Independent Power Production and Water – are strong. However, the capital structure impediments left over from the non-core, former Ogden Corporation businesses, and the lack of access to the capital markets as means by which to deal with them, have foreclosed other options. The exhaustive strategic review has demonstrated that Chapter 11 represents the most viable venue for Covanta to address those capital structure issues, expedite our restructuring and preserve the value of our strong core businesses. When we emerge, we will do so with a strong balance sheet and core businesses unencumbered by the problems we inherited.

“We are gratified by the support of our bank group and KKR, which we believe will allow us to complete the Chapter 11 process expeditiously. Our bank group, particularly the Agents, has worked exceptionally hard to put together an impressive D-I-P facility that will preserve our core businesses through this process. And, the relationship we have formed with KKR over the past several months is particularly exciting. Their expertise, business acumen and financial resources will add significant value to Covanta’s prospects, and their potential investment affirms the strength of our core energy and water operations.

“We are working to obtain court approval of the substantial D-I-P package quickly, but in the meantime, interim approval affords us access to ample cash with which we will continue to operate our energy and water facilities as usual. At this time, the Company has in excess of $55 million in its domestic accounts. We intend to pay in full our post-petition obligations, including payments to vendors. With our bank group and KKR, we look forward to working with our creditors to develop a Plan of Reorganization that is fair and feasible and positions us to realize the full potential of our core businesses,” Mackin said.

$225 Million Equity Investment by KKR

The non-binding Letter of Intent with KKR provides that the Company and the Agents for its bank group will work exclusively with KKR for up to 90 days. Upon completion of due diligence, the negotiation and execution of definitive agreements satisfactory to the Company, KKR, the bank group and other creditors, the confirmation of a Plan of Reorganization by the Court and the satisfaction of other conditions, KKR would acquire the Company upon its emergence from Chapter 11. The Agents of the bank group providing the Company’s D-I-P financing have signed the Letter of Intent and support a transaction with KKR.

The rights of Covanta’s creditors would be determined as part of the Plan of Reorganization. Existing common equity and preferred shareholders are not expected to participate in the new capital structure.

Scott Stuart, Member of KKR, said, “KKR has been working closely with Covanta’s management team for several months to determine the Company’s optimal course for the future. We are pleased that the Company has elected to partner with us after its lengthy strategic review process. While this is an extremely complex situation given the particular challenges of the Company’s capital structure, we are attracted to Covanta’s core assets and strong management team. We look forward to continuing to work closely with the Company, the bank group and other creditors to implement a Plan of Reorganization that will best meet Covanta’s objectives now and over the long term.”

$463 Million Debtor-in-Possession Financing Arranged by Existing Bank Group

The filing immediately enhanced Covanta’s liquidity by enabling the Company to restructure liabilities associated with its non-core entertainment and aviation businesses. Moreover, the Company has obtained a commitment for $463 million in debtor-in-possession (D-I-P) financing from its bank group, led by the Agents. This financing, which is subject to definitive court approval, will cover all of the Company’s ongoing cash needs and helps ensure the continuation of the Company’s Letters of Credit that support the performance and payment obligations of our core energy and water facilities.

Restructuring Program to Focus on Its Core Energy and Water Business

Covanta also announced a restructuring program to focus on the U.S. energy and water industry, expedite the disposition of its non-core assets and, thereby reduce overhead costs.

Further, the Company announced that it has completed the sale of its Thai energy assets for $35 million to two consortia of co-investors. The sales included Covanta’s Saha and Rojana co-generation facilities, as well as its subsidiary operating those plants.

Core Energy, Water Facilities Conducting Business in Ordinary Course

Covanta will continue to conduct business at its core energy and water facilities. The Chapter 11 filing will have no effect on their operation, and the Company intends to continue operating those facilities according to the same high standards as always.

“Continued performance to our loyal customers, client communities, partners and vendors is our paramount focus,” said Mackin. “We value those relationships and are committed to maintaining the same levels of service and performance that they have come to expect from us. In particular, we are grateful to the many clients who have gone out of their way to voice their support for us as we go through this process.

“We will become predominately a domestic energy and water business allowing us to more efficiently focus our resources on the current operations and the expansion opportunities available to us in the U.S. The Chapter 11 process along with KKR’s continuing involvement will give us the ability to efficiently accomplish this self-help program which we will begin immediately.”

The Company’s project debt is unaffected by the Chapter 11 filing. Project bondholders should expect that all debt service payments will continue. In fact, because Chapter 11 protects the value of the Company’s core energy assets, the filing will help ensure the projects’ continued performance and associated project debt payments.

The Company intends to maintain its qualified benefits programs for employees and to continue the current payroll schedule.

“The foundation of Covanta is its employees,” Mackin concluded. “Their effort and dedication, particularly over the last two years, have put us in a position to build on our core franchise to further strengthen the Company and enhance its prospects for the future. We are grateful for their ongoing support.”

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