Covanta : SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL INFORMATION - Form 8-K

Statement of operations data:

Operating revenues:

Waste revenue

Energy revenue

Materials sales revenue

Services revenue

Total operating revenue

Operating expenses:

Cost of operations

Other operating expense, net

General and administrative expense

Depreciation and amortization expense

Impairment charges

Total operating expense

Operating income

Other income (expense):

Interest expense

Net gain on sale of business and investments

Loss on extinguishment of debt

Other (expense) income, net

Total other income (expense)

Income (loss) before income tax benefit (expense) and equity in net income from unconsolidated investments

Income tax benefit (expense)

Equity in net income from unconsolidated investments

NET INCOME (LOSS)

Other financial data:

Net cash provided by operating activities

Net cash used in investing activities

Net cash used in financing activities

Adjusted EBITDA - Historical Presentation(1)

Management Adjusted EBITDA(1)

Pro Forma Adjusted EBITDA(1)

Free Cash Flow(2)

Net secured debt / Pro Forma Adjusted EBITDA

Net total debt / Pro Forma Adjusted EBITDA

Pro Forma Adjusted EBITDA / pro forma interest expense

Balance sheet data:

Cash and cash equivalents

Property, plant and equipment, net

Total assets

Total liabilities

Total stockholders' equity

For all periods presented, Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization, as adjusted for additional items subtracted from or added to net income including the effects of impairment losses, gains or losses on sales, dispositions or retirements of assets, adjustments to reflect the Adjusted EBITDA from our unconsolidated investments, adjustments to exclude significant unusual or non-recurring items that are not directly related to our operating performance, plus adjustments to capital-type expenses for our service fee facilities in line with our credit agreements. We adjust for these items in our Adjusted EBITDA as our management believes that these items would distort their ability to efficiently view and assess our core operating trends. As larger parts of our business are conducted through unconsolidated investments, we adjust EBITDA for our proportionate share of the entity's depreciation and amortization, interest expense, tax expense and other adjustments to exclude significant unusual or non-recurring items that are not directly related to the entity's operating performance, in order to improve comparability to the Adjusted EBITDA of our wholly owned entities. We do not have control, nor have any legal claim to the portion of our unconsolidated investees' revenues and expenses allocable to our joint venture partners. As we do not control, but do exercise significant influence, we account for these unconsolidated investments in accordance with the equity method of accounting. Net income (losses) from these investments are reflected within our consolidated statements of operations in Equity in net income from unconsolidated investments. We define Management Adjusted EBITDA as Adjusted EBITDA further adjusted for adjustments and dividends from unconsolidated investments. We define Pro Forma Adjusted EBITDA as Adjusted EBITDA further adjusted to give effect to the pro forma impact of the continued introduction of operational initiations. Adjusted EBITDA, Management Adjusted EBITDA and Pro Forma Adjusted EBITDA should not be considered as an alternative to net income or cash flow provided by operating activities as an indicator of our performance or liquidity or any other measures of performance or liquidity derived in accordance with

Net income (loss)

Depreciation and amortization expense

Interest expense

Income tax (benefit) expense

Impairment charges⁽¹⁾

Net gain on sale of businesses and investments⁽²⁾

Loss on asset sales

Loss on extinguishment of debt⁽³⁾

Accretion expense

Property insurance recoveries, net

Capital-type expenditures at client-owned facilities⁽⁴⁾

Business development and transaction costs⁽⁵⁾

Severance and reorganization costs⁽⁴⁾⁽⁶⁾

Stock-based compensation expense

Adjustments to reflect Adjusted EBITDA from unconsolidated investments

Other⁽⁷⁾

Adjusted EBITDA - Historical Presentation

Adjustments to reflect Adjusted EBITDA from unconsolidated investments

Dividends from unconsolidated investments

Management Adjusted EBITDA

Other income⁽⁸⁾

TAP system start-up losses⁽⁹⁾

Asian operations EBITDA⁽¹⁰⁾

Rookery Distributions⁽¹¹⁾

Impact of COVID-19⁽¹²⁾

Ash and metal investments⁽¹³⁾

G&A run-rate savings⁽¹⁴⁾

Updated contract pricing impact⁽¹⁵⁾

Pro Forma Adjusted EBITDA

Cash flow provided by operating activities

Cash paid for interest

Cash paid (refunded) paid for taxes, net

Capital-type expenditures at client-owned facilities⁽⁴⁾

Equity in net income from unconsolidated investments

Adjustments to reflect Adjusted EBITDA from unconsolidated investments

Dividends from unconsolidated investments

Adjustment for working capital and other

Adjusted EBITDA - Historical Presentation

Adjustments to reflect Adjusted EBITDA from unconsolidated investments

Dividends from unconsolidated investments

Management Adjusted EBITDA

Other income⁽⁸⁾

TAP system start-up losses⁽⁹⁾

Asian operations EBITDA⁽¹⁰⁾

Rookery Distributions⁽¹¹⁾

Impact of COVID-19⁽¹²⁾

Ash and metal investments⁽¹³⁾

G&A run-rate savings⁽¹⁴⁾

Updated contract pricing impact⁽¹⁵⁾

Pro Forma Adjusted EBITDA

During the nine months ended September 30, 2020 and the year ended December 31, 2020, we recorded a $19 million non-cash impairment charge related to our Covanta Environmental Solutions reporting unit. During the year ended December 31, 2018, we identified indicators of impairment associated with certain of our EfW facilities and recorded a non-cash impairment charge of $86 million, to reduce the carrying value of the facilities to their estimated fair value.

During the year ended December 31, 2020, we recorded a $26 million gain on the sale of business and investments comprised of a $9 million gain related to the Newhurst Energy Recovery Facility development project and a $17 million gain related to the Protos Energy Recovery Facility development project. During the year ended December 31, 2019, we recorded a $56 million gain related to the Rookery South Energy Recovery Facility development project and a $11 million loss related to the divestiture of our Springfield and Pittsfield WtE facilities. During the year ended December 31, 2018, we recorded a $7 million gain on the sale of our equity interests in Koma Kulshan, a $204 million gain on the sale of 50% of our Dublin project to our joint venture with the Green Investment Group Limited and a $6 million gain on the sale of our remaining interests in China. During the nine months ended September 30, 2020, we recorded a $9 million gain related to the Newhurst Energy Recovery Facility development project.

During the year ended December 31, 2020, we recorded a $12 million loss on extinguishment of debt comprised of approximately $10 million related to the redemption of our 5.875% Senior Notes due 2024 and approximately $1 million related to the refinancing of our Tax-Exempt Bonds. During the year ended December 31, 2018, we recorded a $3 million loss related to the refinancing of our Tax-Exempt Bonds and a $12 million loss related to the redemption of our 6.375% Senior Notes due 2022.

Adjustment for capital equipment-related expenditures at our service fee operated facilities which are capitalized at facilities that we own.

During the nine months ended September 30, 2021, we recorded $11 million of legal, accounting and other expenses in connection with our merger related activities.

During the years ended December 31, 2020 and 2019, we recorded $5 million and $13 million, respectively, of costs related to our ongoing asset rationalization and portfolio optimization efforts, early retirement program, and certain organizational restructuring activities.

Added back under the definition of Adjusted EBITDA in Covanta Energy, LLC's credit agreement.

Represents various nonoperating income and gains.

Represents losses associated with the start-up phase of the recently developed Total Ash Processing System.

Represents losses associated with the Asian operations that will be shut down.

Represents the expected run rate of distributions associated with the Rookery operations that will start up in 2022.

Represents the estimated impact of reduced APHIS waste volumes at international airports from the reduction in international passenger volumes due to COVID-19.

Represents the estimated run rate impact of new recovery systems installed at three facilities.

Represents the estimated run rate savings from implementation of specific cost savings initiatives identified during due diligence.

Represents the estimated impact of new contracted customer pricing that has not been fully realized in the LTM period.

We use the non-GAAP financial measure of Free Cash Flow as a criterion of liquidity and performance-based components of employee compensation. For all periods presented, Free Cash Flow is defined as cash flow provided by operating activities, plus changes in operating restricted funds, less maintenance capital expenditures, which are capital expenditures primarily to maintain our existing facilities. We use Free Cash Flow as a measure of liquidity to determine amounts we can reinvest in our core businesses, such as amounts available to make acquisitions, invest in construction of new projects, make principal payments on debt or return capital to our shareholders through dividends and/or stock repurchases. Free Cash Flow should not be considered as an alternative to cash flow provided by operating activities as an indicator of our liquidity or any other measure of liquidity in accordance with GAAP. The following is a summary reconciliation of net cash provided by operating activities to Free Cash Flow for the three years ended December 31, 2018, 2019 and 2020, the nine months ended September 30, 2020 and 2021 and for the twelve-month pro forma period ended September 30, 2021:

Computation of Free Cash Flow:

Cash flow provided by operating activities

Add: Changes in restricted funds-operating(1)

Less: Software implementation expenditures (2)

Less: Maintenance capital expenditures(3)

Free Cash Flow

Adjustment for the impact of the adoption of ASU 2016-18 effective January 1, 2018. As a result of adoption, the statement of cash flows explains the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, changes in restricted funds are eliminated in arriving at net cash, cash equivalents and restricted funds provided by operating activities.

Due to the adoption of ASU 2018-15 effective January 1, 2020, these expenditures, previously included in Maintenance capital expenditures above and Purchase of property, plant and equipment on our consolidated statement of cash flows, are now included in Other, net in the investing section of our consolidated statement of cash flows.

Purchase of property, plant and equipment are also referred to as capital expenditures. Capital expenditures that primarily maintain existing facilities are classified as maintenance capital expenditures.

(dollars in millions)

Assets

Current assets:

Cash and cash equivalents

Restricted funds held in trust (current)

Receivables (less allowances)

Prepaid expenses and other current assets

Total current assets

Property, plant and equipment, net

Restricted funds held in trust (noncurrent)

Intangible assets, net

Goodwill

Other assets

Total assets

Liabilities and stockholders' equity

Current liabilities:

Current portion of long-term debt

Current portion of project debt

Accounts payable

Accrued expenses and other current liabilities

Total current liabilities

Long-term debt

Project debt

Deferred income taxes

Other liabilities

Total liabilities

Members' equity

Preferred stock

Common stock

Additional paid-in capital

Accumulated other comprehensive loss

Accumulated deficit

Treasury stock, at par

Total members' equity

Total liabilities and members' equity

(dollars in millions)

Operating revenue:

Waste revenue

Energy revenue

Materials sales revenue

Services revenue

Total operating revenue

Operating expense:

Cost of operations

Other operating expense, net

General and administrative expense

Depreciation and amortization expense

Impairment charges

Total operating expense

Operating income

Other (expense) income:

Interest expense, net

Net gain on sale of business and investments

Loss on extinguishment of debt

Other expense

Total other expenses

Income (loss) before income tax (expense) benefit and equity in net income from unconsolidated investments

Income tax (expense) benefit

Equity in net income from unconsolidated investments

Net income (loss)

Operating revenue:

Waste revenue

Energy revenue

Materials sales revenue

Services revenue

Total operating revenue

Operating expense:

Cost of operations

Other operating expense, net

General and administrative expense

Depreciation and amortization expense

Impairment charges

Total operating expense

Operating income

Other (expense) income:

Interest expense, net

Net gain on sale of business and investments

Loss on extinguishment of debt

Other expense

Total other expenses

Income (loss) before income tax (expense) benefit and equity in net income from unconsolidated investments

Income tax (expense) benefit

Equity in net income from unconsolidated investments

Net income (loss)

Operating revenue:

Waste revenue

Energy revenue

Materials sales revenue

Services revenue

Total operating revenue

Operating expense:

Cost of operations

Other operating expense, net

General and administrative expense

Depreciation and amortization expense

Impairment charges

Total operating expense

Operating income

Other (expense) income:

Interest expense, net

Net gain on sale of business and investments

Loss on extinguishment of debt

Other expense

Total other expenses

Income (loss) before income tax (expense) benefit and equity in net income from unconsolidated investments

Income tax (expense) benefit

Equity in net income from unconsolidated investments

Net income (loss)

Operating revenue:

Waste revenue

Energy revenue

Materials sales revenue

Services revenue

Total operating revenue

Operating expense:

Cost of operations

Other operating expense, net

General and administrative expense

Depreciation and amortization expense

Impairment charges

Total operating expense

Operating income

Other (expense) income:

Interest expense, net

Net gain on sale of business and investments

Loss on extinguishment of debt

Other expense

Total other expenses

Income (loss) before income tax (expense) benefit and equity in net income from unconsolidated investments

Income tax (expense) benefit

Equity in net income from unconsolidated investments

Net income (loss)

Beginning in the first quarter of 2021, we revised our presentation of revenue to distinguish our waste and service activities between (a) revenue received in connection with accepting waste for processing or disposal and (b) revenue received for performing other services. We also aligned costs for all revenue producing activities, including construction services, under Cost of operations. These reclassifications are reflected in the historical condensed consolidated statement of operations for the year ended December 31, 2020. The change in presentation did not affect our total operating revenue, total operating expense, or operating loss.

Sources

New Term Loan Facilities (1, 2)

Sustainability-linked senior notes offered hereby (3)

Assumed Debt (4)

Equity Financing (5)

Total Sources

Uses

Merger Consideration (6)

Restricted cash for L/C collateral (1)

Repayment of outstanding indebtedness (7)

Assumed Debt (4)

Estimated fees and expenses (8)

Total Uses

Sources and Uses includes the new $100.0 million Initial Term C Facility, which will fund the $100.0 million L/C cash collateral account. This account will be used to collateralize the issuance of certain L/Cs.

We expect to have $440.0 million of availability under the New Revolving Credit Facility (without giving effect to $241 million of outstanding letters of credit). See "Description of Other Indebtedness."

Represents the gross proceeds of the notes offered hereby, assuming an issuance at par.

After giving effect to the Transactions, the Assumed Debt will consist of the 2027 Notes, the 2030 Notes, the Tax-Exempt Bonds, the remaining portion of equipment financing arrangements, finance leases, the China venture loan, and project debt.

Represents cash equity contributions expected to be made by certain investment funds affiliated with the EQT Investors.

Reflects our estimate of the total consideration to be paid to holders of all of the issued and outstanding shares of Common Stock that are entitled to receive the Merger Consideration and the settlement of RSUs in the Merger.

As of September 30, 2021, we had $552.5 million of indebtedness outstanding under the Existing Credit Facilities, including $0.8 million of deferred financing costs, and $400.0 million of the 2025 Notes that remain outstanding, including $3.3 million in deferred financing costs. We intend to use the proceeds from the Financing Transactions to (i) finance the Merger pursuant to the Merger Agreement, (ii) finance the Refinancing and (iii) pay fees and expenses related to the foregoing. See "Use of Proceeds." Following the Refinancing, we expect to repay all such indebtedness using a portion of the proceeds from the Financing Transactions. We also expect to repay $36.2 million of equipment financing and pay $6.1 million in accrued interest. As part of the debt retirement, we will also pay $11.8 million for the redemption of the 2025 Notes. Depending on the timing of the closing of the Transactions, the borrowings and accrued interest associated with the existing indebtedness may vary.

Represents our estimate of fees and expenses associated with the Transactions, including financing fees, original issue discounts, initial purchaser discounts, consent fees with respect to the Consent Solicitations, legal, advisory and professional fees and other transaction costs, such as printing and rating agency fees. To the extent any financing fees, original issue discounts and other fees and expenses exceed the estimated amounts, we expect to fund such amounts with cash on our balance sheet at the closing of the Transactions.

Preliminary Purchase Price

Merger consideration

Repayment of outstanding indebtedness

Settle seller transaction expenses

Total

Less: cash acquired

Total preliminary purchase price, net of cash acquired

Assets acquired

Restricted funds held in trust (current)

Receivables (less allowances)

Prepaid expenses and other current assets

Property, plant and equipment, net

Restricted funds held in trust (noncurrent)

Intangible assets, net

Other assets

Total identifiable assets acquired, net of cash acquired

Liabilities assumed

Current portion of long-term debt

Current portion of project debt

Accounts payable

Accrued expenses and other current liabilities

Long-term debt

Project debt

Deferred income taxes

Other liabilities

Total liabilities assumed

Net assets acquired, excluding goodwill

Total preliminary purchase consideration, net of cash acquired

Goodwill

Reflects the following adjustments to Cash and cash equivalents (in millions):

Purchase price

Repayment of existing indebtedness

Seller transaction expenses

Buyer transaction expenses

Net adjustment to Cash and cash equivalents

Reflects the retirement of the historical debt of the Company for $990.7 million, net of $4.1 million of deferred debt financing costs, comprised of a $971.4 million reduction to long-term debt less current portion, $13.2 million reduction to current portion of long-term debt, and $6.1 million reduction to accrued interest and other current liabilities. As part of the debt retirement, we will also pay $11.8 million for the redemption of the 2025 Notes.

Reflects the following adjustments to Accrued expenses and other current liabilities (in millions):

Elimination of accrued interest related to retired debt

Elimination of accrued dividends on stock compensation to be paid as part of merger consideration

Elimination of accrued sellers transaction expenses

Net adjustment to Accrued expenses and other current liabilities

Reflects the Goodwill to be recorded based on our preliminary purchase price allocation. Goodwill represents the excess of the aggregate preliminary purchase price over the preliminary estimated fair values of recorded tangible and intangible assets acquired and liabilities assumed in the Merger. The actual amount of goodwill to be recorded in connection with the Merger is subject to change once the valuation of the fair value of tangible and intangible assets acquired and liabilities assumed has been completed. The final valuation of such assets and liabilities is expected to be completed as soon as practicable but no later than one year after the consummation of the Merger. The goodwill is expected to be deductible for income tax purposes.

Goodwill recorded as a result of the Merger

Less: Historical book value of goodwill

Net adjustment

Reflects a net adjustment of $636.0 million to reflect the property and equipment to their preliminary estimated fair value. The fair value estimate was determined based on the assumptions that market participants would use in pricing an asset, based on the most advantageous market for the asset (i.e., its highest and best use). The calculated value is preliminary and could vary materially from the final purchase allocation. The preliminary fair value and remaining estimated useful life of property and equipment are estimated as follows:

Fair Value of Property, Plant, and Equipment Acquired

Total fair value of Property, Plant, and Equipment acquired

Less: Historical Property, Plant, and Equipment

Pro forma adjustment to Property, Plant, and Equipment, net

Reflects a net adjustment of $588.0 million to reflect the preliminary fair value of intangible assets identified upon the Merger. The estimated fair value of intangible assets included in this unaudited pro forma combined financial information is preliminary and subject to change after the Company finalizes its review of specific customer relationships and other possible intangible assets. Once a final valuation has been completed, the fair value of intangibles may differ materially from the estimated fair value included in this unaudited pro forma combined financial information. The preliminary fair value and weighted average estimated useful life of identifiable intangible assets are estimated as follows:

Fair Value of Intangible Assets Acquired

Trade Name and Trademark

Customer relationships and contracts

Total fair value of Intangible Assets acquired

Less: Historical Intangible Assets

Pro forma adjustment to Intangible Assets, net

Reflects the net adjustment to Members' equity in conjunction with the Merger calculated as follows (in millions):

Adjustment to Common stock to eliminate the historical balance

Adjustment to Additional paid-in capital to eliminate the historical balance

Adjustment to Accumulated other comprehensive income to eliminate the historical balance

Adjustment to Accumulated deficit to eliminate the historical balance

Adjustment to Accumulated deficit for buyer transaction expenses

Net adjustment to Members' equity

Represents a $330.5 million adjustment to deferred income taxes. This adjustment relates to an increase in our deferred tax liability arising from changes in the book basis of the net assets acquired as compared to the historical basis reflected in our financial statements. The estimates were calculated using a blended statutory tax rate of 27.0%.

$300.0 million of 7-year debt representing the notes offered hereby;

the New Term Loan Facilities in the principal amount of $1,435.0 million;

the New Revolving Credit Facility with borrowing capacity of $440.0 million; and

$2,418.7 million of common equity contribution by certain investment funds affiliated with the EQT Investors.

Reflects an increase in cash of $3,959.1 million, of which relates to the net cash received from the common equity contribution of $2,418.7 million, the notes of $300.0 million, and $1,335.0 million of the New Term Loan Facilities, excluding the $100.0 million Initial Term C Facility that will be used to fund the L/C cash collateral account. This is offset by issuance costs of $70.4 million, bridge financing cost of $17.8 million, and consent fees with respect to the Consent Solicitations of $6.4 million, which were recorded as net adjustments against the proceeds. The composition of the equity contribution and borrowings made by us are as follows (in millions):

Proceeds:

New Revolving Credit Facility

New Term Loan Facilities

Sustainability-linked senior notes offered hereby

Less: Debt issuance costs relating to the notes offered hereby and New Term Loan Facilities (i)

Net Debt

Plus: Equity Financing

Less: Debt issuance costs relating to the New Revolving Credit Facility

Less: Bridge financing cost

Less: Consent fees

Cash received from offering

Less Current maturities of long-term debt

Equity and long-term debt, excluding current maturities and net of deferred financing costs

Debt issuance costs include an estimated $21.5 million original discount on the New Term Loan Facilities.

Reflects a $13.4 million increase to current portion of long-term debt and a $1,627.0 million increase to long-term debt net of current maturities related to the notes and Term Loan Facilities, net of issuance costs of $70.4 million, bridge financing cost of $17.8 million, and consent fees with respect to the Consent Solicitations of $6.4 million.

Reflects the payment of less than $0.1 million of quarterly administrative agent fees associated with the New Term Loan Facilities and New Revolving Credit Facility that are capitalized as a prepaid expense and presented within other current assets.

Reflects the Equity Financing of $2,418.7 million.

Reflects the $100.0 million adjustment to restricted funds held in trust due to the use of the Initial Term C Facility to fund the L/C cash collateral account.

Represents a net adjustment as set forth in the following table from the elimination of historical property and equipment depreciation and the recognition of pro forma depreciation expense for the LTM Period ended September 30, 2021, the nine months ended September 30, 2021, the nine months ended September 30, 2020, and the year ended December 30, 2020.

Depreciation Expense for Property, Plant, and Equipment

Total

Less: Historical Depreciation for Property, Plant, and Equipment

Net Adjustment to Depreciation for Property, Plant, and Equipment

Represents a net adjustment as set forth in the following table resulting from the elimination of historical intangible asset amortization expense and the recognition of pro forma amortization expense for the LTM Period ended September 30, 2021, the nine months ended September 30, 2021, the nine months ended September 30, 2020, and the year ended December 30, 2020.

Amortization Expense for Intangible Assets

Trade Name and Trademark

Customer relationships

Subtotal:

Less: Historical Amortization

Net Adjustment to Amortization

Reflects the elimination of historical interest expense and amortization expense of debt issuance costs associated with the Company's historical indebtedness that was repaid in connection with the Merger. A summary of the effects of the adjustments to interest expense are as follows:

Interest Expense

Less: Historical Interest expense

Represents the adjustment to general and administrative expense for $85.3 million of buyer transaction expenses for the year ended December 30, 2020. These expenses will not affect the Company's consolidated statement of operations and comprehensive income (loss) beyond twelve months after the Merger.

Represents the income tax effect of the Merger adjustments using a blended statutory tax rate of 27.0% for the LTM Period ended September 30, 2021, the nine months ended September 30, 2021, the nine months ended September 30, 2020, and the year ended December 30, 2020. This rate does not reflect the Company's effective tax rate, which may differ from the rates assumed for purposes of preparing these statements. Because the tax rates used for these unaudited pro forma consolidated financial statements are an estimate, the blended rate will likely vary from the actual effective rate in periods subsequent to completion of the Merger.

Represent the quarterly administrative agent fees associated with the New Term Loan Facility and New Revolving Credit Facility. A summary of the effects of the adjustments to general and administrative expenses are as follows:

Quarterly admin agent fees