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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 2000 COMMISSION FILE NO. 001-15065
AZURIX CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0589114
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
333 CLAY STREET
SUITE 1000
HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (713) 646-6001
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
TITLE OF CLASS OUTSTANDING AT APRIL 30, 2000
Common Stock 117,207,176
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AZURIX CORP.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income for the three months ended
March 31, 1999 and 2000 (unaudited).................................................................... 2
Consolidated Balance Sheets as of December 31, 1999 and March 31, 2000 (unaudited)....................... 3
Consolidated Statements of Cash Flows for the three months ended
March 31, 1999 and 2000 (unaudited).................................................................... 4
Notes to Consolidated Financial Statements (unaudited)................................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................................... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................................. 14
Item 6. Exhibits and Reports on Form 8-K................................................................... 14
</TABLE>
1
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AZURIX CORP.
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------------
1999 2000
---------- ----------
<S> <C> <C>
Operating revenues ................................... $ 116.9 $ 194.6
Operating expenses:
Operations and maintenance ......................... 31.2 82.6
General and administrative ......................... 23.2 36.5
Depreciation and amortization ...................... 23.3 31.6
---------- ----------
Total operating expenses ................... 77.7 150.7
---------- ----------
Operating income ..................................... 39.2 43.9
---------- ----------
Other income (expense):
Equity in earnings of unconsolidated affiliates .... 0.2 0.9
Interest expense, net .............................. (14.9) (28.1)
---------- ----------
Income before minority interest and income taxes ..... 24.5 16.7
---------- ----------
Minority interest .................................... -- (0.6)
Income tax expense ................................... 8.4 5.9
---------- ----------
Net income ........................................... $ 16.1 $ 11.4
========== ==========
Earnings per share of common stock - basic and diluted $ 0.16 $ 0.10
========== ==========
Weighted average shares outstanding:
Basic ......................................... 100.0 117.1
========== ==========
Diluted ....................................... 100.0 117.6
========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
2
<PAGE> 4
AZURIX CORP.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31, MARCH 31,
1999 2000
---------- ----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................................................ $ 27.2 $ 31.4
Restricted cash and cash equivalents ............................................. 464.2 491.7
Trade receivables (net of allowance for doubtful accounts
of $40.7 and $46.5, respectively) ............................................. 115.7 119.2
Unbilled receivables ............................................................. 32.5 38.0
Other ............................................................................ 69.7 57.2
---------- ----------
Total current assets ..................................................... 709.3 737.5
---------- ----------
Property, plant and equipment, at cost ............................................. 2,559.1 2,625.0
Less accumulated depreciation ...................................................... (90.4) (115.7)
---------- ----------
Property, plant and equipment, net ....................................... 2,468.7 2,509.3
---------- ----------
Investments in and advances to unconsolidated affiliates ........................... 110.4 114.0
Concession intangibles, net ........................................................ 451.3 448.2
Goodwill, net ...................................................................... 1,029.6 1,016.9
Other assets ....................................................................... 81.1 109.6
---------- ----------
Total Assets ............................................................. $ 4,850.4 $ 4,935.5
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accruals .................................................... $ 236.0 $ 204.2
Deferred income .................................................................. 54.6 23.4
Accrued taxes .................................................................... 21.1 28.5
Short-term debt .................................................................. 602.2 604.7
Current maturities of long-term debt ............................................. 35.0 32.7
---------- ----------
Total current liabilities ................................................ 948.9 893.5
---------- ----------
Long-term debt ..................................................................... 1,301.9 1,401.1
Long-term debt - affiliates ........................................................ 180.0 218.8
Deferred income taxes .............................................................. 443.3 455.2
Other long-term liabilities ........................................................ 31.2 32.8
---------- ----------
Total liabilities ........................................................ 2,905.3 3,001.4
---------- ----------
Commitments and contingencies (Note 4)
Minority interest .................................................................. 3.3 2.6
Stockholders' equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized ................... -- --
Common stock, $0.01 par value, 500,000,000 shares authorized, 117,221,895
shares and 117,205,462 shares issued and outstanding, respectively ........... 1.2 1.2
Additional paid-in capital ....................................................... 1,972.2 1,972.6
Retained earnings ................................................................ 47.9 59.3
Unearned compensation ............................................................ (0.6) (0.4)
Accumulated other comprehensive loss ............................................. (78.9) (101.2)
---------- ----------
Total stockholders' equity ............................................... 1,941.8 1,931.5
---------- ----------
Total Liabilities and Stockholders' Equity ............................... $ 4,850.4 $ 4,935.5
========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
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AZURIX CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1999 2000
---------- ----------
<S> <C> <C>
Operating Activities:
Net income ......................................................... $ 16.1 $ 11.4
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation and amortization................................... 23.3 31.6
Accretion and amortization of debt expenses .................... 0.5 1.2
Deferred income taxes .......................................... 5.3 2.4
Equity in earnings of unconsolidated affiliates ................ (0.2) (0.9)
Minority interest .............................................. -- (0.6)
Changes in operating assets and liabilities:
(Increase) Decrease in trade receivables and other current
assets ................................................ 9.7 (1.0)
Decrease in current liabilities, excluding debt .......... (44.1) (55.6)
Decrease in other assets ................................. 0.3 6.4
Increase (Decrease) in other long-term liabilities ....... 1.6 (4.8)
---------- ----------
Net cash provided by (used in) operating activities ..................... 12.5 (9.9)
---------- ----------
Investing Activities:
Capital expenditures ............................................... (74.5) (85.2)
Investments in and advances to unconsolidated affiliates ........... (28.5) (2.6)
Other .............................................................. (6.8) (28.5)
---------- ----------
Net cash used in investing activities ................................... (109.8) (116.3)
---------- ----------
Financing Activities:
Proceeds from long-term borrowings ................................. 477.7 583.3
Repayments of long-term borrowings ................................. (9.8) (555.2)
Net proceeds from (repayments of) short-term borrowings ............ (410.8) 62.4
Issuance of common stock ........................................... -- 0.3
Advances from affiliates, net of repayments ........................ 48.0 40.6
---------- ----------
Net cash provided by financing activities ............................... 105.1 131.4
---------- ----------
Effect of exchange rate changes on cash ................................. -- (1.0)
---------- ----------
Change in cash and cash equivalents ..................................... 7.8 4.2
---------- ----------
Cash and cash equivalents, beginning of period .......................... 5.3 27.2
---------- ----------
Cash and cash equivalents, end of period ................................ $ 13.1 $ 31.4
========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE> 6
AZURIX CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated interim financial statements and
disclosures are unaudited and have been prepared by Azurix Corp. pursuant to the
rules and regulations of the Securities and Exchange Commission. Accordingly,
these statements reflect all normal recurring adjustments necessary for a fair
presentation, in all material respects, of the results for the interim periods.
The results of operations for the period ended March 31, 2000 is not necessarily
indicative of results to be expected for the full year. Certain information and
notes normally included in financial statements, prepared in accordance with
generally accepted accounting principles, have been condensed or omitted
pursuant to such rules and regulations, although Azurix believes that the
disclosures are adequate to make the information presented not misleading. These
consolidated interim financial statements should be read in conjunction with the
financial statements and the notes thereto included in Azurix's Annual Report on
Form 10-K for the year ended December 31, 1999.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain reclassifications have been made in the 1999 amounts to conform
with the 2000 presentation.
"Azurix" is used from time to time herein as a collective reference to
Azurix Corp. and its subsidiaries and affiliates.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including instruments embedded
in other contracts (collectively referred to as derivatives), and for hedging
contracts. It requires an entity to recognize all derivatives as either assets
or liabilities in the statement of financial position and measure those
instruments at fair value. In June 1999, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 137 which deferred
the effective date of Statement of Financial Accounting Standards No. 133 to
fiscal years beginning after June 15, 2000. Statement of Financial Accounting
Standards No. 133 may be implemented, as of the beginning of any fiscal quarter
after issuance, however, the statement cannot be applied retroactively. Azurix
is currently evaluating and has not yet determined the effect that the adoption
of Statement of Financial Accounting Standards No. 133 will have on its
financial statements. Azurix will adopt the statement beginning fiscal year
2001.
NOTE 2 - LONG-TERM DEBT AND LONG-TERM DEBT - AFFILIATES
In February 2000, Azurix issued U.S. dollar and U.K. pounds sterling
senior subordinated notes with a U.S. dollar equivalent face value of $599.8
million. The senior notes consisted of $240.0 million and (pound)100.0 million,
each due in 2007 and bearing an interest rate of 10 3/8% and $200.0 million due
in 2010 and bearing an interest rate of 10 3/4%. Estimated net proceeds after
underwriter's discount and other estimated offering costs were $583.4 million.
Of this amount, $150.0 million was used to pay down the Azurix revolving credit
facility, $386.0 million was used to pay down the Azurix Europe revolving credit
facility and $18.1 million was used to pay down amounts outstanding under the
credit agreement with Enron. In addition, $11.5 million was used to pay accrued
interest on the three credit facilities. The remaining proceeds were made
available for general corporate purposes. The notes were issued under an
indenture that contains certain covenants that limit Azurix's ability to incur
additional debt, pay dividends or make other distributions, incur liens on its
assets, enter into sale/leaseback transactions and to enter into transactions
with affiliates, or sell assets to, or merge with, another entity.
5
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AZURIX CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
As of March 31, 2000, Azurix, through Wessex, had, among other credit
facilities, committed credit facilities with major commercial banks providing
for an aggregate of $119.4 million of borrowing capacity. No amounts were drawn
at December 31, 1999. As a result of borrowings during the quarter ended March
31, 2000, the balance outstanding under these facilities at March 31, 2000 was
$57.3 million.
During the quarter ended March 31, 2000, Azurix increased its
borrowings under its credit agreement with Enron by $40.6 million, to $93.9
million. Amounts outstanding under the credit agreement may not exceed $120
million and $180 million at any time during calendar years 2000 and 2001,
respectively.
NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes and interest expense is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------------
1999 2000
-------------- -------------
(IN MILLIONS)
<S> <C> <C>
Income taxes ............................................ $ 12.6 $ 1.9
Interest expense (net of amounts capitalized) ........... 12.8 46.0
</TABLE>
NON-CASH TRANSACTION
During the first quarter of 2000, Azurix acquired assets by entering
into capital leases totaling approximately $3.4 million.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Azurix is party to a lawsuit styled Synagro Technologies, Inc. v Azurix
Corp., in the 270th Judicial District Court of Harris County, Texas. The lawsuit
relates to various agreements between the parties regarding potential business
transactions and the possible acquisition by Azurix of two subsidiaries of Waste
Management, Inc., commonly called BioGro. On May 1, 2000, Synagro announced that
it had entered into an agreement to purchase BioGro. On May 9, 2000, Synagro
filed its First Amended Petition in the District Court seeking (i) damages in
excess of $57 million resulting from the alleged breach by Azurix of an
agreement to purchase up to $23 million of Synagro convertible preferred stock
and (ii) unspecified damages resulting from Azurix's alleged breach of
confidentiality and standstill agreements. Azurix intends to continue to defend
these actions vigorously and intends to continue to pursue its claims for
damages resulting from Synagro's interference with Azurix's negotiations to
acquire BioGro. Although no assurances can be given, Azurix believes that the
ultimate resolution of this litigation will not have a material adverse effect
on its results of operations or financial position.
Azurix is involved in various claims and lawsuits incidental to its
business. Although no assurances can be given, Azurix believes that the ultimate
resolution of such items will not have a material adverse effect on its results
of operations or financial position.
Azurix is subject to extensive federal, foreign, state and local
environmental laws and regulations. Azurix anticipates future changes in, or
decisions affecting, regulatory regimes that will serve to expand or tighten
regulatory controls. Some of these changes or decisions could have a material
adverse effect on its financial position and results of operations.
6
<PAGE> 8
AZURIX CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 5 - EARNINGS PER SHARE
The numerators in the basic and diluted earnings per share calculations
are equal. A reconciliation of the denominators is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1999 2000
---------- ----------
(IN MILLIONS)
<S> <C> <C>
Denominator:
Weighted average shares - basic .......................................... 100.0 117.1
Effect of dilutive securities:
Non-vested restricted stock ........................................... -- 0.1
Stock options ......................................................... -- 0.4
---------- ----------
Weighted average shares - diluted ........................................ 100.0 117.6
========== ==========
</TABLE>
NOTE 6 - COMPREHENSIVE LOSS
Comprehensive loss includes the following for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 2000
---------- ----------
(IN MILLIONS)
<S> <C> <C>
Net income ............................................................... $ 16.1 $ 11.4
Other comprehensive loss:
Foreign currency translation adjustment .............................. (46.9) (21.7)
Unrealized loss on available for sale securities ..................... -- (0.6)
---------- ----------
Comprehensive loss ....................................................... $ (30.8) $ (10.9)
========== ==========
</TABLE>
NOTE 7 - RESTRUCTURING CHARGE
In 1998, Azurix adopted a business strategy focused on growth through
acquisitions and development projects around the world. During the fourth
quarter of 1998 and the first half of 1999, Azurix initiated a business
development effort requiring increased personnel to pursue and support
acquisition and privatization activities worldwide. The initiative was based on
Azurix's expectations as to the size, number, location and timing of
privatization projects that would be awarded in 1999, 2000 and beyond. During
the second half of 1999, several large privatization projects were postponed or
cancelled. In the fourth quarter of 1999, Azurix reevaluated its cost structure
in relation to its business development efforts. As a result, Azurix announced a
plan to restructure its operations, which resulted in Azurix recording a
one-time pretax expense totaling $34.2 million in the fourth quarter of 1999.
The restructuring plan includes reducing personnel, reducing its leased office
space and eliminating other costs relating to the pursuit of concessions in
certain regions.
The restructuring plan involves the elimination of 206 employee
positions working in the concession acquisition effort. As of March 31, 2000,
128 employees had been terminated pursuant to the restructuring plan. Azurix
expects that the restructuring actions will be completed by the end of the
second quarter of 2000. The restructuring liability has been classified in
"Accounts payable and accruals" on the Consolidated Balance Sheets and is being
funded through cash provided by operating activities and borrowings under credit
agreements.
7
<PAGE> 9
AZURIX CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
Amounts related to the restructuring liability are shown in the
following table:
<TABLE>
<CAPTION>
BALANCE AT FIRST QUARTER FOREIGN BALANCE AT
DECEMBER 31, 2000 EXCHANGE MARCH 31,
1999 PAYMENTS DIFFERENCE 2000
------------ ------------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Severance and related
payroll burden.......... $ 16.5 $ (5.6) $ (0.1) $ 10.8
====== ======= ====== ======
</TABLE>
NOTE 8 - STOCK PLAN
In March 2000, Azurix granted 1,743,580 stock options to its employees
at an exercise price per share of $7.5625. Of this amount, 600,000 stock options
will vest over a period of three to four years and 1,143,580 stock options will
vest in six years, unless accelerated vesting occurs due to Azurix Corp. meeting
or exceeding a Board of Directors approved annual financial performance target.
NOTE 9 - SUBSEQUENT EVENTS
At March 31, 2000, Azurix had restricted cash and cash equivalents of
$413.7 million on deposit in a cash collateral account that secured a $394.0
million bank loan to an Azurix subsidiary that was used to fund the Buenos Aires
concession acquisition. In April 2000, Azurix used $415.5 million of the amounts
on deposit in the cash collateral account to repay the entire amount of the bank
loan of $394.0 million and related interest of $19.7 million. The bank loan was
classified on the Consolidated Balance Sheets as "Short-term debt." The
remaining $1.8 million on deposit in the cash collateral account was deposited
into a non-restricted cash account.
During April 2000, residents of the city of Bahia Blanca, Argentina and
surrounding areas began noticing unpleasant taste and odor in their water
supply, which is provided by Azurix Buenos Aires, S.A. The taste and odor were
traced to a substance released by algae that have grown to high levels in a
reservoir operated by an agency of the Province of Buenos Aires and that had
entered the local water supply. On becoming aware of the cause of the unpleasant
taste and odor, Azurix Buenos Aires instituted measures that have restored the
taste and odor to acceptable levels. Tests performed by government officials as
well as Azurix Buenos Aires have shown that there were no harmful biological or
toxic substances in the water supply, and provincial officials have stated
publicly that there was no danger to public health. Algae levels in the
reservoir continue to be high, however, and therefore issues of taste, odor and
color may recur.
Before the situation was corrected, at the request of government
officials, Azurix Buenos Aires acquired water from other sources for delivery in
trucks and bottles to residents in Bahia Blanca. Azurix Buenos Aires has agreed
with the provincial regulatory agency not to bill residential customers for
water services for a 23-day period during which the taste and odor of supplied
water were allegedly unsatisfactory, although the regulatory agency has approved
billing industrial and commercial customers for water and all customers for
wastewater services during this time. Because this situation has occurred only
recently, we have not completed an analysis of the impact on costs and revenues
caused by these actions.
8
<PAGE> 10
AZURIX CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
Under the Azurix Buenos Aires' concession agreement with the province,
an agency of the province was required to construct works to remove algae from
the water. The algae-removing works had not been completed or tested before this
incident occurred. International experts have advised Azurix Buenos Aires that
conventional algae removal facilities and reservoir operations would have
prevented the algae from entering the water system. Azurix Buenos Aires believes
the events in Bahia Blanca resulted directly from the provincial agency's
failure to deliver functioning algae removal works as required under the
agreement and intends to seek reimbursement or other compensation from the
province for all costs and forgone revenues.
9
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the
information contained in the Consolidated Financial Statements of Azurix and
related notes thereto, contained herein, as well as the Consolidated Financial
Statements of Azurix and related notes thereto and Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in Azurix's
Annual Report on Form 10-K for the year ended December 31, 1999.
RECENT DEVELOPMENT
During April 2000, residents of the city of Bahia Blanca, Argentina and
surrounding areas began noticing unpleasant taste and odor in their water
supply, which is provided by Azurix Buenos Aires, S.A. The taste and odor were
traced to a substance released by algae that have grown to high levels in a
reservoir operated by an agency of the Province of Buenos Aires and that had
entered the local water supply. On becoming aware of the cause of the unpleasant
taste and odor, Azurix Buenos Aires instituted measures that have restored the
taste and odor to acceptable levels. Tests performed by government officials as
well as Azurix Buenos Aires have shown that there were no harmful biological or
toxic substances in the water supply, and provincial officials have stated
publicly that there was no danger to public health. Algae levels in the
reservoir continue to be high, however, and therefore issues of taste, odor and
color may recur.
Before the situation was corrected, at the request of government
officials, Azurix Buenos Aires acquired water from other sources for delivery in
trucks and bottles to residents in Bahia Blanca. Azurix Buenos Aires has agreed
with the provincial regulatory agency not to bill residential customers for
water services for a 23-day period during which the taste and odor of supplied
water were allegedly unsatisfactory, although the regulatory agency has approved
billing industrial and commercial customers for water and all customers for
wastewater services during this time. Because this situation has occurred only
recently, we have not completed an analysis of the impact on costs and revenues
caused by these actions.
Under the Azurix Buenos Aires' concession agreement with the province,
an agency of the province was required to construct works to remove algae from
the water. The algae-removing works had not been completed or tested before this
incident occurred. International experts have advised Azurix Buenos Aires that
conventional algae removal facilities and reservoir operations would have
prevented the algae from entering the water system. Azurix Buenos Aires believes
the events in Bahia Blanca resulted directly from the provincial agency's
failure to deliver functioning algae removal works as required under the
agreement and intends to seek reimbursement or other compensation from the
province for all costs and forgone revenues.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including instruments embedded
in other contracts (collectively referred to as derivatives), and for hedging
contracts. It requires an entity to recognize all derivatives as either assets
or liabilities in the statement of financial position and measure those
instruments at fair value. In June 1999, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 137 which deferred
the effective date of Statement of Financial Accounting Standards No. 133 to
fiscal years beginning after June 15, 2000. Statement of Financial Accounting
Standards No. 133 may be implemented, as of the beginning of any fiscal quarter
after issuance, however, the statement cannot be applied retroactively. Azurix
is currently evaluating and has not yet determined the effect that the adoption
of Statement of Financial Accounting Standards No. 133 will have on its
financial statements. Azurix will adopt the statement beginning fiscal year
2001.
10
<PAGE> 12
1999 RESTRUCTURING CHARGE
In 1998, Azurix adopted a business strategy focused on growth through
acquisitions and development projects around the world. During the fourth
quarter of 1998 and the first half of 1999, Azurix initiated a business
development effort requiring increased personnel to pursue and support
acquisition and privatization activities worldwide. The initiative was based on
Azurix's expectations as to the size, number, location and timing of
privatization projects that would be awarded in 1999, 2000 and beyond. During
the second half of 1999, several large privatization projects were postponed or
cancelled. In the fourth quarter of 1999, Azurix reevaluated its cost structure
in relation to its business development efforts. As a result, Azurix announced a
plan to restructure its operations, which resulted in Azurix recording a
one-time pretax expense totaling $34.2 million in the fourth quarter of 1999.
The restructuring plan includes reducing personnel, reducing its leased office
space and eliminating other costs relating to the pursuit of concessions in
certain regions. The restructuring liability is being funded through cash
provided by operating activities and borrowings under credit agreements. See
Note 7 of the Notes to the Consolidated Financial Statements.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
Operating revenues for the three months ended March 31, 2000 of $194.6
million, increased $77.7 million, or 66%, when compared to the three months
ended March 31, 1999. The increase resulted primarily from revenue from
acquisitions that occurred after the three months ended March 31, 1999.
Operations and maintenance expense for the three months ended March 31,
2000 of $82.6 million, increased $51.4 million, or 165%, when compared to the
three months ended March 31, 1999. The increase resulted primarily from
operating and maintenance expense of acquisitions that occurred after the three
months ended March 31, 1999 and was partially offset by lower operating costs
from Wessex's unregulated activities.
General and administrative expense for the three months ended March 31,
2000 of $36.5 million, increased $13.3 million, or 57%, when compared to the
three months ended March 31, 1999. The increase resulted primarily from general
and administrative expense of acquisitions that occurred after the three months
ended March 31, 1999.
Depreciation and amortization expense for the three months ended March
31, 2000 of $31.6 million, increased $8.3 million, or 36%, when compared to the
three months ended March 31, 1999. The increase resulted primarily from
depreciation and amortization expense associated with acquisitions that occurred
after the three months ended March 31, 1999 and higher depreciation and
amortization expense at Wessex resulting from its capital investment program.
Interest expense for the three months ended March 31, 2000 of $28.1
million, increased $13.2 million, or 89%, when compared to the three months
ended March 31, 1999. The increase was primarily due to increased borrowings
used to fund acquisitions that occurred after the three months ended March 31,
1999 and higher cost of debt resulting from the issuance of Azurix's senior
subordinated notes in February 2000 which refinanced lower cost short-term debt.
The effective tax rate for the three months ended March 31, 2000 and
March 31, 1999 was 34%. Income tax expense for the three months ended March 31,
2000 of $5.9 million, decreased $2.5 million, or 30%, when compared to the three
months ended March 31, 1999, primarily as a result of the changes in pretax
income discussed above.
11
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
Azurix's cash used in operating activities for the three months ended
March 31, 2000 was $9.9 million. Included in this amount was the payment of
$28.1 million of interest on senior unsecured bonds issued by Wessex in 1999.
Interest payments on these bonds are made annually in March of each year. In
addition, cash receipts from Wessex customers are lower in the first quarter of
each year as a result of their billing cycle. Invoices for non-metered customers
are mailed once a year for the billing cycle April 1 through March 31. Customers
pay these invoices under various payment plans that result in the receipt of the
majority of cash payments for the billing cycle, by the end of the fourth
quarter of each fiscal year. Cash used in investing activities for the period
was $116.3 million and was comprised primarily of capital expenditures of $85.2
million. Cash provided by financing activities for the period was $131.4 million
and primarily resulted from net borrowings during the quarter.
As of March 31, 2000, Azurix had a working capital deficit of $156.0
million, compared to a working capital deficit of $239.6 million at December 31,
1999. Of the working capital deficit at March 31, 2000, $188.4 million is
related to borrowings outstanding or secured by the Azurix Europe revolving
credit facility that terminates in 2002. The Azurix Europe revolving credit
facility contains a provision permitting banks, with two-thirds or more of the
commitments, to terminate the facility at an earlier time if, in their
reasonable opinion, changes have occurred resulting in a material adverse effect
on the borrower's ability to repay the outstanding debt. Azurix has no knowledge
of the lenders' intent to exercise this right; however, the existence of this
provision requires amounts outstanding under the facility to be classified as
short-term debt under generally accepted accounting principles.
In addition, at March 31, 2000, $23.4 million of the working capital
deficit related to funds received from customers in advance of providing
services that are reflected on the Consolidated Balance Sheet as deferred
income. This component of the working capital deficit does not require the use
of cash, but is recognized in income over the period in which the services are
provided. Azurix, and Wessex, its predecessor company, has during the past
several years, operated with a working capital deficit as part of its normal
business practice.
As of March 31, 2000, Azurix, through Wessex, had, among other credit
facilities, committed credit facilities with major commercial banks providing
for an aggregate of $119.4 million of borrowing capacity. No amounts were drawn
at December 31, 1999. As a result of borrowings during the quarter ended March
31, 2000, the balance outstanding under these facilities at March 31, 2000 was
$57.3 million.
Azurix's credit agreement with Enron provides $180 million of liquidity
to fund general, administrative and operating expenses through December 2001.
During the three months ended March 31, 2000, borrowings outstanding under this
credit agreement increased $40.6 million to $93.9 million. The principal amount
outstanding under the credit agreement is limited to no more than $120 million
and $180 million at any time during calendar years 2000 and 2001, respectively.
In February 2000, Azurix issued U.S. dollar and U.K. pounds sterling
senior subordinated notes with a U.S. dollar equivalent face value of $599.8
million. The senior notes consisted of $240.0 million and (pound)100.0 million,
each due in 2007 and bearing an interest rate of 10 3/8% and $200.0 million due
in 2010 and bearing an interest rate of 10 3/4%. Estimated net proceeds after
underwriter's discount and other estimated offering costs were $583.4 million.
Of this amount, $150.0 million was used to pay down the Azurix revolving credit
facility, $386.0 million was used to pay down the Azurix Europe revolving credit
facility and $18.1 million was used to pay down amounts outstanding under the
credit agreement with Enron. In addition, $11.5 million was used to pay accrued
interest on the three credit facilities. The remaining proceeds were made
available for general corporate purposes. The notes were issued under an
indenture that contains certain covenants that limit Azurix's ability to incur
additional debt, pay dividends or make other distributions, incur liens on its
assets, enter into sale/leaseback transactions and to enter into transactions
with affiliates, or sell assets to, or merge with, another entity.
12
<PAGE> 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Azurix is exposed to market risks, particularly changes in U.S. and
international interest rates and changes in currency exchange rates as measured
against the functional currencies in which it operates. Azurix engages in
hedging programs aimed at limiting the impact of significant and sudden
fluctuations, but there can be no assurance that such an approach will be
successful. Factors that could impact the effectiveness of its hedging programs
include the accuracy of revenue forecasts, volatility of the currency and
interest rate markets and the availability of hedging instruments. Azurix
utilizes swap contracts to manage interest rate risk. Currency exchange rate
risk is the result of transactions that are denominated in a currency other than
the functional currencies in which Azurix operates. The primary purpose of
Azurix's foreign currency hedging activities is to manage the volatility
associated with currency exchange rates. Azurix manages these risks by utilizing
derivative financial instruments for non-trading purposes. Azurix enters into
currency or interest rate contracts for the sole purpose of hedging an existing
or anticipated exposure, not for speculation. Azurix's accounting policies for,
and the significant terms of, derivative financial instruments are described in
Note 1 and Note 8, respectively, to the Consolidated Financial Statements
included in Azurix's Annual Report on Form 10-K for the year ended December 31,
1999.
Azurix uses J.P. Morgan's RiskMetrics(TM) system to estimate the
value-at-risk of its financial instruments. Value-at-risk is a statistical
estimate of the loss that would result from changes in market prices.
Value-at-risk is based on volatility and correlation data provided by J.P.
Morgan, a statistical confidence level and an estimate of the time period
required to liquidate the positions in the various financial instruments. The
value-at-risk estimate was based on normal market conditions, a 95% confidence
level and a liquidation period between 30 days and 60 months, depending on the
type of financial instrument. At December 31, 1999, the value-at-risk estimate
for foreign currency and interest rate exposure was $0.1 million and
approximately $19,000, respectively. At March 31, 2000, the value-at-risk
estimate for foreign currency and interest rate exposure was $0.1 million and
approximately $9,000, respectively. The value-at-risk estimate includes only the
risk related to the financial instruments that serve as hedges and does not
include the related underlying hedged item. Judgment is required in interpreting
market data and in the use of different market assumptions or estimation
methodologies that will affect the estimated value-at-risk amount.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-Q may constitute
"forward-looking statements" as such term is defined in the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. The
forward-looking statements are based on management's current expectations and
beliefs and are subject to a number of factors and uncertainties that could
cause actual results to differ materially from those described in the
forward-looking statements. Words such as "anticipates," "believes," "expects,"
"estimates," "intends," "plans," "projects," and similar expressions may
identify such forward-looking statements. Important factors that could cause
actual results to differ materially from those described in the forward-looking
statements include the following: political developments in foreign countries;
the ability to enter new water and wastewater markets in the United States and
in other jurisdictions; the timing and extent of deregulation of water resource
markets in the United States and in other countries; regulatory developments in
the United States and in other countries, including tax and environmental
legislation and regulation; the timing and extent of efforts by governments to
privatize water and wastewater industries; the timing and extent of changes in
non-U.S. currencies and interest rates; the extent of success in securing new
service contracts, acquiring water and wastewater assets and developing and
managing water resources; Azurix's ability to access the debt and equity markets
during periods covered by the forward-looking statements; regulatory
developments affecting the purchase and sale of water resources; acceptance and
utilization by buyers and sellers of an internet marketplace for water
transfers; Azurix's ability to enter into, and retain, strategic relationships
with governmental and quasi-governmental agencies; increased competition and
technological changes in the internet-based marketplace; Azurix's ability to
hire and train, in a highly competitive market, individuals highly skilled in
the internet and e-commerce and other factors discussed elsewhere in this Form
10-Q and in Azurix's other filings with the Securities and Exchange Commission.
13
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported in Azurix's Annual Report on Form 10-K for the
year ended December 31, 1999, and other filings, Azurix is party to a lawsuit
styled Synagro Technologies, Inc. v Azurix Corp., in the 270th Judicial District
Court of Harris County, Texas. The lawsuit relates to various agreements between
the parties regarding potential business transactions and the possible
acquisition by Azurix of two subsidiaries of Waste Management, Inc., commonly
called BioGro. On May 1, 2000, Synagro announced that it had entered into an
agreement to purchase BioGro. On May 9, 2000, Synagro filed its First Amended
Petition in the District Court seeking (i) damages in excess of $57 million
resulting from the alleged breach by Azurix of an agreement to purchase up to
$23 million of Synagro convertible preferred stock and (ii) unspecified damages
resulting from Azurix's alleged breach of confidentiality and standstill
agreements. Azurix intends to continue to defend these actions vigorously and
intends to continue to pursue its claims for damages resulting from Synagro's
interference with Azurix's negotiations to acquire BioGro. Although no
assurances can be given, Azurix believes that the ultimate resolution of this
litigation will not have a material adverse effect on its results of operations
or financial position.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<S> <C> <C>
(a) Exhibits:
EXHIBIT
NUMBER: EXHIBIT
27 Financial Data Schedule (included only in the electronic filing of this document).
(b) Reports on Form 8-K:
</TABLE>
A Report on Form 8-K was filed on January 28, 2000, whereby the
Registrant filed its press release dated January 26, 2000, regarding its
intention to offer U.S. dollar and U.K. pound sterling denominated Senior Notes
due 2007 and U.S. dollar denominated Senior Notes due 2010 in an aggregate
amount of $500,000,000.
A Report on Form 8-K was filed on February 15, 2000, whereby the
Registrant filed its press release dated February 11, 2000, regarding its
intention to sell U.S. $240 million and U.K. (pound)100 million aggregate
principal amount of 10 3/8% Senior Notes due 2007 and U.S. $200 million
aggregate principal amount of 10 3/4% Senior Notes due 2010.
14
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AZURIX CORP.
Date: May 12, 2000 By: /s/ J. Michael Anderson
----------------------------
Managing Director and
Chief Financial Officer
(Duly Authorized Officer)
(Principal Financial Officer)
15
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER: EXHIBIT
<S> <C>
27 Financial Data Schedule (included only in the electronic filing of this document).
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 31
<SECURITIES> 492
<RECEIVABLES> 166
<ALLOWANCES> 47
<INVENTORY> 0
<CURRENT-ASSETS> 738
<PP&E> 2,625
<DEPRECIATION> 116
<TOTAL-ASSETS> 4,936
<CURRENT-LIABILITIES> 894
<BONDS> 1,620
0
0
<COMMON> 1
<OTHER-SE> 1,930
<TOTAL-LIABILITY-AND-EQUITY> 4,936
<SALES> 195
<TOTAL-REVENUES> 195
<CGS> 83
<TOTAL-COSTS> 151
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28
<INCOME-PRETAX> 17
<INCOME-TAX> 6
<INCOME-CONTINUING> 11
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11
<EPS-BASIC> .10
<EPS-DILUTED> .10
</TABLE>
