WHEELABRATOR TECHNOLOGIES INC /DE/, 10-Q, 1997-05-08

WHEELABRATOR TECHNOLOGIES INC /DE/
10-Q, 1997-05-08
COGENERATION SERVICES & SMALL POWER PRODUCERS

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================================================================================

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 1997

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____ to _____

Commission file number: 0-14246

WHEELABRATOR TECHNOLOGIES INC.

(Exact name of registrant as specified in its charter)

Delaware 22-2678047
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)

4 Liberty Lane West
Hampton, New Hampshire 03842
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (603) 929-3000

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
-------- --------

Shares of Registrant's Common Stock, $0.01 par value, issued and outstanding at
April 30, 1997: 156,502,027

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WHEELABRATOR TECHNOLOGIES INC.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 1997
------------------------------------

INDEX
-----

<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
Part I. Financial Information:

Item 1 - Financial Statements

Consolidated Balance Sheets as of December 31, 1996, and March 31, 1997. 1

Consolidated Statements of Income for the Three Months Ended
March 31, 1996 and 1997............................................... 2

Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1996 and 1997............................................... 3

Consolidated Statements of Changes in Stockholders' Equity for the
Three Months Ended March 31, 1996 and 1997............................ 4

Notes to Consolidated Financial Statements.............................. 5

Item 2 - Management's Discussion and Analysis of Results of
Operations and Financial Condition ..................................... 10

Part Ii. Other Information:

Item 1 - Legal Proceedings.................................................. 20
Item 6 - Exhibits and Reports on Form 8-K................................... 20
SIGNATURE................................................................... 21
Exhibit Index............................................................... 22

</TABLE>

<PAGE>

PART I. FINANCIAL INFORMATION

WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000s omitted, except share amounts)
(unaudited)

December 31, March 31,
1996 1997
- --------------------------------------------------------------------------------------

ASSETS
------

Current assets:
<S> <C> <C>
Cash and cash equivalents............................... $ 306,072 $ 312,178
Receivables, net of allowance of $5,094 in 1996
and $3,654 in 1997..................................... 123,164 124,590
Costs and earnings in excess of billings................ 10,632 18,695
Other current assets.................................... 72,148 73,888
---------- ----------
Total current assets.................................. 512,016 529,351

Property, plant and equipment, net........................ 1,561,925 1,546,752
Cost in excess of net assets of acquired businesses, net.. 63,707 63,190
Investments in affiliates................................. 484,141 472,023
Net assets of discontinued operations..................... 54,776 54,980
Other assets.............................................. 374,854 364,859
---------- ----------
Total assets........................................ $3,051,419 $3,031,155
========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------

Current liabilities:
Current maturities of long-term debt.................... $ 35,832 $ 35,980
Accounts payable........................................ 37,084 50,116
Accrued liabilities..................................... 236,426 197,651
Advance payments on contracts........................... 16,194 22,702
---------- ----------
Total current liabilities............................. 325,536 306,449

Long-term debt............................................ 800,153 796,226
Deferred income taxes..................................... 445,582 443,770
Deferred income........................................... 67,678 65,872
Other long-term liabilities............................... 261,954 253,507

Commitments and contingencies.............................

Stockholders' equity:
Preferred stock, par value $1.00 per share,
50,000,000 shares authorized, none
issued or outstanding.................................. - -
Common stock, par value $0.01 per share,
500,000,000 shares authorized, 189,545,407 shares
issued in 1996 and 1997................................ 1,895 1,895
Capital in excess of par value.......................... 875,584 875,123
Cumulative translation adjustments...................... (4,721) (20,002)
Treasury stock at cost; 28,094,425 shares in 1996
and 28,700,080 shares in 1997.......................... (436,306) (444,071)
Retained earnings....................................... 714,064 752,386
---------- ----------
Total stockholders' equity............................ 1,150,516 1,165,331
---------- ----------
Total liabilities and stockholders' equity.......... $3,051,419 $3,031,155
========== ==========

</TABLE>

The accompanying notes are an integral part of these balance sheets.

1
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WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(000s omitted, except per share amounts)
(unaudited)

1996 1997
- -----------------------------------------------------------------------------------
<S> <C> <C>
Revenue....................................................... $219,470 $248,164

Operating expenses............................................ 141,469 171,259
Selling and administrative expenses........................... 10,990 9,997
Interest expense.............................................. 13,458 12,976
Interest income............................................... (1,737) (4,495)
Equity in earnings of affiliates.............................. (3,725) (3,172)
Other expense, net............................................ 755 850
-------- --------
Income from continuing operations before income taxes....... 58,260 60,749

Income tax provision.......................................... 21,510 22,427
-------- --------

Income from continuing operations........................... 36,750 38,322

Discontinued operations:
Income from discontinued operations less applicable income
taxes of $2.1 million in 1996............................. 2,495 -
Equity income from Rust discontinued operations............. 1,325 -
-------- --------

Net income................................................ $ 40,570 $ 38,322
======== ========
Weighted average common and common
equivalent shares outstanding............................... 179,600 161,900
======== ========

Earnings per common and common equivalent share:

Continuing operations....................................... $0.21 $0.24
Income from discontinued operations......................... 0.01 -
Equity income from Rust discontinued operations............. 0.01 -
----- -----

Net income................................................ $0.23 $0.24
===== =====

</TABLE>

The accompanying notes are an integral part of these financial statements.

2
<PAGE>

WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(000s omitted)
(unaudited)

<TABLE>
<CAPTION>
1996 1997
- --------------------------------------------------------------------------

OPERATING ACTIVITIES:
<S> <C> <C>
Net income........................................... $ 40,570 $ 38,322
Adjustments to reconcile net income to cash flows
from operating activities:
Depreciation and amortization...................... 26,253 23,329
Deferred income taxes.............................. 13,815 (1,941)
Undistributed earnings of affiliates............... (3,725) (3,172)
Equity in discontinued operations.................. (1,325) -
Changes in assets and liabilities, net of
effects of acquired businesses:
Receivables, net................................. (18,578) (1,392)
Costs and earnings in excess of billings......... 584 (3,563)
Other current assets............................. 2,638 (746)
Accounts payable and accrued liabilities......... (13,253) (36,675)
Advance payments on contracts.................... 5,906 2,008
Other long-term liabilities...................... (8,538) (9,260)
Other, net......................................... 2,971 889
-------- --------
Net cash provided by operating activities.......... 47,318 7,799
-------- --------

INVESTING ACTIVITIES:
Capital expenditures................................. (14,162) (6,024)
Investments held by trustees......................... (97) 4,215
Cash paid for acquisitions, net of acquired cash..... (1,500) -
Other, net........................................... 2,721 1,708
-------- --------
Net cash used for investing activities............. (13,038) (101)
-------- --------

FINANCING ACTIVITIES:
Additions to long-term debt.......................... - 13,920
Repayments of long-term debt......................... (3,912) (17,684)
Proceeds from exercise of stock options.............. 1,841 1,412
Stock repurchase program............................. (48,408) -
Other, net........................................... 822 760
-------- --------
Net cash used for financing activities............. (49,657) (1,592)
-------- --------

Net increase(decrease) in cash and cash equivalents.. (15,377) 6,106
Cash and cash equivalents at beginning of period..... 54,003 306,072
-------- --------
Cash and cash equivalents at end of period........... $ 38,626 $312,178
======== ========

Supplemental disclosure:
Interest paid, net of amounts capitalized.......... $ 8,668 $ 8,644
======== ========
Income taxes paid.................................. $ 2,531 $ 51,075
======== ========

</TABLE>

The accompanying notes are an integral part of these financial statements.

3
<PAGE>

WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(000s omitted, except share amounts)
(unaudited)
<TABLE>
<CAPTION>

Capital in Cumulative
Common Excess of Translation Treasury Retained
Stock Par Value Adjustment Stock Earnings Total
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1995 $1,895 $876,595 $ (9,986) $(146,494) $728,255 $1,450,265

Net income -- -- -- -- 40,570 40,570
Foreign currency
translation -- -- (1,372) -- -- (1,372)
Exercise of
stock options -- (460) -- 2,301 -- 1,841
Tax benefit from
stock options -- 284 -- -- -- 284
Stock repurchases
(2,992,100 shares) -- -- -- (48,408) -- (48,408)
------ -------- -------- --------- -------- ----------
Balance,
March 31, 1996 $1,895 $876,419 $(11,358) $(192,601) $768,825 $1,443,180
====== ======== ======== ========= ======== ==========

Balance,
December 31, 1996 $1,895 $875,584 $ (4,721) $(436,306) $714,064 $1,150,516

Net income -- -- -- -- 38,322 38,322
Foreign currency
translation -- -- (15,281) -- -- (15,281)
Exercise of
stock options -- (836) -- 2,248 -- 1,412
Tax benefit from
stock options -- 375 -- -- -- 375
Stock repurchases
(762,900 shares) -- -- -- (10,013) -- (10,013)
------ -------- -------- --------- -------- ----------
Balance,
March 31, 1997 $1,895 $875,123 $(20,002) $(444,071) $752,386 $1,165,331
====== ======== ======== ========= ======== ==========
</TABLE>

The accompanying notes are an integral part of these financial statements.

4
<PAGE>

WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

NOTE 1 - BASIS OF PRESENTATION AND ACCOUNTING POLICIES

The accompanying financial statements have been prepared by Wheelabrator
Technologies Inc. ("Wheelabrator" or the "Company"), without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations.

The financial information presented herein reflects all adjustments (consisting
only of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the results for the interim periods
presented. Certain prior period amounts have been reclassified to conform with
the current presentation. The results for interim periods are not necessarily
indicative of the results to be expected for the full year.

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported amounts of assets, liabilities, income and expenses and
disclosures of contingencies. Future events could alter such estimates.

Wheelabrator is a majority-owned subsidiary of WMX Technologies, Inc. ("WMX").
Wheelabrator and WMX are parties to a Master Intercorporate Agreement that
provides, among other things, for Wheelabrator to lend excess cash to WMX at
interest rates at least as favorable as those Wheelabrator could otherwise
obtain. Under the terms of this agreement, in the event the Company requires
short-term cash for the conduct of its business and operations, WMX will make
available to Wheelabrator such amounts as Wheelabrator requires, up to a total
of $100.0 million in excess of amounts loaned by Wheelabrator to WMX. At March
31, 1997, cash and cash equivalents included approximately $305.7 million of net
investments with WMX under the terms of this agreement.

5
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WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Earnings per common and common equivalent share are calculated using the
weighted average number of shares outstanding for each period, including the
effect of common stock equivalents using the treasury stock method. Common
stock equivalents consist of unexercised stock options.

NOTE 2 - ACQUISITIONS AND DIVESTITURES

ACQUISITIONS: No acquisitions were made during the first quarter of 1997.
During the first quarter of 1996, the Company acquired wastewater treatment
operating contracts for $1.5 million. These operating contracts, the proforma
effect of which was immaterial, are part of the discontinued operations
discussed below.

DISCONTINUED OPERATIONS: In November 1996, Wheelabrator sold its water-related
equipment manufacturing and process systems businesses, including substantially
all of the Company's foreign operations and also certain air pollution control
units, to United States Filter Corporation ("U.S. Filter") for $369.6 million in
cash. The related discussions also led to a definitive agreement with U.S.
Filter in early 1997 to sell the Company's water and wastewater facility
operations and privatization business. On April 3, 1997, the Company completed
the sale of its water and wastewater operations and maintenance subsidiary for
2.3 million registered shares of U.S. Filter common stock. The discontinued
businesses have been segregated and the accompanying consolidated balance
sheets, statements of income and related footnote information have been
restated. Wheelabrator expects to realize a gain on the water business
divestiture that will be recognized in the second quarter.

Revenues of the discontinued businesses were $14.3 million in the first quarter
of 1997 versus $120.1 million in the comparable 1996 period. Results of
operations for the three months ended March 31, 1997, were not material and will
be recognized as part of the gain to be recorded in the second quarter.

During 1995, Rust announced that it would sell or discontinue its process
engineering, construction, specialty contracting and similar lines of business.
In 1996, Rust announced that it also planned to divest its remaining domestic
and international environmental and infrastructure engineering and consulting
businesses. Accordingly, Wheelabrator has reported its 40 percent equity
interest in the historical operating results of these businesses separately from
continuing operations.

6
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WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 3 - COMMITMENTS AND CONTINGENCIES

In May 1994, the U.S. Supreme Court ruled that state and local governments may
not constitutionally restrict the free movement of trash in interstate commerce
through the use of flow control laws. Such laws typically involve a municipality
specifying the disposal site for all solid waste generated within its borders.
Since the ruling, several decisions of state or federal courts have invalidated
regulatory flow control schemes in a number of jurisdictions. Other judicial
decisions have upheld nonregulatory means by which municipalities may
effectively control the flow of municipal solid waste. There can be no assurance
that such alternatives to regulatory flow control will in every case be found to
be lawful. The Company's Gloucester County, New Jersey, facility relies on a
disposal franchise for substantially all of its supply of municipal solid waste.
In July 1996, a Federal District Court permanently enjoined the State of New
Jersey from enforcing its solid waste regulatory flow control system, which was
held to be unconstitutional, but stayed the injunction for as long as its ruling
is on appeal plus an additional period of two years to enable the State to
devise an alternative nondiscriminatory approach. On May 1, 1997, the Third
Circuit Court of Appeals affirmed the District Court's ruling as to the
unconstitutionality of New Jersey's flow control system, but vacated the lower
court's two year "post-appeal" stay. However, the Court granted a continued stay
for so long as any appeals are pending. This will delay the effect of the ruling
until such time as the State has exhausted all of its appeal rights, including
an appeal to the U.S. Supreme Court. The State is expected to enforce flow
control during the stay period. In addition, the New Jersey legislature is now
considering a bill to authorize counties and authorities, including the
Gloucester County Improvement Authority, which administers the Company's
franchise there, to implement a constitutionally permissible system of "economic
flow control" designed to recover waste disposal costs incurred in reliance on
the State's franchise system.

The Supreme Court's 1994 ruling and subsequent court decisions have not to date
had a material adverse effect on any of the Company's trash-to-energy
operations. Federal legislation has been proposed, but not yet enacted, to
effectively grandfather existing flow control mandates. In the event that such
legislation is not adopted, the Company believes that affected municipalities
will endeavor to implement alternative lawful means to continue controlling the
flow of waste. In view of the uncertain state of the law at this time, however,
the Company is unable to predict whether such efforts would be successful or
what impact, if any, this matter might have on its trash-to-energy facilities.

7
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WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Within the next several years, the air pollution control systems at certain
trash-to-energy facilities owned or leased by Wheelabrator most likely will be
required to be modified to comply with more stringent air pollution control
standards adopted by the United States Environmental Protection Agency in
December 1995 for municipal waste combusters. The compliance dates will vary by
facility, but all affected facilities will be required to be in compliance with
the new rules by the end of the year 2000. Currently available technologies will
be adequate to meet the new standards. Although the total expenditures required
for such modifications are estimated to be in the $190-$230 million range, they
are not expected to have a material adverse effect on the Company's liquidity or
results of operations because provisions in the impacted facilities' long-term
waste supply agreements generally allow the Company to recover from customers
the majority of incremental capital and operating costs.

As the states and the U.S. Congress have accelerated their consideration of ways
in which economic efficiencies can be gained by deregulating the electric
generation industry, some have argued that over-market power sales agreements
entered into pursuant to the Public Utilities Regulatory Policies Act of 1978
("PURPA") should be voidable as "stranded assets." The Company's power
production facilities are qualifying facilities under PURPA and depend on the
sanctity of their power sales agreements for their economic viability. Recent
state and federal agency and court decisions have unanimously upheld the
inviolate nature of these contracts. The Company believes that federal law
offers strong protections to its PURPA contracts. However, there is a risk that
future utility restructurings, court decisions and/or legislative or
administrative action in this area will have a material and adverse effect on
the business of the Company.

There are various lawsuits and claims pending against Wheelabrator that have
arisen in the normal course of Wheelabrator's business and relate mainly to
matters of environmental and product liability, personal injury, and property
damage. The outcome of these matters is not presently determinable, but in the
opinion of management, based on the advice of counsel, the ultimate resolution
of these matters will not have a material adverse effect on the financial
condition or results of operations of the Company. It is reasonably possible,
however, that a change in the Company's estimate of its probable liability with
respect to these matters could occur in the near-term.

NOTE 4 - ACCOUNTING PRONOUNCEMENTS

In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("FAS") No. 128, "Earnings per Share." This
statement supersedes Accounting Principles Board Opinion No. 15. Primary EPS is
replaced with a presentation

8
<PAGE>

WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

of basic EPS. Basic EPS includes no dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. In addition, fully diluted EPS is replaced with
diluted EPS. Diluted EPS gives effect to all common shares that would have been
outstanding if all potentially dilutive securities (such as stock options) had
been issued. FAS No. 128 is effective for interim and annual periods ending
after December 15, 1997. Earlier application is not permitted, but when the
opinion becomes effective, all prior periods presented must be restated. The
computation of EPS in accordance with FAS No. 128 does not have a material
impact on Wheelabrator's EPS calculation for the three months ended March 31,
1996 and 1997.

In October 1996, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
96-1, "Environmental Remediation Liabilities," which became effective in 1997.
The SOP provides that environmental remediation liabilities should be accrued
when the criteria of FAS No. 5, "Accounting for Contingencies," are met.
Included in the SOP are benchmarks to aid in the determination of when such
criteria are met and environmental remediation liabilities should be recognized.
The SOP also provides that an accrual for environmental liabilities should
include future costs of compensation and benefits for employees expected to
devote a significant amount of time directly to the remediation effort. The
adoption of SOP 96-1 did not have a material impact on Wheelabrator's financial
statements since its previous accounting was in substantial compliance with the
new standard.

9
<PAGE>

ITEM 2 - Management's Discussion and Analysis of Results of Operations and
Financial Condition

Wheelabrator Technologies Inc. ("Wheelabrator" or the "Company"), is primarily
engaged in the ownership and operation of trash-to-energy, waste-fuel powered
independent power, and biosolids pelletizer facilities as well as in providing
biosolids land application services and air quality control equipment design and
installation services. Wheelabrator is a majority-owned subsidiary of WMX
Technologies, Inc. ("WMX") and holds minority interests in two other WMX-
controlled subsidiaries: Waste Management International plc ("WM International")
and Rust International Inc. ("Rust").

In November 1996, Wheelabrator sold its water-related equipment manufacturing
and process systems businesses to United States Filter Corporation ("U.S.
Filter") for $369.6 million in cash. The related discussions also led to a
definitive agreement with U.S. Filter in early 1997 to sell the Company's water
and wastewater facility operations and privatization business. On April 3,
1997, the Company completed the sale of its water and wastewater operations and
maintenance subsidiary for 2.3 million registered shares of U.S. Filter common
stock. The Company has agreed that it will not sell this stock until the
earlier of the filing of U.S. Filter's Form 10-K with the Securities and
Exchange Commission or June 30, 1997. Thereafter, the Company intends, subject
to market conditions and other factors, to sell its U.S. Filter stock in open
market and/or block trades. These businesses (collectively the "Water
Business") have been accounted for as discontinued operations in the
accompanying financial statements.

During 1995, Rust announced that it would sell or discontinue its process
engineering, construction, specialty contracting and similar lines of business.
In 1996, Rust announced that it also planned to divest its remaining domestic
and international environmental and infrastructure engineering and consulting
businesses. Wheelabrator's equity income from these businesses is included in
discontinued operations.

The Company reorganized and streamlined its operating structure in conjunction
with the Water Business divestiture. The biosolids pelletizer facilities, which
have long-term contractual obligations, operating characteristics, customers,
and capital requirements similar to trash-to-energy facilities, were integrated
into the Company's energy plant operating organization. In light of this
reorganization and the sale of the Water Business, the Company now reports its
operating results in one industry segment. Wheelabrator's biosolids land
application and air pollution control businesses, which are not significant, are
also included in this segment. Quarterly results from prior years, during which
the Company reported its results in two industry segments, Clean Energy and
Clean Water, have been restated to conform to the current presentation.

10
<PAGE>

ITEM 2 - Management's Discussion and Analysis of Results of Operations and
Financial Condition (continued)

On April 9, 1997, Wheelabrator announced the formation of a strategic alliance
with Treated Water Outsourcing, a joint venture between U.S. Filter and Nalco
Chemical Corporation, to enhance its marketing capabilities for outsourcing
industrial energy infrastructure projects.

RESULTS OF OPERATIONS
- ---------------------

Consolidated revenue for the quarter ended March 31 was $248.2 million in 1997
compared with $219.5 million in 1996. Revenue in 1997 included $15.9 million of
construction revenue related to the retrofit of Pinellas County, Florida's
trash-to-energy facility and construction of a biosolids compost facility for
Burlington County, New Jersey. There was no construction revenue in the first
quarter of 1996. The remaining $12.8 million of revenue growth was derived
almost equally from new industrial cogeneration plants (so-called "inside-the-
fence" facilities) acquired in 1996, and existing business. The Company is
attempting to leverage its energy plant operating capabilities and project
financing expertise by owning and/or operating inside-the-fence power plants for
industrial customers. Existing business revenue growth was driven largely by
the addition of new biosolids land spreading contracts in the East and higher
energy and disposal fees at certain energy plants. The Company's plant
operations, land spreading, air business and construction represented 81
percent, 8 percent, 5 percent and 6 percent, respectively, of consolidated
revenue in the first quarter of 1997, versus 86 percent, 8 percent, 6 percent
and 0 percent, respectively, during the first quarter of 1996.

Operating income of $66.9 million during the first three months of 1997 was
essentially flat versus the comparable period of 1996, as a gross margin decline
of $1.1 million was almost entirely offset by lower selling and administrative
expenses due to reduced corporate overhead from the Water Business divestiture.
Excluding the construction revenue and related gross margin, operating margin
for the first quarter of 1997 was 28.4% of revenue versus 30.5% in 1996. The
lower 1997 operating margin was due to higher levels of maintenance at the
Pinellas, Falls and Spokane trash-to-energy facilities, higher levels of gas
consumption at the New York Organic Fertilizer Company biosolids pelletizer
project ("NYOFCO"), and the Lassen and Martell inside-the-fence facilities,
which have lower margins than average energy facility margins.

Income from continuing operations and net income were $38.3 million, or $0.24
per share, in the first quarter of 1997. In the first quarter of 1996, income
from continuing

11
<PAGE>

ITEM 2 - Management's Discussion and Analysis of Results of Operations and
Financial Condition (continued)

operations was $36.8 million, or $0.21 per share, and net income was $40.6
million, or $0.23 per share. Net income in 1996 included income from
discontinued Water Business operations of $2.5 million and equity income from
Rust discontinued operations of $1.3 million. The earnings per share
contribution from continuing operations increased $0.03 primarily because of
increased interest income, which is discussed below, and the benefit of 1996
share repurchases.

OTHER ITEMS
- -----------

Interest: Interest expense for the first quarter of 1997 decreased $0.5 million
versus 1996 due mainly to increased capitalized interest related primarily to
the construction of the Baltimore II Dryer facility (see "Financial Condition"
below). Interest income increased $2.8 million from the first quarter of 1996
because of higher average invested balances, including proceeds from the Water
Business sale.

Equity in Earnings of Affiliates: First quarter equity income from
Wheelabrator's affiliates totaled $3.2 million in 1997 compared with $3.7
million in 1996. The decline in equity income for the quarter reflects a $0.5
million decrease in equity income from WM International due to translation
losses resulting from the strength of the British pound against other world
currencies and a reduction of its equity income resulting from the 1996 sale of
its minority interest in Wessex Water Pic. The Company's equity earnings in
Rust continuing operations were flat quarter-over-quarter.

Income Taxes: The Company's effective tax rates excluding equity income, which
is reported net of tax, for the three months ended March 31, 1997 and 1996, were
39.0 percent and 39.4 percent, respectively. The rate decline in 1997 was
primarily the result of tax planning activities which lowered the state tax
rates of certain of the Company's businesses. On a go-forward basis, the
Company expects its effective tax rate excluding equity income to be
approximately 39.5 percent.

Discontinued Operations: As previously discussed, in 1996, the Company decided
to divest its Water Business. This business included the Company's domestic and
international water process systems and equipment manufacturing units, its water
and wastewater

12
<PAGE>

ITEM 2 - Management's Discussion and Analysis of Results of Operations and
Financial Condition (continued)

treatment plant operations and privatization business, its material cleaning
company, and certain specialized air pollution control units. Revenues of the
discontinued businesses were $14.3 million in the first quarter of 1997 versus
$120.1 million in the comparable 1996 period. Results of operations for the
three months ended March 31, 1997, were not material and will be recognized as
part of the gain to be recorded in the second quarter.

Environmental Matters: The majority of Wheelabrator's business is involved with
the protection of the environment. As such, a significant portion of the
Company's operating costs and capital expenditures could be characterized as
costs of environmental protection. While the Company is faced, in the normal
course of its business, with the need to expend funds for environmental
protection, it does not expect such expenditures to have a material adverse
effect on its financial condition or results of operations because its business
is based upon compliance with environmental laws and regulations and its
products and services are priced accordingly. Although unlikely in the near-
term, such ongoing compliance costs may increase in the future as a result of
legislation or regulation. However, the Company believes that in general it
benefits from increased government regulation, which may increase the demand for
its products and services, and that it has the resources and experience to
manage environmental risk.

Estimated closure and postclosure monitoring costs associated with ash residue
monofills for which the Company is responsible include items such as final cap
and cover on the site, leachate management, and groundwater monitoring. These
costs are recognized in proportion to use of the permitted capacity at such
disposal sites. Such costs are estimated based on the technical requirements of
the United States Environmental Protection Agency ("EPA") or applicable state
regulations, whichever are stricter. These accruals for closure and postclosure
costs relate to expenditures to be incurred after a monofill ceases to accept
ash residue. To the extent similar costs are incurred during the active life of
the site, they are expensed as incurred. Preparation costs associated with these
sites and their individual cells are capitalized and amortized over the
respective estimated life of the disposal site or individual cell.

Wheelabrator has instituted procedures to periodically evaluate other identified
and potential environmental exposures. When the Company concludes it is
probable that a liability has been incurred, provision is made in the financial
statements, based upon management's judgment and prior experience, for the
Company's best estimate of the liability. Such estimates are subsequently
revised as deemed necessary when additional information becomes available. While
the Company does not anticipate that any such adjustment would be material to
its financial statements, it is reasonably possible that future technological,
regulatory, or enforcement developments, results of environmental

13
<PAGE>

ITEM 2 - Management's Discussion and Analysis of Results of Operations and
Financial Condition (continued)

studies, or other factors could alter this expectation and necessitate the
recording of additional liabilities, which could be material.

Wheelabrator also becomes involved, in the normal course of business, in
judicial and administrative proceedings related to alleged violations of
licenses, permits, laws or regulations, or differing interpretations of
applicable requirements. From time to time, the Company pays fines and penalties
as a result of such proceedings. To date, such fines and penalties have not been
material and, in the opinion of management, the ultimate liability, if any, with
respect to these matters will not have a material adverse effect on the business
and properties of the Company, taken as a whole, or its financial position or
results of operation.

Accounting Pronouncements: In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards ("FAS") No. 128,
"Earnings per Share." This statement supersedes Accounting Principles Board
Opinion No. 15. Primary EPS is replaced with a presentation of basic EPS. Basic
EPS includes no dilution and is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. In addition, fully diluted EPS is replaced with diluted EPS. Diluted EPS
gives effect to all common shares that would have been outstanding if all
potentially dilutive securities (such as stock options) had been issued. FAS No.
128 is effective for interim and annual periods ending after December 15, 1997.
Earlier application is not permitted, but when the opinion becomes effective,
all prior periods presented must be restated. The computation of EPS in
accordance with FAS No. 128 does not have a material impact on Wheelabrator's
EPS calculation for the three months ended March 31, 1996 and 1997.

14
<PAGE>

ITEM 2 - Management's Discussion and Analysis of Results of Operations and
Financial Condition (continued)

FINANCIAL CONDITION
- -------------------

Liquidity and Capital Resources: Operating activities continue to be
Wheelabrator's principal source of liquidity and provided $7.8 million of cash
for the first three months of 1997 compared to $47.3 million during the same
period of 1996. The majority of the decrease was attributable to approximately
$50 million of tax payments related to the November 1996 Water Business sale to
U.S. Filter, offset in part by less funding of receivables as a result of the
Water Business divestiture.

Investing activities utilized $0.1 million and $13.0 million of cash during the
first three months of 1997 and 1996, respectively. Wheelabrator spent $2.8
million on project construction during the first three months of 1997 versus
$8.6 million in 1996, primarily because of lower construction activity on a
second Company-owned pelletizer facility in Baltimore, Maryland. The majority of
the 1997 construction activity was funded by draw downs from investments held by
trustees. Nonproject capital expenditures were $3.3 million and $5.6 million in
the first three months of 1997 and 1996, respectively. There were no
acquisitions made during the first three months of 1997. During the first three
months of 1996, Wheelabrator acquired wastewater treatment operating contracts,
which are part of the discontinued Water Business, for $1.5 million.

Financing activities required $1.6 million and $49.7 million of cash during the
first three months of 1997 and 1996, respectively. Wheelabrator repurchased 3.0
million shares of its common stock at an aggregate cost of $48.4 million during
the first quarter of 1996. During 1997, Wheelabrator repurchased 0.8 million
shares of its common stock in open market transactions at an aggregate cost of
$10.0 million. Since the settlement date for these repurchases occurred after
the quarter end, the repurchases will not be a use of cash until the second
quarter of 1997. The Company is authorized to repurchase approximately 29.2
million additional shares of its common stock during 1997 and 1998 on the open
market or in privately negotiated or other transactions.

The Company currently expects its major uses of capital during 1997 to include
spending on facility retrofits related to the Clean Air Act Amendments of 1990
(see Contingencies below), continued acquisitions of inside-the-fence industrial
cogeneration facilities, project investments, and stock repurchases, in addition
to dividends, scheduled debt repayments, and nonproject capital expenditures.
The Company completed a $13.9 million refinancing of the tax-exempt project debt
on its Claremont, New Hampshire, facility in

15
<PAGE>

ITEM 2 - Management's Discussion and Analysis of Results of Operations and
Financial Condition (continued)

January 1997 and a $24.9 million limited-recourse financing associated with the
Lassen facility in April 1997.

Wheelabrator had net working capital of $222.9 million as of March 31, 1997,
compared to net working capital of $186.5 million at December 31, 1996.
Included in March 31, 1997, working capital was $312.2 million in cash and cash
equivalents. This cash, short-term borrowings from WMX and cash generated by
operating activities are expected to be sufficient to meet the Company's
anticipated short-term capital expenditure, dividend payment, debt retirement,
and operating liquidity needs. Pursuant to the Master Intercorporate Agreement,
which governs borrowing and lending between the Company and WMX, Wheelabrator
may borrow up to $100.0 million in excess of any amounts loaned to WMX. This
agreement automatically renews annually unless either party provides 90-day
notice of termination. Expected share repurchase and acquisition activities may
be funded by external, long-term financing of certain unleveraged projects, in
addition to using available internally-generated cash, proceeds of the 1997
Lassen project financing and the after-tax proceeds from the potential
liquidation of the U.S. Filter stock received in connection with the second-
stage Water Business divestiture transaction. Wheelabrator's ratio of total debt
to total capital was approximately 42% at March 31, 1997, which the Company
believes to be indicative of additional unused borrowing capacity given its
historically strong ability to generate cash from operations.

DERIVATIVES: From time to time, the Company has used foreign currency
derivatives to attempt to mitigate the impact of currency fluctuations on its
equity income from WM International and on certain specifically identified
transactions. Derivatives used are confined to simple instruments that do not
involve multipliers or leverage. Wheelabrator's use of derivatives has not been
and is not expected to be material to the Company's financial statements.

CONTINGENCIES: In May 1994, the U.S. Supreme Court ruled that state and local
governments may not constitutionally restrict the free movement of trash in
interstate commerce through the use of flow control laws. Such laws typically
involve a municipality specifying the disposal site for all solid waste
generated within its borders. Since the ruling, several decisions of state or
federal courts have invalidated regulatory flow control schemes in a number of
jurisdictions. Other judicial decisions have upheld nonregulatory means by which
municipalities may effectively control the flow of municipal solid waste. There
can be no assurance that such alternatives to regulatory flow control will in
every case be found to be lawful. The Company's Gloucester County, New Jersey,

16
<PAGE>

ITEM 2 - Management's Discussion and Analysis of Results of Operations and
Financial Condition (continued)

facility relies on a disposal franchise for substantially all of its supply of
municipal solid waste. In July 1996, a Federal District Court permanently
enjoined the State of New Jersey from enforcing its solid waste regulatory flow
control system, which was held to be unconstitutional, but stayed the injunction
for as long as its ruling is on appeal plus an additional period of two years to
enable the State to devise an alternative nondiscriminatory approach. On May 1,
1997, the Third Circuit Court of Appeals affirmed the District Court's ruling as
to the unconstitutionality of New Jersey's flow control system, but vacated the
lower court's two year "post-appeal" stay. However, the Court granted a
continued stay for so long as any appeals are pending. This will delay the
effect of the ruling until such time as the State has exhausted all of its
appeal rights, including an appeal to the U.S. Supreme Court. The State is
expected to enforce flow control during the stay period. In addition, the New
Jersey legislature is now considering a bill to authorize counties and
authorities, including the Gloucester County Improvement Authority, which
administers the Company's franchise there, to implement a constitutionally
permissible system of "economic flow control" designed to recover waste disposal
costs incurred in reliance on the State's franchise system.

Within the next several years, the air pollution control systems at certain
trash-to-energy facilities owned or leased by Wheelabrator most likely will be
required to be modified to comply with more stringent air pollution control
standards adopted by the EPA in December 1995 for municipal waste combusters.
The compliance dates will vary by facility, but all affected facilities will be
required to be in compliance with the new rules by the end of the year 2000.
Currently available technologies will be adequate to meet the new standards.
Although the total expenditures required for such modifications are estimated to
be in the $190-$230 million range, they are not expected to have a material
adverse effect on the Company's liquidity or results of operations because
provisions in the impacted facilities' long-term waste supply agreements
generally allow the Company to recover from customers the majority of
incremental capital and operating costs.

17
<PAGE>

ITEM 2 - Management's Discussion and Analysis of Results of Operations and
Financial Condition (continued)

OUTLOOK
- -------

The Company's focus in 1997 will be on further optimizing operations while
pursuing domestic opportunities to own and operate inside-the-fence power plants
for industrial customers. In addition, development or acquisition of trash-to-
energy and other waste fuel-fired power plants will be pursued on an
opportunistic basis both domestically and internationally. Such development
activities typically require multi-year efforts.

The Company expects the profitability of two of its facilities to be negatively
impacted beginning in 1998. The Shasta project will reach the end of the ten-
year fixed price portion of its power sales contract with Pacific Gas and
Electric Co. and will begin to receive significantly lower, avoided cost-based
electric rates. In addition, NYOFCO will reach the end of its initial five-year
contract with New York City the same year. The Company has been awarded a 15-
year renewal of this contract which is subject to final negotiation, and is
awaiting public hearing and final city approval. The terms of the proposed
renewal are anticipated to result in lower revenue and lower operating margins,
in part because the initial contract provided for Wheelabrator to recover its
invested capital in NYOFCO during the initial five-year contract. On a combined
basis, these two

18
<PAGE>

ITEM 2 - Management's Discussion and Analysis of Results of Operations and
Financial Condition (continued)

contract matters are expected to decrease 1998 revenue and net income by
approximately $44 million and $17 million, respectively. Revenue and net income
are anticipated to decline approximately an additional $31 million and $9
million, respectively, in 1999 as the full year impact of these contract changes
is recognized. On March 25, 1997, the Company announced the indefinite deferment
of its previously announced "Dutch auction" self-tender offer, which would have
reduced Wheelabrator's average number of shares outstanding more rapidly than
its open market stock repurchases. As a result, the Company now anticipates that
its earnings per share for 1997 will be $1.10 to $1.15, and that earnings per
share for 1998 and 1999 will also be correspondingly lower than previous
estimates. The 1997 earnings per share goal set forth above assumes average
outstanding shares of approximately 157 million.

The Company continues to anticipate cash flow from operations in 1997 of $220
million before approximately $100 million of tax payments relating to the Water
Business sale, utilization of approximately $30 million of previously
unavailable tax credits, and capital expenditures of $50 to $75 million.

Forward-Looking Information: Except for historical data, the information
herein constitutes forward-looking statements. Forward-looking statements are
inherently uncertain and subject to risks. Such statements should be viewed with
caution. Actual results or experience could differ materially from the forward-
looking statements as a result of many factors, including, but not limited to,
fluctuation in spot pricing for trash disposal, unanticipated plant maintenance
or repair expense, adverse weather conditions, increased project development
opportunities, slowing of the overall economy, increased interest costs, the
nature and timing of electric utility deregulation, adverse flow control
developments, and the cost and timing of the Company's stock repurchase
programs. The Company makes no commitment to disclose any revisions to forward-
looking statements, or any facts, events or circumstances after the date hereof,
that may bear upon forward-looking statements.

19
<PAGE>

WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

Regulatory - The business in which the Company is engaged is intrinsically
connected with the protection of the environment, and the potential exists for
the discharge of materials into the environment. In the ordinary course of
conducting its business activities, the Company becomes involved in judicial and
administrative proceedings involving governmental authorities at the federal,
state and local level including, in certain instances, proceedings instituted by
citizens or local governmental authorities seeking to overturn governmental
action in which governmental officials or agencies are named as defendants
together with the Company or one or more of its subsidiaries, or both. In the
majority of the situations where proceedings are commenced by governmental
authorities, the matters involved relate to alleged technical violations of
licenses or permits pursuant to which the Company operates or is seeking to
operate or laws or regulations to which its operations are subject or are the
result of different interpretations of the applicable requirements.

OTHER: In addition, there are other routine lawsuits and claims, including
certain environmental matters, pending against Wheelabrator and its subsidiaries
which are incidental to its businesses. In the opinion of the Company's
management, the ultimate liability, if any, with respect to the above
proceedings, lawsuits and claims will not have a material adverse effect on the
business and properties of the Company, taken as a whole, or its financial
position and results of operations.

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:
The exhibits to this report are listed on the Exhibit Index elsewhere
herein.
(b) Reports on Form 8-K:
During the quarter ended March 31, 1997, the Company filed a report dated
February 4, 1997, on Form 8-K reporting under Item 5 that the Company
issued a news release announcing the election of two board members and new
officers, as well as its results of operations for the three months and
year ended December 31, 1996. The news release also disclosed certain
charges to 1996 earnings that were recorded during the fourth quarter of
1996, as well as the registrant's intention to undertake a $350 million
"Dutch Auction" tender offer to repurchase its shares.

20
<PAGE>

SIGNATURE

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.

WHEELABRATOR TECHNOLOGIES INC.

/s/ Robert J. Gagalis
-------------------------------
Vice President, Chief Financial
Officer and Treasurer

May 8, 1997

21
<PAGE>

WHEELABRATOR TECHNOLOGIES INC.

EXHIBIT INDEX

Number and Description of Exhibit*
- ---------------------------------
<C> <S>

2 None

3 None

4 None

10 None

11 None

15 None

18 None

19 None

22 None

23 None

24 None

27 Financial Data Schedule

99 None
</TABLE>

- --------------------------------------
* Exhibits not listed are inapplicable

<PAGE>

<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the March 31, 1997, Consolidated Balance Sheet and the Consolidated Statement of
Income for the three-month period ended March 31, 1997, and is qualified in its
entirety by reference to such financial statements and the footnotes thereto.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 312,178
<SECURITIES> 0
<RECEIVABLES> 128,244
<ALLOWANCES> 3,654
<INVENTORY> 0
<CURRENT-ASSETS> 529,351
<PP&E> 1,991,714
<DEPRECIATION> 444,962
<TOTAL-ASSETS> 3,031,155
<CURRENT-LIABILITIES> 306,449
<BONDS> 796,226
0
0
<COMMON> 1,895
<OTHER-SE> 1,163,436
<TOTAL-LIABILITY-AND-EQUITY> 3,031,155
<SALES> 0
<TOTAL-REVENUES> 248,164
<CGS> 0
<TOTAL-COSTS> 171,259
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 179
<INTEREST-EXPENSE> 12,976
<INCOME-PRETAX> 60,749
<INCOME-TAX> 22,427
<INCOME-CONTINUING> 38,322
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,322
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0

</TABLE>