Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, our subsidiaries are party to financial instruments that are subject to market risks arising from changes in commodity prices, interest rates, foreign currency exchange rates, and derivative instruments. Our use of derivative instruments is very limited and we do not enter into derivative instruments for trading purposes. The following analysis provides quantitative information regarding our exposure to financial instruments with market risks. We use a sensitivity model to evaluate the fair value or cash flows of financial instruments with exposure to market risk that assumes instantaneous, parallel shifts in exchange rates and interest rate yield curves. There are certain limitations inherent in the sensitivity analysis presented, primarily due to the assumption that exchange rates change in a parallel manner and that interest rates change instantaneously. In addition, the fair value estimates presented herein are based on pertinent information available to us as of
December 31, 2016
. Further information is included in
Item 8. Financial Statements And Supplementary Data — Note 12. Financial Instruments
and
Note 13. Derivative Instruments
.
Commodity Price Risk
Energy Price Risk
In contrast to our waste disposal agreements, as a result of structural and regulatory changes in the energy markets over time, we expect that multi-year contracts for energy sales will generally be less available than in the past, thereby increasing our exposure to energy market price volatility upon expiration. As our historic energy contracts have expired and our service fee contracts have transitioned to tip fee contracts, our exposure to market energy prices has increased. We expect this trend to continue. In order to mitigate our exposure to near-term (one to three years) revenue fluctuations in energy markets, we enter into hedging arrangements and we expect to do so in the future. Our efforts in this regard will involve only mitigation of price volatility for the energy we produce, and will not involve speculative energy trading. In connection with this hedging strategy, we have entered into swap agreements with various financial institutions to hedge our exposure to market risk. As of
December 31, 2016
, the net fair value of the energy derivatives of
$2 million
pre-tax, was recorded as a
$3 million
current asset and a
$1 million
current liability and as a component of Accumulated Other Comprehensive Income (“AOCI”).
Recycled Metals Price Risk
We recover and sell ferrous and non-ferrous metals, with pricing linked to related commodity indices. Therefore, our metals revenue is completely exposed to market price fluctuations. A 10% change in the current market rates would impact recycled metals revenue by approximately $3 million and $4 million for ferrous and non-ferrous, respectively. We are currently unable to mitigate this exposure effectively either via long-term pricing contracts or with hedging instruments as there are limited options to enter into such arrangements for this segment of the market.
Waste Price Risk
We have some protection against fluctuations in fuel (municipal waste) price risk in our North America segment energy-from-waste business because approximately
78%
of our municipal waste is provided under multi-year contracts where we are paid for our fuel at fixed rates. At our tip fee energy-from-waste facilities, differing amounts of waste processing capacity are not subject to long-term contracts and, therefore, we are partially exposed to the risk of market fluctuations in the waste disposal fees we may charge for fuel. At service fee facilities, waste disposal fees generally increase annually due to annual contract price escalations intended to reflect changes in our costs. Declines in waste disposal fees at our energy-from-waste facilities are mitigated through internalizing waste disposal by utilizing our network of transfer stations located throughout the northeast United States and by increasing our profiled waste volumes, which we can sell at a higher price than municipal solid waste.
We expect that multi-year contracts for waste supply at facilities we own or lease will continue to be available on acceptable terms in the marketplace, at least for a substantial portion of facility capacity, as municipalities continue to value long-term committed and sustainable waste disposal capacity. We also expect that an increasing portion of system capacity will be contracted on a shorter-term basis, and so we will have more frequent exposure to waste market risk.
Interest Rate Risk
Outstanding loan balances under the Credit Facilities bear interest at floating rates, which are calculated as either interest at a reserve adjusted British Bankers Association Interest Settlement Rate, commonly referred to as “LIBOR,” the “prime rate” or the Federal Funds rate plus 0.5% per annum, plus a borrowing margin. For details as to the various election options under the Credit Facility, see
Item 8. Financial Statements And Supplementary Data — Note 11. Consolidated Debt
. As of
December 31, 2016
, the outstanding balance of the Term Loan was
$195 million
. We have not entered into any interest rate hedging arrangements against this balance. A hypothetical increase of 1% in the underlying
December 31, 2016
market interest rates would result in a potential reduction to twelve-month future earnings of approximately $2 million, pre-tax. For details, see
Item 8. Financial Statements And Supplementary Data —
Note 11.
Consolidated Debt
.
In order to hedge the risk of adverse variable interest rate fluctuations associated with the Dublin Project Senior Term Loan, we have entered into floating to fixed rate swap agreements, denominated in Euros for the full €250 million loan amount with various financial institutions that terminate between
2017 and 2021
. This interest rate swap is designated as a cash flow hedge, which is recorded at fair value as a noncurrent liability with changes in fair value recorded as a component of AOCI. As of
December 31, 2016
, the fair value of the interest rate swap derivative of
$20 million
pre-tax, was recorded as a noncurrent liability. For additional information, see
Item 8. Financial Statements And Supplementary Data —
Note 13.
Derivative Instruments
.
Foreign Currency Exchange Rate Risk
We have operations in various foreign markets, including China, Canada, Ireland and Italy. As and to the extent we grow our international business, we expect to invest in foreign currencies to pay either for the construction costs of facilities we develop, or for the cost to acquire existing businesses or assets. Currency volatility in those markets, as well as the effectiveness of any currency hedging strategies we may implement, may impact both the amount we are required to invest in new projects as well as our financial returns on these projects and our reported results. We have mitigated our currency risks in certain cases by structuring our project contracts so that our revenue adjust in line with corresponding changes in the relevant currency rates. In such cases,
only that portion of our working capital investment and associated project debt, if any, that are denominated in a currency other than the project entity’s functional currency are exposed to currency risks. As of
December 31, 2016
, the fair value of the foreign currency derivatives of zero pre-tax, was recorded as a current asset. For additional information, see
Item 8. Financial Statements And Supplementary Data —
Note 13.
Derivative Instruments
.
As of
December 31, 2016
, we also had equity investments in foreign subsidiaries and projects. See
Item 8. Financial Statements And Supplementary Data —
Note 9.
Equity Method Investments
for further discussion.
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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Page
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Consolidated Statements of Operations for the Years Ended December 31, 2016, 2015, and 2014
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Consolidated Statements of Comprehensive (Loss) Income for the Years Ended December 31, 2016, 2015, and 2014
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Consolidated Balance Sheets as of December 31, 2016 and 2015
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Consolidated Statements of Cash Flow for the Years Ended December 31, 2016, 2015, and 2014
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Consolidated Statements of Equity for the Years Ended December 31, 2016, 2015 and 2014
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Note 4.
Dispositions, Assets Held for Sale and Discontinued Operations
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Covanta Holding Corporation
We have audited the accompanying consolidated balance sheets of Covanta Holding Corporation (the “Company”) as of
December 31, 2016 and 2015
, and the related consolidated statements of operations, comprehensive (loss) income, equity, and cash flows for each of the three years in the period ended
December 31, 2016
. Our audits also included the financial statement schedule listed in the Index at Item 8. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Covanta Holding Corporation at
December 31, 2016 and 2015
, and the consolidated results of its operations and its cash flows for each of the three years in the period ended
December 31, 2016
, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for service concession arrangements as a result of the adoption of the amendments to the Financial Accounting Standards Board Accounting (FASB) Standards Codification resulting from Accounting Standards Update (ASU) No. 2014-05, “Service Concession Arrangements,” effective January 1, 2015. As discussed in Note 1 to the consolidated financial statements, the Company changed the classification of all deferred tax assets and liabilities to noncurrent on the consolidated balance sheet as a result of the adoption of the amendments to the FASB Accounting Standards Codification resulting from ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes,” effective December 31, 2015. As discussed in Note 1 to the consolidated financial statements, the Company changed the classification of its debt issuance costs to be presented as a direct reduction from the carrying amount of the related liability on the consolidated balance sheet as a result of the adoption and the amendments to the FASB Accounting Standards Codification resulting in ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs”, effective January 1, 2016.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Covanta Holding Corporation's internal control over financial reporting as of
December 31, 2016
, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated
February 28, 2017
expressed an adverse opinion thereon.
/s/ Ernst & Young LLP
MetroPark, New Jersey
February 28, 2017
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
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For the Years Ended December 31,
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2016
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2015
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2014
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(In millions, except per share amounts)
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OPERATING REVENUE:
|
|
|
|
|
|
|
Waste and service revenue
|
|
$
|
1,187
|
|
|
$
|
1,104
|
|
|
$
|
1,032
|
|
Energy revenue
|
|
370
|
|
|
421
|
|
|
460
|
|
Recycled metals revenue
|
|
61
|
|
|
61
|
|
|
93
|
|
Other operating revenue
|
|
81
|
|
|
59
|
|
|
97
|
|
Total operating revenue
|
|
1,699
|
|
|
1,645
|
|
|
1,682
|
|
OPERATING EXPENSE:
|
|
|
|
|
|
|
Plant operating expense
|
|
1,177
|
|
|
1,129
|
|
|
1,055
|
|
Other operating expense, net
|
|
86
|
|
|
73
|
|
|
101
|
|
General and administrative expense
|
|
100
|
|
|
93
|
|
|
97
|
|
Depreciation and amortization expense
|
|
207
|
|
|
198
|
|
|
211
|
|
Impairment charges
|
|
20
|
|
|
43
|
|
|
64
|
|
Total operating expense
|
|
1,590
|
|
|
1,536
|
|
|
1,528
|
|
Operating income
|
|
109
|
|
|
109
|
|
|
154
|
|
Other income (expense):
|
|
|
|
|
|
|
Investment income
|
|
1
|
|
|
—
|
|
|
1
|
|
Interest expense
|
|
(139
|
)
|
|
(134
|
)
|
|
(135
|
)
|
Non-cash convertible debt related expense
|
|
—
|
|
|
—
|
|
|
(13
|
)
|
Gain on asset sales
|
|
44
|
|
|
—
|
|
|
—
|
|
Loss on extinguishment of debt
|
|
—
|
|
|
(2
|
)
|
|
(2
|
)
|
Other expense, net
|
|
(1
|
)
|
|
(1
|
)
|
|
(1
|
)
|
Total other expense
|
|
(95
|
)
|
|
(137
|
)
|
|
(150
|
)
|
Income (loss) before income tax (expense) benefit and equity in net income from unconsolidated investments
|
|
14
|
|
|
(28
|
)
|
|
4
|
|
Income tax (expense) benefit
|
|
(22
|
)
|
|
84
|
|
|
(15
|
)
|
Equity in net income from unconsolidated investments
|
|
4
|
|
|
13
|
|
|
10
|
|
NET (LOSS) INCOME
|
|
(4
|
)
|
|
69
|
|
|
(1
|
)
|
Less: Net income attributable to noncontrolling interests in subsidiaries
|
|
—
|
|
|
1
|
|
|
1
|
|
NET (LOSS) INCOME ATTRIBUTABLE TO COVANTA HOLDING CORPORATION
|
|
$
|
(4
|
)
|
|
$
|
68
|
|
|
$
|
(2
|
)
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding
|
|
|
|
|
|
|
Basic
|
|
129
|
|
|
132
|
|
|
130
|
|
Diluted
|
|
129
|
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|
133
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|
|
130
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(Loss) Income Per Share Attributable to Covanta Holding Corporation Stockholders:
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Basic
|
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$
|
(0.03
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)
|
|
$
|
0.52
|
|
|
$
|
(0.01
|
)
|
Diluted
|
|
$
|
(0.03
|
)
|
|
$
|
0.51
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
Cash Dividend Declared Per Share:
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
|
$
|
0.86
|
|
The accompanying notes are an integral part of the consolidated financial statements.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
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|
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|
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|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
(In millions)
|
Net (loss) income
|
|
$
|
(4
|
)
|
|
$
|
69
|
|
|
$
|
(1
|
)
|
Foreign currency translation
|
|
(7
|
)
|
|
(22
|
)
|
|
(12
|
)
|
Net unrealized (loss) gain on derivative instruments, net of tax (benefit) expense of $(8), $7, and $2, respectively
|
|
(21
|
)
|
|
10
|
|
|
(7
|
)
|
Net unrealized loss on available for sale securities
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
Other comprehensive loss attributable to Covanta Holding Corporation
|
|
(28
|
)
|
|
(12
|
)
|
|
(20
|
)
|
Comprehensive (loss) income
|
|
(32
|
)
|
|
57
|
|
|
(21
|
)
|
Less: Net income attributable to noncontrolling interests in subsidiaries
|
|
—
|
|
|
1
|
|
|
1
|
|
Comprehensive (loss) income attributable to Covanta Holding Corporation
|
|
$
|
(32
|
)
|
|
$
|
56
|
|
|
$
|
(22
|
)
|
The accompanying notes are an integral part of the consolidated financial statements.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
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|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
|
(In millions, except per
share amounts)
|
ASSETS
|
|
|
|
Current:
|
|
|
|
Cash and cash equivalents
|
$
|
84
|
|
|
$
|
94
|
|
Restricted funds held in trust
|
56
|
|
|
77
|
|
Receivables (less allowances of $9 million and $7 million, respectively)
|
332
|
|
|
312
|
|
Prepaid expenses and other current assets
|
72
|
|
|
117
|
|
Assets held for sale
|
—
|
|
|
97
|
|
Total Current Assets
|
544
|
|
|
697
|
|
Property, plant and equipment, net
|
3,024
|
|
|
2,690
|
|
Restricted funds held in trust
|
54
|
|
|
83
|
|
Waste, service and energy contracts, net
|
263
|
|
|
284
|
|
Other intangible assets, net
|
34
|
|
|
38
|
|
Goodwill
|
302
|
|
|
301
|
|
Other assets
|
63
|
|
|
141
|
|
Total Assets
|
$
|
4,284
|
|
|
$
|
4,234
|
|
LIABILITIES AND EQUITY
|
|
|
|
Current:
|
|
|
|
Current portion of long-term debt
|
$
|
9
|
|
|
$
|
8
|
|
Current portion of project debt
|
22
|
|
|
16
|
|
Accounts payable
|
98
|
|
|
90
|
|
Accrued expenses and other current liabilities
|
289
|
|
|
234
|
|
Liabilities held for sale
|
—
|
|
|
23
|
|
Total Current Liabilities
|
418
|
|
|
371
|
|
Long-term debt
|
2,243
|
|
|
2,255
|
|
Project debt
|
361
|
|
|
182
|
|
Deferred income taxes
|
617
|
|
|
595
|
|
Waste and service contracts, net
|
7
|
|
|
13
|
|
Other liabilities
|
169
|
|
|
178
|
|
Total Liabilities
|
3,815
|
|
|
3,594
|
|
Commitments and Contingencies (Note 18)
|
|
|
|
Equity:
|
|
|
|
Covanta Holding Corporation stockholders' equity:
|
|
|
|
Preferred stock ($0.10 par value; authorized 10 shares; none issued and outstanding)
|
—
|
|
|
—
|
|
Common stock ($0.10 par value; authorized 250 shares; issued 136 shares, outstanding 130 and 131, respectively)
|
14
|
|
|
14
|
|
Additional paid-in capital
|
807
|
|
|
801
|
|
Accumulated other comprehensive loss
|
(62
|
)
|
|
(34
|
)
|
Accumulated deficit
|
(289
|
)
|
|
(143
|
)
|
Treasury stock, at par
|
(1
|
)
|
|
—
|
|
Total Covanta Holding Corporation stockholders' equity
|
469
|
|
|
638
|
|
Noncontrolling interests in subsidiaries
|
—
|
|
|
2
|
|
Total Equity
|
469
|
|
|
640
|
|
Total Liabilities and Equity
|
$
|
4,284
|
|
|
$
|
4,234
|
|
The accompanying notes are an integral part of the consolidated financial statements.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
OPERATING ACTIVITIES:
|
(In millions)
|
Net (loss) income
|
$
|
(4
|
)
|
|
$
|
69
|
|
|
$
|
(1
|
)
|
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization expense
|
207
|
|
|
198
|
|
|
211
|
|
Amortization of long-term debt deferred financing costs
|
6
|
|
|
8
|
|
|
8
|
|
Gain on asset sales
|
(44
|
)
|
|
—
|
|
|
—
|
|
Impairment charges
|
20
|
|
|
43
|
|
|
64
|
|
Amortization of debt premium and discount
|
1
|
|
|
—
|
|
|
(1
|
)
|
Loss on extinguishment of debt
|
—
|
|
|
2
|
|
|
2
|
|
Non-cash convertible debt related expense
|
—
|
|
|
—
|
|
|
13
|
|
Provision for doubtful accounts
|
2
|
|
|
1
|
|
|
4
|
|
Stock-based compensation expense
|
16
|
|
|
18
|
|
|
17
|
|
Equity in net income from unconsolidated investments
|
(4
|
)
|
|
(13
|
)
|
|
(10
|
)
|
Dividends from unconsolidated investments
|
2
|
|
|
5
|
|
|
11
|
|
Deferred income taxes
|
21
|
|
|
(11
|
)
|
|
4
|
|
IRS audit settlement
|
—
|
|
|
(93
|
)
|
|
—
|
|
Change in restricted funds held in trust
|
22
|
|
|
28
|
|
|
11
|
|
Other, net
|
(6
|
)
|
|
16
|
|
|
2
|
|
Change in operating assets and liabilities, net of effects of acquisitions:
|
|
|
|
|
|
Receivables
|
(19
|
)
|
|
(12
|
)
|
|
(40
|
)
|
Debt services billings in excess of revenue recognized
|
(1
|
)
|
|
5
|
|
|
17
|
|
Accounts payable and accrued expenses
|
45
|
|
|
(8
|
)
|
|
57
|
|
Deferred revenue
|
(2
|
)
|
|
(5
|
)
|
|
(22
|
)
|
Other, net
|
20
|
|
|
(2
|
)
|
|
(7
|
)
|
Total adjustments for continuing operations
|
286
|
|
|
180
|
|
|
341
|
|
Net cash provided by operating activities from continuing operations
|
282
|
|
|
249
|
|
|
340
|
|
Net cash provided by operating activities from discontinued operations
|
—
|
|
|
—
|
|
|
1
|
|
Net cash provided by operating activities
|
282
|
|
|
249
|
|
|
341
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
Purchase of property, plant and equipment
|
(359
|
)
|
|
(376
|
)
|
|
(216
|
)
|
Acquisition of businesses, net of cash acquired
|
(9
|
)
|
|
(72
|
)
|
|
(13
|
)
|
Acquisition of noncontrolling interests in subsidiaries
|
—
|
|
|
—
|
|
|
(12
|
)
|
Purchase of investment securities
|
—
|
|
|
—
|
|
|
(4
|
)
|
Proceeds from asset sales
|
109
|
|
|
—
|
|
|
—
|
|
Property insurance proceeds
|
3
|
|
|
1
|
|
|
2
|
|
Proceeds from the sale of investment securities
|
—
|
|
|
—
|
|
|
6
|
|
Proceeds from available-for-sale marketable securities
|
—
|
|
|
—
|
|
|
11
|
|
Other, net
|
2
|
|
|
(1
|
)
|
|
(6
|
)
|
Net cash used in investing activities from continuing operations
|
(254
|
)
|
|
(448
|
)
|
|
(232
|
)
|
Net cash provided by investing activities from discontinued operations
|
—
|
|
|
—
|
|
|
3
|
|
Net cash used in investing activities
|
(254
|
)
|
|
(448
|
)
|
|
(229
|
)
|
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW – (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(In millions)
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
Proceeds from borrowings on long-term debt
|
—
|
|
|
294
|
|
|
412
|
|
Proceeds from borrowings on revolving credit facility
|
744
|
|
|
895
|
|
|
531
|
|
Proceeds from equipment financing capital lease
|
—
|
|
|
15
|
|
|
63
|
|
Proceeds from borrowings on project debt
|
—
|
|
|
59
|
|
|
63
|
|
Proceeds from borrowings on Dublin project financing
|
159
|
|
|
86
|
|
|
—
|
|
Proceeds from the exercise of options for common stock, net
|
—
|
|
|
—
|
|
|
10
|
|
Proceeds from settlement of Note Hedge
|
—
|
|
|
—
|
|
|
(83
|
)
|
Payments related to Cash Conversion Option
|
—
|
|
|
—
|
|
|
83
|
|
Principal payments on long-term debt
|
(4
|
)
|
|
(196
|
)
|
|
(557
|
)
|
Payments of borrowings on revolving credit facility
|
(749
|
)
|
|
(692
|
)
|
|
(496
|
)
|
Payments of equipment financing capital lease
|
(4
|
)
|
|
(4
|
)
|
|
(1
|
)
|
Principal payments on project debt
|
(51
|
)
|
|
(85
|
)
|
|
(52
|
)
|
Payments of deferred financing costs
|
(6
|
)
|
|
(11
|
)
|
|
(36
|
)
|
Cash dividends paid to stockholders
|
(131
|
)
|
|
(133
|
)
|
|
(101
|
)
|
Common stock repurchased
|
(20
|
)
|
|
(30
|
)
|
|
—
|
|
Change in restricted funds held in trust
|
28
|
|
|
5
|
|
|
(43
|
)
|
Other, net
|
(6
|
)
|
|
5
|
|
|
(3
|
)
|
Net cash (used in) provided by financing activities from continuing operations
|
(40
|
)
|
|
208
|
|
|
(210
|
)
|
Net cash used in financing activities from discontinued operations
|
—
|
|
|
—
|
|
|
(6
|
)
|
Net cash (used in) provided by financing activities
|
(40
|
)
|
|
208
|
|
|
(216
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
—
|
|
|
(4
|
)
|
|
(5
|
)
|
Net (decrease) increase in cash and cash equivalents
|
(12
|
)
|
|
5
|
|
|
(109
|
)
|
Cash and cash equivalents at beginning of period
|
96
|
|
|
91
|
|
|
200
|
|
Cash and cash equivalents at end of period
|
84
|
|
|
96
|
|
|
91
|
|
Less: Cash and cash equivalents of assets held for sale and discontinued operations at end of period
|
—
|
|
|
2
|
|
|
7
|
|
Cash and cash equivalents of continuing operations at end of period
|
$
|
84
|
|
|
$
|
94
|
|
|
$
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Paid for Interest and Income Taxes:
|
|
|
|
|
|
Interest
|
$
|
150
|
|
|
$
|
141
|
|
|
$
|
121
|
|
Income taxes, net of refunds
|
$
|
6
|
|
|
$
|
2
|
|
|
$
|
11
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Covanta Holding Corporation Stockholders’ Equity
|
|
Noncontrolling
Interests in
Subsidiaries
|
|
Total
|
|
|
Common Stock
|
|
Additional
Paid-In
Capital
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Accumulated
Earnings (Deficit)
|
|
Treasury Stock
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
|
(In millions)
|
Balance as of December 31, 2013
|
|
136
|
|
|
$
|
14
|
|
|
$
|
790
|
|
|
$
|
(2
|
)
|
|
$
|
101
|
|
|
6
|
|
|
$
|
(1
|
)
|
|
$
|
4
|
|
|
$
|
906
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
Dividend declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(114
|
)
|
|
|
|
|
|
|
|
|
|
|
(114
|
)
|
Shares repurchased for tax withholdings for vested stock awards
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
Exercise of options to purchase common stock
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
10
|
|
Exercise of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
1
|
|
|
|
|
|
1
|
|
Shares issued in non-vested stock award
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
—
|
|
Other
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Acquisition of noncontrolling interests in subsidiaries
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
(12
|
)
|
Comprehensive (loss) income, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
(20
|
)
|
|
(2
|
)
|
|
|
|
|
|
|
|
1
|
|
|
(21
|
)
|
Balance as of December 31, 2014
|
|
136
|
|
|
$
|
14
|
|
|
$
|
805
|
|
|
$
|
(22
|
)
|
|
$
|
(15
|
)
|
|
3
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
784
|
|
Opening retained earnings adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
(45
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
Dividend declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(133
|
)
|
|
|
|
|
|
|
|
|
|
|
(133
|
)
|
Common stock repurchased
|
|
|
|
|
|
|
|
(13
|
)
|
|
|
|
|
(19
|
)
|
|
2
|
|
|
|
|
|
|
|
|
(32
|
)
|
Shares repurchased for tax withholdings for vested stock awards
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
Distribution to partners of noncontrolling interest of subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
(1
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Adjustment for acquisition of noncontrolling interests in subsidiaries
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
Comprehensive (loss) income, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
68
|
|
|
|
|
|
|
|
|
1
|
|
|
57
|
|
Balance as of December 31, 2015
|
|
136
|
|
|
$
|
14
|
|
|
$
|
801
|
|
|
$
|
(34
|
)
|
|
$
|
(143
|
)
|
|
5
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
640
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
Dividend declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(132
|
)
|
|
|
|
|
|
|
|
|
|
|
(132
|
)
|
Common stock repurchased
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
(11
|
)
|
|
1
|
|
|
(1
|
)
|
|
|
|
|
(18
|
)
|
Shares repurchased for tax withholdings for vested stock awards
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
Exchange of China equity investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
(2
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Comprehensive loss, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
(28
|
)
|
|
(4
|
)
|
|
|
|
|
|
|
|
—
|
|
|
(32
|
)
|
Balance as of December 31, 2016
|
|
136
|
|
|
$
|
14
|
|
|
$
|
807
|
|
|
$
|
(62
|
)
|
|
$
|
(289
|
)
|
|
6
|
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
469
|
|
The accompanying notes are an integral part of the consolidated financial statements.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The terms “we,” “our,” “ours,” “us” and “Company” refer to Covanta Holding Corporation and its subsidiaries; the term “Covanta Energy” refers to our subsidiary Covanta Energy, LLC and its subsidiaries.
Organization
Covanta is one of the world’s largest owners and operators of infrastructure for the conversion of waste to energy (known as “energy-from-waste” or “EfW”), and also owns and operates related waste transport and disposal and other renewable energy production businesses. EfW serves two key markets as both a sustainable waste management solution that is environmentally superior to landfilling and as a source of clean energy that reduces overall greenhouse gas emissions and is considered renewable under the laws of many states and under federal law. Our facilities are critical infrastructure assets that allow our customers, which are principally municipal entities, to provide an essential public service.
Our EfW facilities earn revenue from both the disposal of waste and the generation of electricity and/or steam, generally under contracts, as well as from the sale of metal recovered during the EfW process. We process approximately
20 million
tons of solid waste annually. We operate and/or have ownership positions in
42
energy-from-waste facilities, which are primarily located in North America, and
5
additional energy generation facilities, including other renewable energy production facilities in North America (wood biomass and hydroelectric). In total, these assets produce approximately
10 million
megawatt hours (“MWh”) of baseload electricity annually. We also operate a waste management infrastructure that is complementary to our core EfW business.
We have
one
reportable segment,
North America, which is comprised of waste and energy services operations located primarily in the United States and Canada.
We are currently constructing an EfW facility in Dublin, Ireland, which we own and will operate upon completion. We hold interests in an energy-from-waste facility in Italy and an infrastructure business in China which is engaged in energy-from-waste operations. For additional information on our reportable segment, see
Note 6.
Financial Information by Business Segments
.
During 2016, we divested the majority of our investments in China. For additional information see
Note 4.
Dispositions, Assets Held for Sale and Discontinued Operations
.
Summary of Significant Accounting Policies
The financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The following is a description of our significant accounting policies.
Principles of Consolidation
The consolidated financial statements reflect the results of our operations, cash flows and financial position of our majority-owned or controlled subsidiaries. All intercompany accounts and transactions have been eliminated.
Equity and Cost Method Investments
Investments in unconsolidated entities over which we have significant influence are accounted for under the equity method of accounting. Investments in entities in which we do not have the ability to exert significant influence over the investees’ operating and financing activities are accounted for under the cost method of accounting. Cost-method investments are carried at historical cost unless indicators of impairment are identified. We monitor investments for other-than-temporary declines in value and make reductions when appropriate. For additional information on equity method investments, see
Note 9.
Equity Method Investments
.
For additional information on our cost method investment in China, see
Note 4.
Dispositions, Assets Held for Sale and Discontinued Operations
.
Revenue Recognition
Our revenue is generated from the fees we earn for: waste disposal, operating energy-from-waste and independent power facilities, servicing project debt, and for waste transportation and processing; from the sale of electricity and steam; from the sale of recycled ferrous and non-ferrous metal; and from construction services. The fees charged for our services are generally defined in our service agreements and vary based on contract-specific terms. We generally recognize revenue as services are performed or products are delivered. For example, revenue typically is recognized as waste is received or processed at our facilities, metals are shipped from our sites or as kilowatts are delivered to a customer by an EfW facility or independent power production plant.
Revenue under existing fixed-price or cost-plus construction contracts is recognized using the percentage-of-completion method, measured by the cost-to-cost method. If an arrangement involves multiple deliverables, the delivered items are considered separate units of accounting if the items have value on a stand-alone basis. Amounts allocated to each element are based on its objectively determined fair value, such as the sales price for the product or service when it is sold separately or competitor prices for similar products or services.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Plant Operating Expense
Plant operating expense includes facility employee costs, expense for materials and parts for facility scheduled and unscheduled maintenance and repair expense, which includes costs related to our internal maintenance team and non-facility employee costs. Plant operating expense also includes hauling and disposal expenses, fuel costs, chemicals and reagents, operating lease expense, and other facility operating related expense.
Pass Through Costs
Pass through costs are costs for which we receive a direct contractually committed reimbursement from the municipal client that sponsors an EfW project. These costs generally include utility charges, insurance premiums, ash residue transportation and disposal, and certain chemical costs. These costs are recorded net of municipal client reimbursements in our consolidated financial statements. Total pass through costs for the years ended
December 31, 2016, 2015 and 2014
were
$41 million
,
$52 million
, and
$59 million
, respectively.
Income Taxes
Deferred income taxes are based on the difference between the financial reporting and tax basis of assets and liabilities. The deferred income tax provision represents the change during the reporting period in the deferred tax assets and deferred tax liabilities, net of the effect of acquisitions and dispositions. Deferred tax assets include tax losses and credit carryforwards and are reduced by a valuation allowance if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
We file a consolidated federal income tax return for each of the periods covered by the consolidated financial statements, which include all eligible United States subsidiary companies. Foreign subsidiaries are taxed according to regulations existing in the countries in which they do business. Our federal consolidated income tax return also includes the taxable results of certain grantor trusts, which are excluded from our consolidated financial statements; however, certain related tax attributes are recorded in our consolidated financial statements since they are part of our federal tax return. For additional information, see
Note 15.
Income Taxes
.
Stock-Based Compensation
Stock-based compensation for share-based awards to employees is accounted for as compensation expense based on their grant date fair values. For additional information, see
Note 17.
Stock-Based Award Plans
.
Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and highly liquid investments having maturities of three months or less from the date of purchase. These short-term investments are stated at cost, which approximates fair value. Balances held by our international subsidiaries are not generally available for near-term liquidity in our domestic operations.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consist of amounts due to us from normal business activities. Allowances for doubtful accounts are the estimated losses from the inability of customers to make required payments. We use historical experience, as well as current market information, in determining the estimate.
Restricted Funds Held in Trust
Restricted funds held in trust are primarily amounts received and held by third party trustees relating to certain projects we own. We generally do not control these accounts and these funds may be used only for specified purposes. These funds include debt service reserves for payment of principal and interest on project debt. Revenue funds are comprised of deposits of revenue received with respect to projects prior to their disbursement. Other funds include escrowed debt proceeds, amounts held in trust for operations, maintenance, environmental obligations, operating lease reserves in accordance with agreements with our clients, and amounts held for future scheduled distributions. Such funds are invested principally in money market funds, bank deposits and certificates of deposit, United States treasury bills and notes, United States government agency securities, and high-quality municipal bonds.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Restricted fund balances are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2016
|
|
2015
|
|
|
Current
|
|
Noncurrent
|
|
Current
|
|
Noncurrent
|
Debt service funds - principal
|
|
$
|
10
|
|
|
$
|
7
|
|
|
$
|
9
|
|
|
$
|
8
|
|
Debt service funds - interest
|
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
Total debt service funds
|
|
11
|
|
|
7
|
|
|
10
|
|
|
8
|
|
Revenue funds
|
|
3
|
|
|
—
|
|
|
4
|
|
|
—
|
|
Other funds
|
|
42
|
|
|
47
|
|
|
63
|
|
|
75
|
|
Total
|
|
$
|
56
|
|
|
$
|
54
|
|
|
$
|
77
|
|
|
$
|
83
|
|
Deferred Revenue
Deferred revenue included in Accrued expenses and other current liabilities on our consolidated balance sheet consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2016
|
|
2015
|
Advance billings to municipalities
|
|
$
|
5
|
|
|
$
|
6
|
|
Other
|
|
11
|
|
|
7
|
|
Total
|
|
$
|
16
|
|
|
$
|
13
|
|
Advance billings to certain customers are billed one or two months prior to performance of service and are recognized as income in the period the service is provided.
Property, Plant and Equipment
Property, plant, and equipment acquired in business acquisitions is recorded at our estimate of fair value on the date of the acquisition. Additions, improvements and major expenditures are capitalized if they increase the original capacity or extend the remaining useful life of the original asset more than one year. Maintenance repairs and minor expenditures are expensed in the period incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which generally range from
three
years for computer equipment to
50 years
for certain infrastructure components of energy-from-waste facilities. Property, plant and equipment at our service fee operated facilities are not recognized on our balance sheet due to the adoption of the service concession arrangements guidance described in greater detail within the
Accounting Pronouncements Recently Adopted
discussion below
.
Any additions, improvements and major expenditures for which we are responsible at our service fee operated facilities are expensed in the period incurred. Our leasehold improvements are depreciated over the life of the lease term or the asset life, whichever is shorter. Upon retirement or disposal of assets, the cost and related accumulated depreciation are removed from the consolidated balance sheets and any gain or loss is reflected in the consolidated statements of operations.
Property, plant and equipment consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2016
|
|
2015
|
Land
|
|
$
|
29
|
|
|
$
|
22
|
|
Facilities and equipment
|
|
4,188
|
|
|
3,885
|
|
Landfills (primarily for ash disposal)
|
|
63
|
|
|
64
|
|
Construction in progress
|
|
433
|
|
|
266
|
|
Total
|
|
4,713
|
|
|
4,237
|
|
Less: accumulated depreciation and amortization
|
|
(1,689
|
)
|
|
(1,547
|
)
|
Property, plant, and equipment — net
|
|
$
|
3,024
|
|
|
$
|
2,690
|
|
Depreciation and amortization expense related to property, plant and equipment was
$185 million
,
$177 million
, and
$191 million
, for the years ended
December 31, 2016, 2015 and 2014
, respectively. Non-cash investing activities related to capital expenditures for growth projects totaled
$41 million
and
$26 million
as of
December 31, 2016 and 2015
, respectively and were recorded in accrued expenses and other current liabilities on our consolidated balance sheet.
Property, plant and equipment is evaluated for impairment whenever events or changes in circumstances indicate their carrying value may not be recoverable over their estimated useful life. In reviewing for recoverability, we compare the carrying amount of
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
the relevant assets to their estimated undiscounted future cash flows. When the estimated undiscounted future cash flows are less than the assets carrying amount, the carrying amount is compared to the assets fair value. If the assets fair value is less than the carrying amount an impairment charge is recognized to reduce the assets carrying amount to its fair value. For additional information, see
Note 14.
Supplementary Information
- Impairment Charges
.
Asset Retirement Obligations
We recognize a liability for asset retirement obligations when it is incurred, which is generally upon acquisition, construction, or development. Our liabilities include closure and post-closure costs for landfill cells and site restoration for certain energy-from-waste and power producing sites. We principally determine the liability using internal estimates of the costs using current information, assumptions, and interest rates, but also use independent appraisals as appropriate to estimate costs. When a new liability for asset retirement obligation is recorded, we capitalize the cost of the liability by increasing the carrying amount of the related long-lived asset. The liability is accreted to its present value each period and the capitalized cost is depreciated over the useful life of the related asset. We recognize period-to-period changes in the liability resulting from revisions to the timing or the amount of the original estimate of the undiscounted cash flows.
Current and noncurrent asset retirement obligations are included in Accrued expenses and other current liabilities and Other liabilities, respectively, on our consolidated balance sheet. Our asset retirement obligation is presented as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2016
|
|
2015
|
Beginning of period asset retirement obligation
|
|
$
|
30
|
|
|
$
|
28
|
|
Accretion expense
|
|
2
|
|
|
2
|
|
Net change
(1)
|
|
(7
|
)
|
|
—
|
|
End of period asset retirement obligation
|
|
25
|
|
|
30
|
|
Less: current portion
|
|
—
|
|
|
(3
|
)
|
Noncurrent asset retirement obligation
|
|
$
|
25
|
|
|
$
|
27
|
|
|
|
(1)
|
Comprised primarily of expenditures and settlements of the asset retirement obligation liability, net revisions based on current estimates of the liability and revised expected cash flows and life of the liability.
|
Intangible Assets and Liabilities
Our waste, service and energy contracts are intangible assets related to long-term operating contracts at acquired facilities. These intangible assets and liabilities, as well as lease interest and other finite and indefinite-lived intangible assets, are recorded at their estimated fair market values upon acquisition based primarily upon discounted cash flows in accordance with accounting standards related to business combinations. See
Note 7.
Amortization of Waste, Service and Energy Contracts
and
Note 8.
Other Intangible Assets and Goodwill
.
Intangible assets with finite lives are evaluated for impairment whenever events or changes in circumstances indicate their carrying value may not be recoverable over their estimated useful life. In reviewing for recoverability, we compare the carrying amount of the relevant assets to their estimated undiscounted future cash flows. When the estimated undiscounted future cash flows are less than the assets carrying amount, the carrying amount is compared to the assets fair value. If the assets fair value is less than the carrying amount an impairment charge is recognized to reduce the assets carrying amount to its fair value. As of December 31, 2016, there were no indicators of impairment identified.
Goodwill
Goodwill is the excess of our purchase cost over the fair value of the net assets of acquired businesses. We do not amortize goodwill, but we assess our goodwill for impairment at least annually. We assess whether a goodwill impairment exists using both qualitative and quantitative assessments. When we elect to perform a qualitative assessment, it involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If based on this qualitative assessment we determine it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or if we did not elect to perform the qualitative assessment we will perform a quantitative assessment.
A quantitative assessment of goodwill requires a comparison of the estimated fair value of the reporting unit to which the goodwill has been assigned to its carrying value. All goodwill is related to the North America reportable segment, which is comprised of two reporting units. A reporting unit is defined as an operating segment or a component of an operating segment to the extent discrete financial information is available that is reviewed by segment management. If the carrying value of the reporting unit exceeds the fair value, the reporting unit’s goodwill is compared to its implied value of goodwill. If the carrying value of the
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
reporting unit’s goodwill exceeds the implied value, an impairment charge is recognized to reduce the carrying value to the implied value.
There were no impairment charges recognized related to our evaluation of goodwill for the years ended
December 31, 2016, 2015 and 2014
.
Business Combinations
We recognize the assets acquired and liabilities assumed in a business combination at fair value including any noncontrolling interest of the acquired entity; recognize any goodwill acquired; establish the acquisition-date fair value based on the highest and best use by market participants for the asset as the measurement objective; and disclose information needed to evaluate and understand the nature and financial effect of the business combination. We expense transaction costs directly associated to the acquisition as incurred; capitalize in-process research and development costs, if any; and record a liability for contingent consideration at the measurement date with subsequent remeasurement recognized in the results of operations. Any costs for business restructuring and exit activities related to the acquired company are included in the post-combination results of operations. Tax adjustments related to previously recorded business combinations, if any, are recognized in the results of operations.
Accumulated Other Comprehensive Income ("AOCI")
AOCI, in the consolidated statements of equity, includes unrealized gains and losses excluded from the consolidated statements of operations. These unrealized gains and losses consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2016
|
|
2015
|
Foreign currency translation
|
|
$
|
(41
|
)
|
|
$
|
(34
|
)
|
Pension and other postretirement plan unrecognized net gain
|
|
2
|
|
|
2
|
|
Net unrealized loss on derivatives
|
|
(23
|
)
|
|
(2
|
)
|
Accumulated other comprehensive loss
|
|
$
|
(62
|
)
|
|
$
|
(34
|
)
|
The changes in accumulated other comprehensive (loss) income are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation
|
|
Pension and Other Postretirement Plan Unrecognized Net Gain
|
|
Net Unrealized Loss on Derivatives
|
|
Total
|
Balance December 31, 2014
|
$
|
(12
|
)
|
|
$
|
2
|
|
|
$
|
(12
|
)
|
|
$
|
(22
|
)
|
Other comprehensive (loss) income before reclassifications
|
(22
|
)
|
|
—
|
|
|
10
|
|
|
(12
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net current period comprehensive (loss) income
|
(22
|
)
|
|
—
|
|
|
10
|
|
|
(12
|
)
|
Balance December 31, 2015
|
$
|
(34
|
)
|
|
$
|
2
|
|
|
$
|
(2
|
)
|
|
$
|
(34
|
)
|
Other comprehensive loss before reclassifications
|
(2
|
)
|
|
—
|
|
|
(21
|
)
|
|
(23
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
(5
|
)
|
|
—
|
|
|
—
|
|
|
(5
|
)
|
Net current period comprehensive loss
|
(7
|
)
|
|
—
|
|
|
(21
|
)
|
|
(28
|
)
|
Balance December 31, 2016
|
$
|
(41
|
)
|
|
$
|
2
|
|
|
$
|
(23
|
)
|
|
$
|
(62
|
)
|
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
|
|
|
|
|
|
|
Amount Reclassified from Accumulated Other Comprehensive Income
|
Accumulated Other Comprehensive Income Component
|
|
Year Ended December 31, 2016
|
|
Affected Line Item in the Consolidated Statement of Operations
|
|
|
|
|
|
Foreign currency translation
|
|
$
|
5
|
|
|
Gain on asset sales
(1)
|
|
|
5
|
|
|
Total before tax
|
|
|
—
|
|
|
Tax benefit
|
Total reclassifications
|
|
$
|
5
|
|
|
Net of tax
|
(1)
For additional information see,
Note 4.
Dispositions, Assets Held for Sale and Discontinued Operations
.
Derivative Instruments
We recognize derivative instruments on the balance sheet at their fair value. The cash conversion option and note hedge were derivative instruments that were recorded at fair value quarterly with changes in fair value recognized in our consolidated statements of operations as non-cash convertible debt related expense. We have entered into swap agreements with various financial institutions to hedge our exposure to energy price risk and interest rate risk. Changes in the fair value of the energy derivatives and the interest rate swap are recognized as a component of AOCI. For additional information, see
Note 13.
Derivative Instruments
.
Foreign Currency Translation
For foreign operations, assets and liabilities are translated at year-end exchange rates and revenue and expense are translated at the average exchange rates during the year. Unrealized gains and losses resulting from foreign currency translation are included in the consolidated statements of equity as a component of AOCI. Currency transaction gains and losses are recorded in other operating expense in the consolidated statements of operations.
Pension and Postretirement Benefit Obligations
Our pension and other postretirement benefit plans are accounted for based on actuarially-determined estimates. For additional information, see
Note 16.
Employee Benefit Plans
.
Share Repurchases
Under our share repurchase program, common stock repurchases may be made, from time to time, in the open market, in privately negotiated transactions, or by other available methods, at management’s discretion and in accordance with applicable federal securities laws. The timing and amounts of any repurchases will depend on many factors, including our capital structure, the market price of our common stock and overall market conditions, and whether any restrictions then exist under our policies relating to trading in compliance with securities laws. Purchase price over par value for share repurchases are allocated to additional paid-in capital up to the weighted average amount per share recorded at the time of initial issuance of our common stock, with any excess recorded as a reduction to retained earnings. For additional information, see
Note 5.
Equity and Earnings Per Share ("EPS")
.
Use of Estimates
The preparation of financial statements requires us to make estimates and assumptions that affect the reported amounts of assets or liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. Significant estimates include: useful lives of long-lived assets, asset retirement obligations, construction expense estimates, unbilled service receivables, fair value of financial instruments, fair value of the reporting units for goodwill impairment analysis, fair value of long-lived assets for impairment analysis, renewable energy credits, stock-based compensation, purchase accounting allocations, cash flows and taxable income from future operations, deferred taxes, allowances for uncollectible receivables, and liabilities related to employee medical benefit obligations, workers’ compensation, severance and certain litigation.
Reclassifications
Certain amounts have been reclassified in our prior period consolidated balance sheet to conform to current year presentation and such amounts were not material to current and prior periods. During the year ended December 31, 2016, we concluded that it was appropriate to include Net interest expense on project debt within Interest expense, net on our consolidated statement of operations because such amounts were deemed immaterial. Previously, Net interest expense on project debt was reported separately, as a component of Operating expense. For the years ended December 31, 2015 and 2014, Net interest expense on project debt of
$9 million
and
$10 million
, respectively, was reclassified to Interest expense, net on our consolidated statement of operations and as a result, Operating income increased accordingly for those periods.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Change in Estimate
Revenue under our Durham York construction contract is recognized using the percentage-of-completion method, measured by the cost-to-cost method. We evaluate the estimate of our total construction costs for the contract throughout the life of the project and make revisions to our estimated costs as necessary. During the year ended December 31, 2015, we reduced our overall profit estimate related to this construction project by
$20 million
. The project was completed in 2015 and no further significant construction expenses were incurred related to this project. We are currently seeking to resolve outstanding disputes with our primary contractor for the Durham-York construction project, for additional information see
Note 18. Commitments and Contingencies
.
Accounting Pronouncements Recently Adopted
Effective January 1, 2016, we adopted guidance concerning the presentation of debt issuance costs, which are required to be presented as a direct reduction from the carrying amount of the related debt liability. We adopted this guidance retrospectively, which resulted in a reduction in our December 31, 2015 current and non-current asset balances of
$5 million
and
$20 million
, respectively, along with a corresponding reduction in current and long-term debt balances. The December 31, 2015 balance sheet includes certain costs for Dublin project financing within current assets for debt that has not yet been drawn down. For additional information, see
Note 11.
Consolidated Debt
.
Effective January 1, 2015, we were required to adopt guidance concerning service concession arrangements. The amendment applies to an operating entity of a service concession arrangement entered into with a public-sector entity grantor when the arrangement meets certain conditions. The amendments specify that such an arrangement may not be accounted for as a lease nor should the infrastructure used in a service concession arrangement be recognized as property, plant and equipment by the operating entity. Instead, the operating entity should refer to other guidance to account for the arrangement, such as Topic 605 of the Accounting Standard Codification - Revenue Recognition. We adopted this guidance using a modified retrospective approach which requires the cumulative effect of applying this guidance to arrangements existing at the beginning of the period of adoption be recognized as an adjustment to retained earnings. As a result, accumulated deficit as of January 1, 2015 as originally reported of
$15 million
increased by
$45 million
(
$75 million
reduction of property, plant and equipment, net of tax of
$30 million
) to
$60 million
.
The adoption of this guidance had the following effect on our consolidated statement of operations for the year ended December 31, 2015 (in millions, except per share amounts):
|
|
|
|
|
|
|
|
Increase (Decrease)
|
Plant operating expense
|
|
$
|
31
|
|
Depreciation and amortization
|
|
$
|
(22
|
)
|
Income tax expense
|
|
$
|
(4
|
)
|
Net income attributable to Covanta Holding Corporation
|
|
$
|
(5
|
)
|
Basic and Diluted income per share
|
|
$
|
(0.04
|
)
|
Effective December 31, 2015, we early adopted the guidance, on a prospective basis, concerning simplified presentation of deferred income taxes by requiring that deferred tax assets and liabilities be classified as non-current in the statement of financial position. Adoption of this guidance resulted in reclassification of our net current deferred tax asset of
$67 million
to the net non-current deferred tax asset in our consolidated balance sheet as of December 31, 2015.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
In January of 2017, the Financial Accounting Standards Board ("FASB") issued guidance clarifying the definition of a business to assist entities when determining whether an integrated set of assets and activities meets the definition of a business. The update provides that when substantially all the fair value of the assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of this new guidance is not expected to have a material impact on our consolidated financial statements.
In January of 2017, the FASB issued updated guidance to eliminate the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge (Step 2). As a result, an impairment charge will equal the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the amount of goodwill allocated to the reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendment should be applied on a prospective basis. The guidance is effective for goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for goodwill impairment tests performed after January 1, 2017. The impact of this guidance for the Company will depend on the outcomes of future goodwill impairment tests.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In November of 2016, the FASB issued guidance requiring that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The guidance is required to be adopted in the first quarter of 2018 on a retrospective basis. Adoption of this guidance will eliminate the disclosure of Change in restricted funds held in trust, which we currently include in Net cash provided by operating and Net cash provided by financing activities on our consolidated statement of cash flows.
In October 2016, the FASB issued guidance requiring comprehensive recognition of current and deferred income taxes on intra-entity asset transfers other than inventory, which was previously prohibited. The guidance now requires us to recognize the tax expense from the intra-entity transfer of an asset when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. We are required to adopt this guidance in the first quarter of 2018 on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Early adoption is permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements.
In August 2016, the FASB issued updated guidance on eight specific cash flow issues with regard to how cash receipts and cash payments are presented and classified in the statement of cash flows in order to clarify existing guidance and reduce diversity in practice. The guidance is required to be adopted in the first quarter of 2018 on a retrospective basis, unless it is impracticable to apply, in which case it should be applied prospectively as of the earliest date practicable. Early adoption is permitted. We are currently evaluating the impact this guidance will have on our consolidated statement of cash flows.
In March 2016, the FASB issued amended guidance relating to employee share-based compensation. Under the new guidance we are required to recognize the tax effects of stock compensation as income tax expense or benefit in the income statement and treat the tax effects of exercised or vested awards as discrete items in the reporting period in which they occur. Excess tax benefits are required to be classified as operating activities, and shares we withhold on behalf of employees for tax purposes are required to be classified as financing activities. We may make an accounting policy election to continue to estimate the number of awards that are expected to vest or account for forfeitures when they occur. The threshold to qualify for equity classification permits withholding up to the maximum statutory tax rates. This guidance is required to be adopted in the first quarter of 2017. We are currently evaluating the impact this guidance will have on our consolidated financial statements.
In February 2016, the FASB issued amended guidance for lease arrangements in order to increase transparency and comparability by providing additional information to users of financial statements regarding an entity's leasing activities. The revised guidance seeks to achieve this objective by requiring reporting entities to recognize lease assets and lease liabilities on the balance sheet for substantially all lease arrangements. The guidance, which is required to be adopted in the first quarter of 2019, will be applied on a modified retrospective basis beginning with the earliest period presented. Early adoption is permitted. We are currently evaluating the impact of adopting this guidance on our consolidated financial statements.
In January 2016, the FASB issued accounting guidance that would require equity investments not accounted for as an equity method investment or that result in consolidation to be recorded at their fair value with changes in fair value recognized in our consolidated statements of operations. Those equity investments that do not have a readily determinable fair value may be measured at cost less impairment, if any, plus or minus changes resulting from observable price changes. This standard is required to be adopted in the first quarter of 2018, with early adoption prohibited. We are currently evaluating the impact this guidance will have on our consolidated financial statements and related disclosures.
In May 2014, the FASB issued Accounting Standards update 2014-09, “Revenue from Contracts with Customers.” The standard is based on the principle that revenue is recognized in an amount expected to be collected and to which the entity expects to be entitled in exchange for the transfer of goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and certainty of revenue arising from contracts with customers. In August 2015, the FASB deferred the effective date by one year to January 1, 2018, while providing the option to early adopt the standard on the original effective date of January 1, 2017. Covanta will adopt the standard on January 1, 2018, as required. The standard can be adopted either retrospectively or as a cumulative-effect adjustment as of the date of adoption. We are currently determining the impacts of the standard on our consolidated financial statements and are evaluating the options with respect to our transition method. Our implementation approach includes performing a detailed review of key contracts representative of the services that we provide and assessing the conformance of historical accounting policies and practices with the standard. Because the standard may impact our business processes, systems and controls, we have initiated the development of a comprehensive change management project plan to guide the implementation.
NOTE 3. NEW BUSINESS AND ASSET MANAGEMENT
The acquisitions in the section below are not material to our consolidated financial statements individually or in the aggregate and therefore, disclosures of pro forma financial information have not been presented. The results of operations reflect the period of ownership of the acquired businesses, business development projects and dispositions.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Environmental Services Acquisitions
During 2016, we acquired two environmental services business, in separate transactions, for a total of
$9 million
. During 2015, we acquired four environmental services businesses (one of which was accounted for as an asset purchase), in separate transactions, for a total of
$69 million
. During 2014, we acquired one environmental services business for
$13 million
.
These acquisitions expand our Covanta Environmental Solutions capabilities and client service offerings, and allow us to direct additional non-hazardous profiled waste volumes into our EfW facilities, and therefore are highly synergistic with our existing business.
Pittsfield EfW Facilit
y
In March 2016, we exercised an early termination option available under the steam sale agreement at our Pittsfield EfW facility that would have been effective in March 2017. Upon termination of the steam agreement, we intended to cease operations at the Pittsfield facility. As a result, during the first quarter of 2016, we recorded a non-cash impairment charge of
$13 million
, pre-tax, which was calculated based on the estimated cash flows for this facility during its remaining operations utilizing Level 3 inputs. For more information regarding fair value measurements, see
Note 12.
Financial Instruments
.
In October 2016, we withdrew our termination notice. The City of Pittsfield has agreed to fund certain upgrades to the facility and the State of Massachusetts will provide energy tax credits, both of which will serve to improve the economics of the facility. In addition, we will continue to sell steam generated by the facility under an amended agreement.
Dublin EfW Facility
In 2014, we entered into agreements to build, own and operate the Dublin EfW facility, a
600,000
metric ton-per-year,
58
megawatt facility in Dublin, Ireland. The project will source residential, commercial and profiled waste from Dublin and the surrounding areas and will sell electricity into the local electricity grid, with over
50%
of the facility’s generation expected to qualify for preferential pricing under Ireland’s renewable feed-in tariff. We commenced construction of the facility in the fourth quarter of 2014, with operational commencement expected in late-2017. We will operate the facility under a
45
-year public-private-partnership, after which ownership of the facility will transfer to the City of Dublin. Our total investment in the project is expected to be approximately
€500 million
, funded by project equity (approximately
€125 million
) and third party non-recourse project financing (
€375 million
). For additional information related to funding for this project, see
Note 11.
Consolidated Debt
- Dublin Project Financing.
New York City Waste Transport and Disposal Contract
In 2013, New York City's Department of Sanitation awarded us a contract to handle waste transport and disposal from two marine transfer stations located in Queens and Manhattan. We are utilizing capacity at existing facilities for the disposal of an estimated
800,000
tons per year of municipal solid waste. Service for the Queens marine transfer station began in early 2015, with service for the Manhattan marine transfer station expected to follow pending notice to proceed to be issued by New York City, which is anticipated in 2018. The contract is for
20
years, effective from the commencement of operations at the Queens marine transfer station in March 2015, with options for New York City to extend the term for two additional five-year periods, and requires waste to be transported using a multi-modal approach. We have acquired equipment, including barges, railcars, containers, and intermodal equipment to support this contract. We expect that our total initial investment will be approximately
$150 million
, including the cost to acquire equipment of approximately
$114 million
and approximately
$36 million
of enhancements to existing facilities that will be part of the network of assets supporting this contract. During the years ended
December 31, 2016, 2015 and 2014
, we invested
$3 million
,
$31 million
and
$59 million
, respectively, in property, plant and equipment relating to this contract. Since 2013, we have invested a total of
$115 million
in property, plant and equipment relating to this contract.
Pinellas County Energy-from-Waste Facility
In 2014, we entered into a
ten
-year service fee contract to operate an existing
3,150
ton-per-day energy-from-waste facility located in Pinellas County, Florida, and we assumed operations of the facility in December of 2014. In addition to the annual service fee, during the initial few years of the contract we will complete a number of projects to improve operations of the facility. Our client will pay for these projects, for which we will record construction revenue and expense.
Durham-York Energy-from-Waste Facility
During 2011, we began construction of a municipally-owned
140,000
metric ton-per-year greenfield EfW facility located in Durham Region of Canada and owned by our municipal clients, the Durham and York Regions. We built the facility under the terms of a fixed-price construction contract totaling
C$250 million
. The project entered commercial operations in January 2016 under a
20
-year service fee contract. We are currently seeking to resolve outstanding disputes with our primary contractor for the Durham-York construction project, for additional information see
Note 18. Commitments and Contingencies
.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 4. DISPOSITIONS, ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
Dispositions
China Investments
Our interests in China included an
85%
ownership of an EfW facility located in Jiangsu Province ("Taixing"), a
49%
equity interest in an EfW facility located in Sichuan Province and a
40%
equity interest in Chongqing Sanfeng Covanta Environmental Industry Co., a company located in the Chongqing Municipality that is engaged in the business of providing design and engineering, procurement, construction services and equipment sales for EfW facilities in China, as well as operating services for EfW facilities. During 2016, we completed the exchange of our project ownership interests in China for a
15%
ownership interest in Chongqing Sanfeng Environmental Industrial Group, Co., Ltd ("Sanfeng Environment") and subsequently sold approximately
90%
of that interest to a third-party, a subsidiary of CITIC Limited, a leading Chinese industrial conglomerate and investment company. As a result, during the year ended December 31, 2016, we recorded a pre-tax gain of
$41 million
. We received pre-tax proceeds of
$105 million
. The gain resulted from the excess of pre-tax proceeds over the cost-method book value of
$70 million
, plus
$5 million
of realized gains on the related cumulative foreign currency translation adjustment, that were reclassified out of other comprehensive income. Subsequent to completing the exchange, Sanfeng Environment has made certain claims for indemnification under the agreement related to the condition of the facility in Taixing. To the extent that any payment is made related to these claims, such amount could reduce the gain as recorded in a future period.
In connection with these transactions, we entered into foreign currency exchange collars and forwards to hedge against rate fluctuations that impacted the cash proceeds in U.S. dollar terms. For more information, see
Note 13.
Derivative Instruments
.
As of December 31, 2016, our remaining cost-method investment in Sanfeng Environment totaled
$7 million
and was included in our consolidated balance sheet as a component of "Other assets". There were no impairment indicators related to our cost-method investment during the year ended December 31, 2016.
Insurance Business
During 2014, we sold our insurance subsidiary and recorded a non-cash impairment charge of
$14 million
comprised of the write-down of the carrying amount in excess of the realizable fair value of
$12 million
, plus
$2 million
in disposal costs.
Assets Held for Sale Summary
During the second quarter of 2015, we determined that the assets and liabilities associated with our interests in China met the criteria for classification as Assets Held for Sale, but did not meet the criteria for classification as Discontinued Operations. In making this determination, we evaluated our consolidated subsidiary, Taixing, as well as our Sanfeng and Chengdu equity method investments as a single disposal group under the applicable accounting guidance.
The assets and liabilities associated with our China investments are presented in our consolidated balance sheets as current "Assets Held for Sale” and current "Liabilities Held for Sale.” The following table sets forth the assets and liabilities of the Assets Held for Sale included in the consolidated balance sheets as of the dates indicated (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2016
|
|
2015
|
Cash and cash equivalents
|
|
$
|
—
|
|
|
$
|
2
|
|
Receivables
|
|
—
|
|
|
3
|
|
Prepaid expenses and other current assets
|
|
—
|
|
|
1
|
|
Property, plant and equipment, net
|
|
—
|
|
|
49
|
|
Other noncurrent assets
|
|
—
|
|
|
42
|
|
Assets held for sale
|
|
$
|
—
|
|
|
$
|
97
|
|
|
|
|
|
|
Current portion of project debt
|
|
$
|
—
|
|
|
$
|
3
|
|
Accounts payable
|
|
—
|
|
|
3
|
|
Accrued expenses and other current liabilities
|
|
—
|
|
|
5
|
|
Project debt
|
|
—
|
|
|
12
|
|
Liabilities held for sale
|
|
$
|
—
|
|
|
$
|
23
|
|
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Discontinued Operations Summary
During the fourth quarter of 2013, assets related to our development activities in the United Kingdom met the criteria to be presented in discontinued operations. The results of operations of these businesses for the year ended December 31, 2014 was comprised of Other operating revenue of
$1 million
and Other operating expense of
$1 million
. The cash flows of these businesses for the year ended December 31, 2014 were presented separately in our consolidated statements of cash flows.
NOTE 5. EQUITY AND EARNINGS PER SHARE ("EPS")
Equity
In May 2014, the stockholders of the Company approved the Covanta Holding Corporation 2014 Equity Award Plan. For additional information, see
Note 17.
Stock-Based Award Plans
.
During the year ended
December 31, 2016
, we granted awards of
761,426
shares of restricted stock,
888,144
of restricted stock units and withheld
210,438
shares of our common stock in connection with tax withholdings for vested stock awards. For information related to stock-based award plans, see
Note 17.
Stock-Based Award Plans
.
During the years ended
December 31, 2016, 2015 and 2014
common shares repurchased and dividends declared were as follows (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Total repurchases
|
$
|
18
|
|
|
$
|
32
|
|
|
$
|
—
|
|
Shares repurchased
|
1.2
|
|
|
2.1
|
|
|
—
|
|
Weighted average cost per share
|
$
|
15.29
|
|
|
$
|
15.33
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Dividends declared
|
$
|
132
|
|
|
$
|
133
|
|
|
$
|
114
|
|
Per share
|
$
|
1.00
|
|
|
$
|
1.00
|
|
|
$
|
0.86
|
|
As of
December 31, 2016
, there were
136 million
shares of common stock issued of which
130 million
shares were outstanding; the remaining
6 million
shares of common stock issued but not outstanding were held as treasury stock. As of
December 31, 2016
, there were
4 million
shares of common stock available for future issuance under equity plans.
As of
December 31, 2016
, there were
10 million
shares of preferred stock authorized, with none issued or outstanding. The preferred stock may be divided into a number of series as defined by our Board of Directors. The Board of Directors are authorized to fix the rights, powers, preferences, privileges and restrictions granted to and imposed upon the preferred stock upon issuance.
Earnings Per Share
We calculate basic earnings per share ("EPS") using net earnings for the period and the weighted average number of outstanding shares of our common stock, par value
$0.10
per share, during the period. Basic weighted average shares outstanding have decreased due to share repurchases. Diluted earnings per share computations, as calculated under the treasury stock method, include the weighted average number of shares of additional outstanding common stock issuable for stock options, restricted stock awards and restricted stock units whether or not currently exercisable. Diluted earnings per share does not include securities if their effect was anti-dilutive. Basic and diluted weighted average shares outstanding were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
December 31,
|
|
2016
|
|
2015
|
|
2014
|
Basic weighted average common shares outstanding
|
129
|
|
|
132
|
|
|
130
|
|
Dilutive effect of restricted stock and restricted stock units
(1)
|
—
|
|
|
1
|
|
|
—
|
|
Diluted weighted average common shares outstanding
|
129
|
|
|
133
|
|
|
130
|
|
(1)
Excludes the following securities because their inclusion would have been anti-dilutive (in millions):
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
December 31,
|
|
2016
|
|
2015
|
|
2014
|
Stock options
|
1
|
|
|
1
|
|
|
1
|
|
Restricted stock
|
1
|
|
|
—
|
|
|
1
|
|
Restricted stock units
|
1
|
|
|
—
|
|
|
—
|
|
Warrants
|
—
|
|
|
—
|
|
|
25
|
|
|
|
|
|
|
|
In 2009, we issued warrants in connection with the issuance of 3.25% Cash Convertible Senior Notes that matured on June 1, 2014. The warrants were exercisable only at expiration in equal tranches over a 60 day period that began on September 2, 2014 and ended on November 26, 2014. The warrants were net share settled, which means that, with respect to any exercise date, we delivered to the warrant holders a number of shares for each warrant equal to the excess of the volume-weighted average price of our common stock on each exercise date over the then effective strike price of the warrants, divided by such volume-weighted average price of our common stock, with a cash payment in lieu of fractional shares. During the year ended December 31, 2014,
1,430,870
shares of our common stock were issued in connection with warrant exercises. For additional information see
Note 11.
Consolidated Debt
- 3.25% Cash Convertible Senior Notes due 2014
.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 6. FINANCIAL INFORMATION BY BUSINESS SEGMENTS
We have
one
reportable segment,
North America, which is comprised of waste and energy services operations located primarily in the United States and Canada.
The results of our reportable segment are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
All Other
(1)
|
|
Total
|
Year Ended December 31, 2016:
|
|
|
|
|
|
Operating revenue
|
$
|
1,692
|
|
|
$
|
7
|
|
|
$
|
1,699
|
|
Depreciation and amortization expense
|
$
|
207
|
|
|
$
|
—
|
|
|
$
|
207
|
|
Impairment charges
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
20
|
|
Operating income (loss)
|
$
|
116
|
|
|
$
|
(7
|
)
|
|
$
|
109
|
|
Interest expense, net
|
$
|
66
|
|
|
$
|
72
|
|
|
$
|
138
|
|
Gain on asset sales
|
$
|
3
|
|
|
$
|
41
|
|
|
$
|
44
|
|
Equity in net income from unconsolidated investments
|
$
|
1
|
|
|
$
|
3
|
|
|
$
|
4
|
|
|
|
|
|
|
|
As of December 31, 2016:
|
|
|
|
|
|
Total assets
|
$
|
3,794
|
|
|
$
|
490
|
|
|
$
|
4,284
|
|
Capital additions
|
$
|
188
|
|
|
$
|
171
|
|
|
$
|
359
|
|
Year Ended December 31, 2015:
|
|
|
|
|
|
Operating revenue
|
$
|
1,607
|
|
|
$
|
38
|
|
|
$
|
1,645
|
|
Depreciation and amortization expense
|
$
|
197
|
|
|
$
|
1
|
|
|
$
|
198
|
|
Impairment charges
|
$
|
43
|
|
|
$
|
—
|
|
|
$
|
43
|
|
Operating income
|
$
|
108
|
|
|
$
|
1
|
|
|
$
|
109
|
|
Interest expense, net
|
$
|
60
|
|
|
$
|
74
|
|
|
$
|
134
|
|
Equity in net income from unconsolidated investments
|
$
|
—
|
|
|
$
|
13
|
|
|
$
|
13
|
|
|
|
|
|
|
|
As of December 31, 2015:
|
|
|
|
|
|
Total assets
|
$
|
3,838
|
|
|
$
|
396
|
|
|
$
|
4,234
|
|
Capital additions
|
$
|
175
|
|
|
$
|
201
|
|
|
$
|
376
|
|
Year Ended December 31, 2014:
|
|
|
|
|
|
Operating revenue
|
$
|
1,641
|
|
|
$
|
41
|
|
|
$
|
1,682
|
|
Depreciation and amortization expense
|
$
|
208
|
|
|
$
|
3
|
|
|
$
|
211
|
|
Impairment charges
|
$
|
50
|
|
|
$
|
14
|
|
|
$
|
64
|
|
Operating income (loss)
|
$
|
168
|
|
|
$
|
(14
|
)
|
|
$
|
154
|
|
Interest expense, net
|
$
|
63
|
|
|
$
|
84
|
|
|
$
|
147
|
|
Equity in net income from unconsolidated investments
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
10
|
|
|
|
|
|
|
|
As of December 31, 2014:
|
|
|
|
|
|
Total assets
|
$
|
3,882
|
|
|
$
|
297
|
|
|
$
|
4,179
|
|
Capital additions
|
$
|
188
|
|
|
$
|
28
|
|
|
$
|
216
|
|
|
|
(1)
|
All other is comprised of the financial results of our insurance subsidiaries’ operations through the date of disposal and our international assets.
|
Our operations are principally located in the United States. See the list of projects for the North America segment in
Item 1. Business.
A summary of operating revenue and total assets by geographic area is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
Other
|
|
Total
|
Operating Revenue:
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
$
|
1,677
|
|
|
$
|
22
|
|
|
$
|
1,699
|
|
Year Ended December 31, 2015
|
|
$
|
1,589
|
|
|
$
|
56
|
|
|
$
|
1,645
|
|
Year Ended December 31, 2014
|
|
$
|
1,567
|
|
|
$
|
115
|
|
|
$
|
1,682
|
|
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
Assets Held
for Sale
|
|
Other
|
|
Total
|
Total Assets:
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
$
|
3,763
|
|
|
$
|
—
|
|
|
$
|
521
|
|
|
$
|
4,284
|
|
As of December 31, 2015
|
|
$
|
3,847
|
|
|
$
|
97
|
|
|
$
|
290
|
|
|
$
|
4,234
|
|
As of December 31, 2014
|
|
$
|
3,802
|
|
|
$
|
96
|
|
|
$
|
281
|
|
|
$
|
4,179
|
|
NOTE 7. AMORTIZATION OF WASTE, SERVICE AND ENERGY CONTRACTS
Waste, Service and Energy Contracts
Our waste, service and energy contracts are intangible assets and liabilities relating to long-term operating contracts at acquired facilities and are recorded upon acquisition at their estimated fair market values based upon discounted cash flows. Intangible assets and liabilities are amortized using the straight line method over their useful lives. Waste, service and energy contracts consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
As of December 31, 2015
|
|
|
Remaining Weighted Average Useful
Life
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
Waste, service and energy contracts (asset)
|
|
22 years
|
|
$
|
526
|
|
|
$
|
263
|
|
|
$
|
263
|
|
|
$
|
531
|
|
|
$
|
247
|
|
|
$
|
284
|
|
Waste and service contracts (liability)
|
|
3 years
|
|
$
|
(131
|
)
|
|
$
|
(124
|
)
|
|
$
|
(7
|
)
|
|
$
|
(131
|
)
|
|
$
|
(118
|
)
|
|
$
|
(13
|
)
|
The following table details the amount of the actual/estimated amortization expense and contra-expense associated with these intangible assets and liabilities as of
December 31, 2016
included or expected to be included in our consolidated statements of operations for each of the years indicated (in millions):
|
|
|
|
|
|
|
|
|
|
Waste, Service and
Energy Contracts
(Amortization Expense)
|
|
Waste and Service
Contracts
(Contra-Expense)
|
Year ended December 31, 2016
|
$
|
21
|
|
|
$
|
(6
|
)
|
2017
|
14
|
|
|
(2
|
)
|
2018
|
13
|
|
|
(2
|
)
|
2019
|
13
|
|
|
(2
|
)
|
2020
|
13
|
|
|
(1
|
)
|
2021
|
13
|
|
|
—
|
|
Thereafter
|
197
|
|
|
—
|
|
Total
|
$
|
263
|
|
|
$
|
(7
|
)
|
The weighted average number of years prior to the next renewal period for contracts that we have an intangible recorded is
6
years.
During the year ended December 31, 2014, we recorded non-cash impairment charges totaling
$16 million
related to service contract intangibles that were recorded upon acquisition in 2009. See
Note 14.
Supplementary Information
- Impairment charges
discussion for additional information.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 8. OTHER INTANGIBLE ASSETS AND GOODWILL
Other Intangible Assets
Other intangible assets consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
As of December 31, 2015
|
|
Remaining Weighted Average Useful
Life
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
Customer relationships and other
|
8 years
|
$
|
43
|
|
|
$
|
13
|
|
|
$
|
30
|
|
|
$
|
40
|
|
|
$
|
6
|
|
|
$
|
34
|
|
Other intangibles
|
Indefinite
|
4
|
|
|
—
|
|
|
4
|
|
|
4
|
|
|
—
|
|
|
4
|
|
Other intangible assets, net
|
|
$
|
47
|
|
|
$
|
13
|
|
|
$
|
34
|
|
|
$
|
44
|
|
|
$
|
6
|
|
|
$
|
38
|
|
The following table details the amount of the estimated amortization expense associated with other intangible assets as of
December 31, 2016
expected to be included in our statements of operations for each of the years indicated (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
Thereafter
|
|
Total
|
Annual remaining amortization
|
|
$
|
5
|
|
|
$
|
5
|
|
|
$
|
5
|
|
|
$
|
4
|
|
|
$
|
3
|
|
|
$
|
8
|
|
|
$
|
30
|
|
Amortization expense related to other intangible assets was
$6 million
,
$2 million
and
$1 million
for the years ended
December 31, 2016, 2015 and 2014
, respectively.
Goodwill
Goodwill represents the total consideration paid in excess of the fair value of the net tangible and identifiable intangible assets acquired and the liabilities assumed in acquisitions. Goodwill has an indefinite life and is not amortized but is reviewed for impairment under the provisions of accounting standards for goodwill. All goodwill is related to the North America reporting segment, which is comprised of two reporting units. We performed the required annual impairment review of our recorded goodwill for our reporting units as of October 1, 2016 and determined that the fair value of our reporting units was not less than their relative carrying values. As of
December 31, 2016
, goodwill of approximately
$56 million
was deductible for federal income tax purposes.
The following table details the changes in carrying value of goodwill (in millions):
|
|
|
|
|
|
Total
|
Balance as of December 31, 2014
|
$
|
274
|
|
Goodwill related to acquisitions
|
27
|
|
Balance as of December 31, 2015
|
301
|
|
Goodwill related to acquisitions
|
1
|
|
Balance as of December 31, 2016
|
$
|
302
|
|
NOTE 9. EQUITY METHOD INVESTMENTS
Our subsidiaries are parties to agreements through which we have equity investments in several operating projects. The joint venture agreements generally provide for the sharing of operational control as well as voting percentages. We record our share of earnings from our equity investees in equity in net income from unconsolidated investments in our consolidated statements of operations.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As of
December 31, 2016 and 2015
, investments in investees and joint ventures accounted for under the equity method, included in Other assets on our consolidated balance sheet, were as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ownership Interest as of
December 31, 2016
|
|
2016
|
|
Ownership Interest as of
December 31, 2015
|
|
2015
|
South Fork Plant (U.S.)
|
|
50%
|
|
$
|
—
|
|
|
50%
|
|
$
|
—
|
|
Koma Kulshan Plant (U.S.)
|
|
50%
|
|
4
|
|
|
50%
|
|
5
|
|
TARTECH (U.S.)
(1)
|
|
50%
|
|
1
|
|
|
50%
|
|
5
|
|
Ambiente 2000 (Italy)
|
|
40%
|
|
—
|
|
|
40%
|
|
—
|
|
Total investments in investees and joint ventures
|
|
|
|
$
|
5
|
|
|
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
Investments in investees and joint ventures classified as held for sale:
(2)
|
|
|
|
|
|
|
|
|
Sanfeng (China)
|
|
—%
|
|
—
|
|
|
40%
|
|
$
|
17
|
|
Chengdu (China)
|
|
—%
|
|
—
|
|
|
49%
|
|
22
|
|
Total investments in investees and joint ventures classified as held for sale
|
|
|
|
$
|
—
|
|
|
|
|
$
|
39
|
|
|
|
(1)
|
During 2016, we recorded a net impairment of our investment in this joint venture, see
Note 14.
Supplementary Information
for additional information.
|
|
|
(2)
|
During 2016, we divested the majority of our investments in China, see
Note 4.
Dispositions, Assets Held for Sale and Discontinued Operations
for additional information.
|
NOTE 10. OPERATING LEASES
Leases are primarily operating leases for leaseholds on EfW facilities, as well as for trucks and automobiles, office space and machinery and equipment. Some of these operating leases have renewal options. Expense under operating leases was
$19 million
,
$16 million
, and
$15 million
, for the years ended
December 31, 2016, 2015 and 2014
, respectively.
The following is a schedule, by year, of future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of
December 31, 2016
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
Thereafter
|
|
Total
|
Future Minimum Rental Payments
|
|
$
|
8
|
|
|
$
|
7
|
|
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
24
|
|
|
$
|
57
|
|
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 11. CONSOLIDATED DEBT
Consolidated debt is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2016
|
|
2015
|
LONG-TERM DEBT:
|
|
|
|
|
Revolving Credit Facility (2.98% - 3.23%)
(1)
|
|
$
|
343
|
|
|
$
|
348
|
|
Term Loan, net (2.48%)
(1)
|
|
195
|
|
|
200
|
|
Credit Facilities Sub-total
|
|
$
|
538
|
|
|
$
|
548
|
|
7.25% Senior Notes due 2020
|
|
$
|
400
|
|
|
$
|
400
|
|
6.375% Senior Notes due 2022
|
|
400
|
|
|
400
|
|
5.875% Senior Notes due 2024
|
|
400
|
|
|
400
|
|
Less: deferred financing costs related to senior notes
|
|
(14
|
)
|
|
(16
|
)
|
Senior Notes Sub-total
|
|
$
|
1,186
|
|
|
$
|
1,184
|
|
4.00% - 5.25% Tax-Exempt Bonds due from 2024 to 2045
|
|
$
|
464
|
|
|
$
|
464
|
|
Less: deferred financing costs related to tax-exempt bonds
|
|
(5
|
)
|
|
(6
|
)
|
Tax-Exempt Bonds Sub-total
|
|
$
|
459
|
|
|
$
|
458
|
|
3.48% - 4.52% Equipment financing capital leases due 2020 through 2027
|
|
$
|
69
|
|
|
$
|
73
|
|
Total long-term debt
|
|
$
|
2,252
|
|
|
$
|
2,263
|
|
Less: current portion
|
|
(9
|
)
|
|
(8
|
)
|
Noncurrent long-term debt
|
|
$
|
2,243
|
|
|
$
|
2,255
|
|
PROJECT DEBT:
|
|
|
|
|
North America project debt
|
|
|
|
|
4.00 - 5.00% North America Project Debt related to Service Fee structures due 2017 through 2035
|
|
$
|
78
|
|
|
$
|
117
|
|
Union capital lease due 2017 through 2053
|
|
99
|
|
|
—
|
|
5.248% - 6.20% North America Project Debt related to Tip Fee structures due 2017 through 2020
|
|
16
|
|
|
23
|
|
Unamortized debt premium, net
|
|
4
|
|
|
5
|
|
Less: deferred financing costs related to North America project debt
|
|
(1
|
)
|
|
(1
|
)
|
Total North America project debt
|
|
$
|
196
|
|
|
$
|
144
|
|
Other project debt:
|
|
|
|
|
Dublin senior loan due 2021 (5.72% - 6.41%)
(2)
|
|
$
|
155
|
|
|
$
|
—
|
|
Debt discount related to Dublin senior loan
|
|
(6
|
)
|
|
—
|
|
Less: deferred financing costs related to Dublin senior loan
|
|
(18
|
)
|
|
—
|
|
Dublin senior loan, net
|
|
$
|
131
|
|
|
$
|
—
|
|
Dublin junior loan due 2022 (9.23% - 9.73%)
|
|
$
|
58
|
|
|
$
|
57
|
|
Debt discount related to Dublin junior loan
|
|
(1
|
)
|
|
(1
|
)
|
Less: deferred financing costs related to Dublin junior loan
|
|
(1
|
)
|
|
(2
|
)
|
Dublin junior loan, net
|
|
$
|
56
|
|
|
$
|
54
|
|
Total other project debt, net
|
|
187
|
|
|
54
|
|
Total project debt
|
|
383
|
|
|
198
|
|
Less: Current portion, includes $1 and $1 of net unamortized premium
|
|
(22
|
)
|
|
(16
|
)
|
Noncurrent project debt
|
|
$
|
361
|
|
|
$
|
182
|
|
TOTAL CONSOLIDATED DEBT
|
|
$
|
2,635
|
|
|
$
|
2,461
|
|
Less: Current debt
|
|
(31
|
)
|
|
(24
|
)
|
TOTAL NONCURRENT CONSOLIDATED DEBT
|
|
$
|
2,604
|
|
|
$
|
2,437
|
|
(1)
Eurodollar rates only; excludes base rate borrowings.
|
|
|
|
|
(2)
Reflects hedged fixed rates.
|
|
|
|
|
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Credit Facilities
Our subsidiary, Covanta Energy, has
$1.2 billion
in senior secured credit facilities consisting of a
$1.0 billion
revolving credit facility expiring 2019 through 2020 (the “Revolving Credit Facility”) and a
$196 million
term loan due 2020 (the “Term Loan”) (collectively referred to as the "Credit Facilities").
The Revolving Credit Facility is available for the issuance of letters of credit of up to
$600 million
, provides for a
$50 million
sub-limit for the issuance of swing line loans (a loan that can be requested in US Dollars on a same day basis for a short drawing period); and is available in US Dollars, Euros, Pounds Sterling, Canadian Dollars and certain other currencies to be agreed upon, in each case for either borrowings or for the issuance of letters of credit. The proceeds under the Revolving Credit Facility are available for working capital and general corporate purposes of Covanta Energy and its subsidiaries.
We have the option to establish additional term loan commitments and/or increase the size of the Revolving Credit Facility (collectively, the “Incremental Facilities”), subject to the satisfaction of certain conditions and obtaining sufficient lender commitments, in an amount up to the greater of
$500 million
and the amount that, after giving effect to the incurrence of such Incremental Facilities, would not result in a leverage ratio, as defined in the credit agreement governing our Credit Facilities (the “Credit Agreement”), exceeding
2.75
:1.00.
Availability under Revolving Credit Facility
As of
December 31, 2016
, we had availability under the Revolving Credit Facility as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Facility Commitment
|
|
Expiring
(1)
|
|
Direct Borrowings as of
December 31, 2016
|
|
Outstanding Letters of Credit as of
December 31, 2016
|
|
Availability as of
December 31, 2016
|
Revolving Credit Facility
|
$
|
1,000
|
|
|
2020
|
|
$
|
343
|
|
|
$
|
156
|
|
|
$
|
501
|
|
(1) The Tranche B commitment of $50 million expires in March 2019.
During the year ended
December 31, 2016
, we made aggregate cumulative direct borrowings of
$744 million
under the Revolving Credit Facility, and repaid
$749 million
prior to the end of the year.
Repayment Terms
As of
December 31, 2016
, the Term Loan has mandatory principal payments of
$5 million
in each year from 2017 through 2019 and
$181 million
in 2020. The Credit Facilities are pre-payable at our option at any time.
Interest and Fees
Borrowings under the Credit Facilities bear interest, at our option, at either a base rate or a Eurodollar rate plus an applicable margin determined by a pricing grid based on Covanta Energy’s leverage ratio. Base rate is defined as the higher of (i) the Federal Funds Effective Rate plus
0.50%
, (ii) the rate the administrative agent announces from time to time as its per annum “prime rate” or (iii) the London Interbank Offered Rate (“LIBOR”), or a comparable or successor rate, plus
1.00%
. Base rate borrowings under the Revolving Credit Facility bear interest at the base rate plus an applicable margin ranging from
0.75%
to
1.75%
. Eurodollar borrowings under the Revolving Credit Facility bear interest at LIBOR plus an applicable margin ranging from
1.75%
to
2.75%
. Fees for issuances of letters of credit include fronting fees equal to
0.15%
per annum and a participation fee for the lenders equal to the applicable interest margin for LIBOR rate borrowings. We will incur an unused commitment fee ranging from
0.30%
to
0.50%
on the unused amount of commitments under the Revolving Credit Facility.
Base rate borrowings under the Term Loan bear interest at the base rate plus an applicable margin ranging from
0.75%
to
1.00%
. Eurodollar borrowings under the Term Loan bear interest at LIBOR plus an applicable margin ranging from
1.75%
to
2.00%
.
Guarantees and Securitization
The Credit Facilities are guaranteed by us and by certain of our subsidiaries. The subsidiaries that are party to the Credit Facilities agreed to secure all of the obligations under the Credit Facilities by granting, for the benefit of secured parties, a first priority lien on substantially all of their assets, to the extent permitted by existing contractual obligations. The Credit Facilities are also secured by a pledge of substantially all of the capital stock of each of our domestic subsidiaries and
65%
of substantially all the capital stock of each of our directly-owned foreign subsidiaries, in each case to the extent not otherwise pledged.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Credit Agreement Covenants
The loan documentation governing the Credit Facilities contains various affirmative and negative covenants, as well as financial maintenance covenants, that limit our ability to engage in certain types of transactions. We were in compliance with all of the affirmative and negative covenants under the Credit Facilities as of
December 31, 2016
.
The negative covenants of the Credit Facilities limit our and our restricted subsidiaries’ ability to, among other things:
|
|
•
|
incur additional indebtedness (including guarantee obligations);
|
|
|
•
|
create certain liens against or security interests over certain property;
|
|
|
•
|
pay dividends on, redeem, or repurchase our capital stock or make other restricted junior payments;
|
|
|
•
|
enter into agreements that restrict the ability of our subsidiaries to make distributions or other payments to us;
|
|
|
•
|
consolidate, merge or transfer all or substantially all of our assets and the assets of our subsidiaries on a consolidated basis;
|
|
|
•
|
dispose of certain assets; and
|
|
|
•
|
make certain acquisitions.
|
The financial maintenance covenants of the Credit Facilities, which are measured on a trailing four quarter period basis, include the following:
|
|
•
|
a maximum Leverage Ratio of
4.00
to 1.00 for the trailing four quarter period, which measures the principal amount of Covanta Energy’s consolidated debt less certain restricted funds dedicated to repayment of project debt principal and construction costs (“Consolidated Adjusted Debt”) to its adjusted earnings before interest, taxes, depreciation and amortization, as calculated in the Credit Agreement (“Adjusted EBITDA”). The definition of Adjusted EBITDA in the Credit Facilities excludes certain non-recurring and non-cash charges.
|
|
|
•
|
a minimum Interest Coverage Ratio of
3.00
to 1.00, which measures Covanta Energy’s Adjusted EBITDA to its consolidated interest expense plus certain interest expense of ours, to the extent paid by Covanta Energy as calculated in the Credit Agreement.
|
Senior Notes and Debentures
7.25% Senior Notes due 2020 (the “7.25% Notes”)
In 2010, we sold
$400 million
aggregate principal amount of 7.25% Senior Notes due 2020. Interest on the 7.25% Notes is payable semi-annually on June 1 and December 1 of each year, commencing on June 1, 2011 and the 7.25% Notes will mature on
December 1, 2020
unless earlier redeemed or repurchased.
At our option, the 7.25% Notes are subject to redemption at any time, in whole or in part, at the redemption prices set forth in the indenture, together with accrued and unpaid interest, if any, to the date of redemption.
The 7.25% Notes are senior unsecured obligations, ranking equally in right of payment with any of the future senior unsecured indebtedness of Covanta Holding Corporation. The 7.25% Notes are effectively junior to our existing and future secured indebtedness, including any guarantee of indebtedness under the Credit Facilities. The 7.25% Notes are not guaranteed by any of our subsidiaries and are effectively subordinated to all existing and future indebtedness and other liabilities of our subsidiaries.
The indenture for the 7.25% Notes may limit our ability and the ability of certain of our subsidiaries to:
|
|
•
|
incur additional indebtedness;
|
|
|
•
|
pay dividends or make other distributions or repurchase or redeem their capital stock;
|
|
|
•
|
prepay, redeem or repurchase certain debt;
|
|
|
•
|
make loans and investments;
|
|
|
•
|
sell restricted assets;
|
|
|
•
|
enter into transactions with affiliates;
|
|
|
•
|
alter the businesses they conduct;
|
|
|
•
|
enter into agreements restricting our subsidiaries’ ability to pay dividends; and
|
|
|
•
|
consolidate, merge or sell all or substantially all of their assets.
|
If and for so long as the 7.25% Notes have an investment grade rating and no default under the indenture has occurred, certain of the covenants will be suspended.
If we sell certain of our assets or experience specific kinds of changes in control, we must offer to purchase the 7.25% Notes. The occurrence of specific kinds of changes in control will be a triggering event requiring us to offer to purchase from the holders
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
all or a portion of the 7.25% Notes at a price equal to
101%
of their principal amount, together with accrued and unpaid interest, if any, to the date of purchase. In addition, certain asset dispositions will be triggering events that may require us to use the proceeds from those asset dispositions to make an offer to purchase the 7.25% Notes at
100%
of their principal amount, together with accrued and unpaid interest, if any, to the date of purchase if such proceeds are not otherwise used within 365 days to repay indebtedness or to invest or commit to invest such proceeds in additional assets related to our business or capital stock of a restricted subsidiary.
6.375% Senior Notes due 2022 (the “6.375% Notes”)
In March 2012, we sold
$400 million
aggregate principal amount of 6.375% Senior Notes due 2022. Interest on the 6.375% Notes is payable semi-annually on April 1 and October 1 of each year, commencing on October 1, 2012, and the 6.375% Notes will mature on
October 1, 2022
unless earlier redeemed or repurchased. Net proceeds from the sale of the 6.375% Notes were
$392 million
, consisting of gross proceeds of
$400 million
net of
$8 million
in offering expenses. We used a portion of the net proceeds of the 6.375% Notes offering to repay a portion of the amounts outstanding under Covanta Energy’s previously existing term loan.
At our option, the 6.375% Notes are subject to redemption at any time on or after April 1, 2017, in whole or in part, at the redemption prices set forth in the indenture, together with accrued and unpaid interest, if any, to the date of redemption. In addition, at any time prior to April 1, 2017, we may redeem some or all of the 6.375% Notes at a price equal to
100%
of their principal amount, plus accrued and unpaid interest, plus a “make-whole premium”.
Other terms and conditions of the 6.375% Notes, including guarantees and security, covenants, and repurchase requirements in the case of certain asset sales or a change of control, are substantially similar to those described above under 7.25% Notes.
5.875% Senior Notes due 2024 (the "5.875% Notes")
In March 2014, we sold
$400 million
aggregate principal amount of 5.875% Senior Notes due
March 2024
. Interest on the 5.875% Notes is payable semi-annually on March 1 and September 1 of each year, commencing on
September 1, 2014
, and the 5.875% Notes will mature on
March 1, 2024
unless earlier redeemed or repurchased. Net proceeds from the sale of the 5.875% Notes were approximately
$393 million
, consisting of gross proceeds of
$400 million
net of approximately
$7 million
in offering expenses. We used the net proceeds of the 5.875% Notes offering in part for the repayment of the 3.25% Cash Convertible Notes at maturity on
June 1, 2014
.
The 5.875% Notes are subject to redemption at our option, at any time on or after March 1, 2019, in whole or in part, at the redemption prices set forth in the prospectus supplement, plus accrued and unpaid interest. At any time prior to March 1, 2017, we may redeem up to
35%
of the original principal amount of the 5.875% Notes with the proceeds of certain equity offerings at a redemption price of
105.875%
of the principal amount of the 5.875% Notes plus accrued and unpaid interest. At any time prior to March 1, 2019, we may also redeem the 5.875% Notes, in whole but not in part, at a price equal to
100%
of the principal amount of the 5.875% Notes, plus accrued and unpaid interest and a “make-whole premium.”
Other terms and conditions of the 5.875% Notes, including guarantees and security, covenants, and repurchase requirements in the case of certain asset sales or a change of control, are substantially similar to those described above under 7.25% Notes.
3.25% Cash Convertible Senior Notes due 2014 (the “3.25% Notes”)
In 2009, we issued
$460 million
aggregate principal amount of the 3.25% Notes due in 2014 in a private transaction exempt from registration under the Securities Act of 1933, as amended. We used the net proceeds from the offering for general corporate purposes, including capital expenditures, permitted investments or permitted acquisitions. On
June 1, 2014
, we repaid the
$460 million
3.25% Notes utilizing net proceeds from the March 2014 5.875% Notes issuance.
During the period from March 1, 2014 to May 30, 2014, and under certain additional limited circumstances, the 3.25% Notes were cash convertible by holders thereof (the "Cash Conversion Option"). The conversion rate was 64.6669 shares of our common stock (which represented a conversion price of approximately $15.46 per share) for the period from March 17, 2014 through March 21, 2014, and 65.3501 shares of our common stock (which represented a conversion price of approximately $15.30 per share), as adjusted for the dividend paid on April 2, 2014, for the period from March 24, 2014 to May 30, 2014.
We did not deliver common stock (or any other securities) upon conversion. Upon maturity, we were required to pay
$83 million
to satisfy the obligation under the Cash Conversion Option in addition to the principal amount of the 3.25% Notes.
In connection with the issuance of 3.25% Notes offering, we entered into privately negotiated cash convertible note hedge transactions (the “Note Hedge”) with affiliates of certain of the initial purchasers of the 3.25% Notes which we cash-settled for
$83 million
upon maturity of the 3.25% Notes and effectively offset our liability under the Cash Conversion Option.
In connection with the issuance of the 3.25% Notes, we also sold warrants, correlating to the number of shares underlying the 3.25% Notes. The warrants were exercisable only at expiration in equal tranches over a 60 day period which began on September
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2, 2014 and ended on November 26, 2014. During the year ended December 31, 2014,
1,430,870
shares of our common stock were issued in connection with warrant exercises.
4.00% - 5.25% Tax-Exempt Bonds due from 2024-2045 ("Tax-Exempt Bonds")
In November 2012, we issued tax-exempt corporate bonds totaling
$335 million
. Proceeds from the offerings were utilized to refinance tax-exempt project debt at our Haverhill, Niagara and SEMASS facilities, as well as to fund certain capital expenditures in Massachusetts. Approximately
$7 million
of financing costs were incurred, of which
$3 million
was expensed and
$4 million
will be recognized over the term of the debt.
In August 2015, we issued two new series of fixed rate tax-exempt corporate bonds totaling
$130 million
. Proceeds from the offerings were utilized to refinance tax-exempt project debt at our Delaware Valley facility and to fund certain capital improvements at our Essex County facility. Financing costs were not material.
Details of the issues and the use of proceeds are as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Series
|
|
Amount
|
|
Maturity
|
|
Coupon
|
|
Use of Proceeds
|
Massachusetts Series 2012A
|
|
$
|
20
|
|
|
2027
|
|
4.875%
|
|
New proceeds for qualifying capital expenditures in Massachusetts
|
Massachusetts Series 2012B
|
|
67
|
|
|
2042
|
|
4.875%
|
|
Redeem SEMASS project debt
|
Massachusetts Series 2012C
|
|
82
|
|
|
2042
|
|
5.25%
|
|
Redeem Haverhill project debt
|
Niagara Series 2012A
|
|
130
|
|
|
2042
|
|
5.25%
|
|
Redeem Niagara project debt
|
Niagara Series 2012B
|
|
35
|
|
|
2024
|
|
4.00%
|
|
Redeem Niagara project debt
|
New Jersey Series 2015A
|
|
90
|
|
|
2045
|
|
5.25%
|
|
Finance qualifying expenditures at Essex County facility
|
Pennsylvania Series 2015A
|
|
40
|
|
|
2043
|
|
5.00%
|
|
Refinance outstanding tax-exempt debt
|
|
|
$
|
464
|
|
|
|
|
|
|
|
We entered into a loan agreement with the Massachusetts Development Finance Agency under which they issued the Resource Recovery Revenue Bonds (the “Massachusetts Series” bonds in the table above) and loaned the proceeds of the Massachusetts Series bonds to us for the purposes of (i) financing qualifying capital expenditures at certain solid waste disposal facilities in Massachusetts and (ii) redeeming the outstanding principal balance of the SEMASS and Haverhill project debt.
We entered into a loan agreement with the Niagara Area Development Corporation under which they issued the Solid Waste Disposal Facility Refunding Revenue Bonds (the “Niagara Series” bonds in the table above) and loaned the proceeds of the Niagara Series bonds to us for the purpose of redeeming the outstanding principal balance of the Niagara project debt.
The Massachusetts Series bonds and the Niagara Series bonds are obligations of Covanta Holding Corporation, are guaranteed by Covanta Energy; and are not secured by project assets. Principal and interest on the Massachusetts Series bonds and the Niagara Series bonds are payable from the repayments we make to the Massachusetts Development Finance Agency and Niagara Area Development Corporation, respectively, pursuant to the respective loan agreements.
The Massachusetts Series bonds and the Niagara Series bonds bear interest at the interest rates per annum set forth in the table above, payable semi-annually on May 1 and November 1 of each year, commencing on May 1, 2013.
We entered into a loan agreement with the Essex County Improvement Authority under which they issued the Solid Waste Disposal Revenue Bonds (the “New Jersey Series” bonds in the table above) and loaned the proceeds to us for the purposes of financing capital improvements at our Essex County facility, including a new emissions control system. Interest on the bonds is paid semi-annually on January 1 and July 1 of each year beginning on January 1, 2016. Interest expense incurred during the construction period will be capitalized.
We entered into a loan agreement with the Delaware County Industrial Development Authority under which they issued the Refunding Revenue Bonds (the “Pennsylvania Series” bonds in the table above) and loaned the proceeds to us for the purpose of redeeming the outstanding
$34 million
principal amount of the Variable Rate Bonds and of refinancing
$6 million
of project debt due on July 1, 2015 at our Delaware Valley facility. See Variable Rate Tax-Exempt Demand Bonds due 2043 below. Interest on the bonds is paid semi-annually on January 1 and July 1 of each year beginning on January 1, 2016.
Each of the loan agreements contains customary events of default, including failure to make any payments when due, failure to perform its covenants under the respective loan agreement, and the bankruptcy or insolvency. Additionally, each of the loan agreements contains cross-default provisions that relate to our other indebtedness. Upon the occurrence of an event of default, the unpaid balance of the loan under the applicable loan agreement will become due and payable immediately.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Massachusetts Series bonds and the Niagara Series bonds contain certain terms including mandatory redemption requirements in the event that (i) the respective loan agreement is determined to be invalid, or (ii) the respective bonds are determined to be taxable. In the event of a mandatory redemption of the bonds, we will have an obligation under each respective loan agreement to prepay the respective loan in order to fund the redemption.
Tax-Exempt Variable Rate Demand Bonds due 2043 ("Variable Rate Bonds")
In July 2013 and 2014, we issued
$22 million
and
$12 million
, respectively of tax-exempt corporate variable-rate demand bonds, which were secured by a letter of credit issued under our Revolving Credit Facility and had a maturity date of July 1, 2043. Proceeds from the offering were utilized to refinance project debt at our Delaware Valley facility due through July 1, 2014.
In August 2015, we refinanced the
$34 million
of outstanding Variable Rate Bonds with a portion of the net proceeds of the
$40 million
Pennsylvania Series 2015A bonds due 2043. See
4.00% - 5.25% Tax-Exempt Bonds due from 2024-2045
above.
Union County EfW Capital Lease Arrangement
In June 2016, we extended the lease term related to the Union County EfW facility through 2053, which resulted in capital lease treatment for the revised lease. We recorded a lease liability of
$104 million
, calculated utilizing an incremental borrowing rate of
5.0%
which is included in long-term project debt on our consolidated balance sheet. The lease includes certain periods of contingent rentals based upon plant performance as either a share of revenue or a share of plant profits. These contingent payments have been excluded from the calculation of the lease liability and instead will be treated as a period expense when incurred. As of
December 31, 2016
, the outstanding borrowings under the capital lease have mandatory amortization payments remaining as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
Thereafter
|
Annual Remaining Amortization
|
|
$
|
5
|
|
|
$
|
5
|
|
|
$
|
5
|
|
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
72
|
|
Equipment Financing Capital Lease Arrangements
In 2014, we entered into equipment financing capital lease arrangements to finance the purchase of barges, railcars, containers and intermodal equipment related to our New York City contract. The lease terms range from
10 years
to
12 years
and the fixed interest rates range from
3.48%
to
4.52%
. The outstanding borrowings under the equipment financing capital lease arrangements were
$69 million
as of
December 31, 2016
, and have mandatory amortization payments remaining as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
Thereafter
|
Annual Remaining Amortization
|
|
$
|
5
|
|
|
$
|
5
|
|
|
$
|
5
|
|
|
$
|
5
|
|
|
$
|
5
|
|
|
$
|
44
|
|
Depreciation associated with these capital lease arrangements is included in Depreciation and amortization expense on our consolidated statement of operations. For additional information see
Note 1.
Organization and Summary of Significant Accounting Policies
- Property, Plant and Equipment
.
PROJECT DEBT
The maturities of long-term project debt as of
December 31, 2016
are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
Thereafter
|
|
Total
|
|
Less:
Current
Portion
|
|
Total
Noncurrent
Project Debt
|
Debt
|
|
$
|
22
|
|
|
$
|
31
|
|
|
$
|
26
|
|
|
$
|
17
|
|
|
$
|
144
|
|
|
$
|
166
|
|
|
$
|
406
|
|
|
$
|
(22
|
)
|
|
$
|
384
|
|
Premium and deferred financing costs
|
|
(5
|
)
|
|
(5
|
)
|
|
(5
|
)
|
|
(5
|
)
|
|
(4
|
)
|
|
1
|
|
|
(23
|
)
|
|
—
|
|
|
(23
|
)
|
Total
|
|
$
|
17
|
|
|
$
|
26
|
|
|
$
|
21
|
|
|
$
|
12
|
|
|
$
|
140
|
|
|
$
|
167
|
|
|
$
|
383
|
|
|
$
|
(22
|
)
|
|
$
|
361
|
|
Project debt associated with the financing of energy-from-waste facilities is arranged by municipal entities through the issuance of tax-exempt and taxable revenue bonds or other borrowings. For those facilities we own, that project debt is recorded as a liability on our consolidated financial statements. Generally, debt service for project debt related to Service Fee structures is the primary responsibility of municipal entities, whereas debt service for project debt related to Tip Fee structures is paid by our project subsidiary from project revenue expected to be sufficient to cover such expense.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Payment obligations for our project debt associated with energy-from-waste facilities are generally limited recourse to the operating subsidiary and non-recourse to us, subject to operating performance guarantees and commitments. These obligations are typically secured by the revenue pledged under the respective indentures and by a mortgage lien and a security interest in the respective energy-from-waste facility and related assets. As of
December 31, 2016
, such revenue bonds were collateralized by property, plant and equipment with a net carrying value of
$669 million
and restricted funds held in trust of approximately
$84 million
.
In April 2015, in connection with a long-term service fee contract extension at our Onondaga County facility, our Onondaga County client refinanced
$42 million
of outstanding project debt with
$54 million
of new tax-exempt bonds issued with a
$5 million
premium. The incremental proceeds were used to establish a
$15 million
restricted cash fund to be used toward facility projects and to satisfy
$2 million
in transaction costs which will be deferred and amortized over the term of the bonds. The bonds bear interest from
4.00%
to
5.00%
and have scheduled annual payments with final maturity on May 1, 2035. Consistent with other service fee projects we own and have project debt in place, the client community will pay us debt service revenue equivalent to the principal and interest on the bonds.
Dublin Project Financing
During 2014, we executed agreements for project financing totaling
€375 million
to fund a majority of the construction costs of the Dublin EfW facility. The project financing package includes: (i)
€300 million
of project debt under a credit facility agreement with various lenders (the “Dublin Credit Agreement”), which consists of a
€250 million
senior secured term loan (the “Dublin Senior Term Loan”) and a
€50 million
second lien term loan (the “Dublin Junior Term Loan”), and (ii) a
€75 million
convertible preferred investment (the “Dublin Convertible Preferred”), which was committed by a leading global energy infrastructure investor. For additional information related to this project, see
Note 3.
New Business and Asset Management
.
Dublin Senior Term Loan due 2021
As of December 31, 2016,
$155 million
(
€147 million
) of the
€250 million
Dublin Senior Term Loan has been drawn and is included in project debt on our consolidated balance sheet. The remainder of the Dublin Senior Term Loan is expected to be drawn over the course of 2017 to fund remaining construction costs. Key commercial terms of the Dublin Senior Term Loan include:
|
|
•
|
Final maturity on
September 30, 2021
(approximately four years after the anticipated operational commencement date of the facility).
|
|
|
•
|
Scheduled repayments will be made semi-annually according to a 15-year amortization profile, beginning in 2018. The loan is pre-payable at our option following operational commencement.
|
|
|
•
|
Borrowings will bear interest at the Euro Interbank Offered Rate ("EURIBOR") plus an applicable margin, which will range from
4.00%
to
4.50%
according to a pre-determined schedule. Interest on outstanding borrowings will be payable in cash monthly prior to the operational commencement date of the facility, and payable in cash semi-annually after the operational commencement date, based on the prevailing one and six month EURIBOR rates, respectively. Undrawn commitments will accrue commitment fees at a rate of
2.25%
per annum. We entered into interest rate swap agreements in order to hedge our exposure to adverse variable interest rate fluctuations under the Dublin Senior Term Loan. For additional information, see
Note 13.
Derivative Instruments
.
|
|
|
•
|
The Dublin Senior Term Loan is a senior obligation of the project company and certain other related subsidiaries, all of which are wholly-owned by us, and is secured by a first priority lien on substantially all of the project-related assets. The Dublin Senior Term Loan is non-recourse to us and our subsidiary Covanta Energy. See
Note 18.
Commitments and Contingencies
for a description of the commitments of Covanta Energy related to the Dublin project financing.
|
|
|
•
|
The Dublin Credit Agreement contains positive, negative and financial maintenance covenants that are customary for a project financing of this type. Our ability to service the Dublin Junior Term Loan and the Dublin Convertible Preferred and to make cash distributions to common equity following the operational commencement date is subject to ongoing compliance with these covenants, including maintaining a minimum debt service coverage ratio and loan life coverage ratio on the Dublin Senior Term Loan.
|
Dublin Junior Term Loan due 2022
The
€50 million
Dublin Junior Term Loan was funded into an escrow account in September 2014 and was utilized in 2015 to fund construction costs as our initial equity investment into the project and the Dublin Convertible Preferred were fully utilized. As of
December 31, 2016
,
$58 million
(
€55 million
), inclusive of interest accrued to the balance of the loan, is included in project debt on our consolidated balance sheet. Key commercial terms of the Dublin Junior Term Loan include:
|
|
•
|
Final maturity on
March 31, 2022
(six months after the maturity of the Dublin Senior Term Loan).
|
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
|
•
|
Scheduled repayments will be made semi-annually according to a 15-year amortization profile, beginning in 2018. The loan is pre-payable at our option following operational commencement.
|
|
|
•
|
Borrowings bear interest at a fixed rate of
5.23%
during the first six months of the loan, and thereafter at fixed rates ranging from
9.23%
to
9.73%
according to a pre-determined schedule. Interest on outstanding borrowings is payable semi-annually and will be payable 50% in cash and 50% accrued to the balance of the loan prior to the operational commencement date of the facility, and payable 100% in cash after the operational commencement date.
|
|
|
•
|
The Dublin Junior Term Loan is a junior obligation of the project company and certain other related subsidiaries, all of which are wholly-owned by us, and is secured by a second priority lien on substantially all of the project-related assets and a first priority lien on the assets of the top tier project holding company. The Dublin Junior Term Loan is non-recourse to us and our subsidiary Covanta Energy.
|
|
|
•
|
Under the Dublin Credit Agreement, our ability to service the Dublin Convertible Preferred and to make cash distributions to common equity is subject to ongoing compliance with the covenants under the agreement, including maintaining a minimum debt service coverage ratio and loan life coverage ratio on the Dublin Junior Term Loan.
|
Dublin Convertible Preferred
The
€75 million
Dublin Convertible Preferred was utilized to fund construction costs in 2015 after our initial equity investment into the project was fully utilized. As of December 31, 2016, the Dublin convertible preferred instrument of
$87 million
, (
€83 million
) inclusive of dividends accrued to the balance, was included in other noncurrent liabilities in our consolidated balance sheet. The instrument has: (i) a liquidation preference equal to par value of the investment, (ii) a preferred claim on project cash flows during operations (after debt service) to pay a fixed dividend rate and repay principal according to an amortization schedule, and (iii) an option to convert loan principal into a common equity interest in the project.
The Dublin Convertible Preferred is structured as a shareholder loan (the “Stakeholder Loan”) with the concurrent issuance of warrants (the “Stakeholder Warrants”). Key commercial terms of the Dublin Convertible Preferred include:
|
|
•
|
The Stakeholder Loan will accrue dividends at a fixed rate of
13.50%
per annum. The dividends are payable 50% in cash and 50% accrued to the principal balance on a monthly basis prior to the operational commencement date, and payable 100% in cash semi-annually thereafter, subject to available project cash flows after debt service.
|
|
|
•
|
Scheduled repayments of principal of the Stakeholder Loan will be made semi-annually according to a 13-year amortization profile beginning in 2020 (two years after the operational commencement date), with a final repayment date of
September 30, 2032
, all subject to available project cash flows after debt service.
|
|
|
•
|
Voluntary prepayments are not permitted during the first five years of the Stakeholder Loan, after which the principal is pre-payable at our option in increments of 33% of the aggregate outstanding principal balance per year.
|
|
|
•
|
The Stakeholder Loan is mandatorily pre-payable at the option of the Stakeholder Loan holder(s) under certain circumstances in the event of a refinancing of the Dublin Senior Term Loan and/or the Dublin Junior Term Loan.
|
|
|
•
|
The Stakeholder Warrants are exercisable into ordinary shares of our subsidiary holding company that owns 100% of the project company on five conversion dates, scheduled at six month intervals, beginning on the operational commencement date, or upon a refinancing of the Dublin Credit Agreement. The warrants contain customary anti-dilution protection and are exercisable on a cashless basis at a specified conversion price on each conversion date, representing a set premium to the original subscription price for common shares (i.e., Covanta’s subscription price) that increases over time. The number of shares that can potentially be issued upon exercise is limited to a maximum of
24.99%
of the outstanding shares.
|
|
|
•
|
The Dublin Convertible Preferred holder(s) is entitled to nominate two out of five voting board members of the project subsidiary holding company. The right to nominate board members will be reduced with future reductions in the outstanding principal amount of the Stakeholder Loan and/or number of common shares held following conversion of the Stakeholder Warrants.
|
Financing Costs
All deferred financing costs are amortized to interest expense over the life of the related debt using the effective interest method. For each of the years ended
December 31, 2016, 2015 and 2014
amortization of deferred financing costs included as a component of interest expense totaled
$6 million
,
$8 million
and
$8 million
, respectively.
Capitalized Interest
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Interest expense paid and costs amortized to interest expense related to project financing are capitalized during the construction and start-up phase of the project. During the years ended December 31, 2016, 2015 and 2014, interest expense of
$26 million
,
$10 million
and
$2 million
, respectively, was capitalized.
NOTE 12. FINANCIAL INSTRUMENTS
Fair Value Measurements
Authoritative guidance associated with fair value measurements provides a framework for measuring fair value and establishes a fair value hierarchy that prioritizes the inputs used to measure fair value, giving the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs), then significant other observable inputs (Level 2 inputs) and the lowest priority to significant unobservable inputs (Level 3 inputs). The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
|
|
•
|
For cash and cash equivalents, restricted funds, and marketable securities, the carrying value of these amounts is a reasonable estimate of their fair value. The fair value of restricted funds held in trust is based on quoted market prices of the investments held by the trustee.
|
|
|
•
|
Fair values for long-term debt and project debt are determined using quoted market prices.
|
|
|
•
|
The fair value for interest rate swaps were determined by obtaining quotes from two counterparties (one is a holder of the long position and the other is in the short) and extrapolating those across the long and short notional amounts. The fair value of the interest rate swaps was adjusted to reflect counterparty risk of non-performance, and was based on the counterparty’s credit spread in the credit derivatives market.
|
|
|
•
|
The fair values of our energy hedges were determined using the spread between our fixed price and the forward curve information available within the market.
|
|
|
•
|
The fair value of our foreign currency hedge was determined by obtaining quotes from two counterparties and is based on market accepted option pricing methodology which utilizes inputs such as the currency spot rate as of the balance sheet date, the strike price of the options and volatility.
|
The estimated fair value amounts have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we would realize in a current market exchange. The fair-value estimates presented herein are based on pertinent information available to us as of
December 31, 2016
. Such amounts have not been comprehensively revalued for purposes of these financial statements since
December 31, 2016
, and current estimates of fair value may differ significantly from the amounts presented herein.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following financial instruments are recorded at their estimated fair value. The following table presents information about the recurring fair value measurement of our assets and liabilities as of
December 31, 2016 and 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
Financial Instruments Recorded at Fair Value on a Recurring Basis:
|
|
Fair Value Measurement Level
|
|
2016
|
|
2015
|
|
|
|
|
(In millions)
|
Assets:
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
Bank deposits and certificates of deposit
|
|
1
|
|
$
|
79
|
|
|
$
|
89
|
|
Money market funds
|
|
1
|
|
5
|
|
|
5
|
|
Total cash and cash equivalents:
|
|
|
|
84
|
|
|
94
|
|
Restricted funds held in trust:
|
|
|
|
|
|
|
Bank deposits and certificates of deposit
|
|
1
|
|
12
|
|
|
9
|
|
Money market funds
|
|
1
|
|
36
|
|
|
66
|
|
U.S. Treasury/agency obligations
(1)
|
|
1
|
|
14
|
|
|
18
|
|
State and municipal obligations
|
|
1
|
|
46
|
|
|
59
|
|
Commercial paper/guaranteed investment contracts/repurchase agreements
|
|
1
|
|
2
|
|
|
8
|
|
Total restricted funds held in trust:
|
|
|
|
110
|
|
|
160
|
|
Investments:
|
|
|
|
|
|
|
Mutual and bond funds
(2)
|
|
1
|
|
2
|
|
|
2
|
|
Derivative asset — energy hedges
(3)
|
|
2
|
|
3
|
|
|
21
|
|
Total assets:
|
|
|
|
$
|
199
|
|
|
$
|
277
|
|
Liabilities:
|
|
|
|
|
|
|
Derivative liability — energy hedges
(4)
|
|
2
|
|
$
|
1
|
|
|
$
|
—
|
|
Derivative liability — interest rate swaps
(4) (5)
|
|
2
|
|
20
|
|
|
14
|
|
Total liabilities:
|
|
|
|
$
|
21
|
|
|
$
|
14
|
|
The following financial instruments are recorded at their carrying amount (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
As of December 31, 2015
|
Financial Instruments Recorded at Carrying Amount:
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
Assets:
|
|
|
|
|
|
|
|
|
Accounts receivables
(6)
|
|
$
|
333
|
|
|
$
|
333
|
|
|
$
|
314
|
|
|
$
|
314
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
2,252
|
|
|
$
|
2,237
|
|
|
$
|
2,263
|
|
|
$
|
2,244
|
|
Project debt
|
|
$
|
383
|
|
|
$
|
387
|
|
|
$
|
198
|
|
|
$
|
206
|
|
|
|
(1)
|
The U.S. Treasury/agency obligations in restricted funds held in trust are primarily comprised of Federal Home Loan Mortgage Corporation securities at fair value.
|
|
|
(2)
|
Included in other noncurrent assets in the consolidated balance sheets.
|
|
|
(3)
|
Included in prepaid expenses and other current assets in the consolidated balance sheets.
|
|
|
(4)
|
Included in accrued expenses and other current liabilities in the consolidated balance sheets.
|
|
|
(5)
|
Included in other noncurrent liabilities in the consolidated balance sheets.
|
|
|
(6)
|
Includes
$1 million
and
$2 million
of noncurrent receivables in other noncurrent assets in the consolidated balance sheets as of
December 31, 2016 and 2015
.
|
In addition to the recurring fair value measurements, certain assets are measured at fair value on a non-recurring basis when an indication of impairment is identified and the assets fair value is determined to be less than its carrying value. See
Note 14. Supplementary Information - Impairment Charges
for additional information.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 13. DERIVATIVE INSTRUMENTS
The following disclosures summarize the fair value of derivative instruments not designated as hedging instruments in the consolidated balance sheets and the effect of changes in fair value related to those derivative instruments not designated as hedging instruments on the consolidated statements of operations (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments Not Designated
As Hedging Instruments
|
|
|
|
Fair Value as of December 31,
|
Balance Sheet Location
|
|
2016
|
|
2015
|
Asset Derivatives:
|
|
|
|
|
|
|
Foreign currency hedges
|
|
Prepaid expenses and other current assets
|
|
$
|
—
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized In Income on Derivatives
|
Effect on Income of Derivative Instruments Not Designated As Hedging Instruments
|
|
Location of Gain or (Loss) Recognized
in Income on Derivatives
|
|
For the Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Foreign currency hedge
|
|
Other expense, net
|
|
$
|
(2
|
)
|
|
$
|
6
|
|
|
$
|
—
|
|
Note hedge
|
|
Non-cash convertible debt related expense
|
|
—
|
|
|
—
|
|
|
5
|
|
Cash conversion option
|
|
Non-cash convertible debt related expense
|
|
—
|
|
|
—
|
|
|
(5
|
)
|
Effect on income of derivative instruments not designated as hedging instruments
|
|
$
|
(2
|
)
|
|
$
|
6
|
|
|
$
|
—
|
|
Foreign Currency Hedge
In order to hedge the risk of adverse foreign currency exchange rate fluctuations impacting the expected sale proceeds from our equity transfer agreement in China (See
Note 4.
Dispositions, Assets Held for Sale and Discontinued Operations
), we entered into a foreign currency exchange collar with two financial institutions covering approximately
$100 million
of notional to protect against further rate fluctuations pending the sale of our ownership interest to CITIC, which was completed during September 2016. The foreign currency hedge is accounted for as a derivative instrument and, as such, was recorded at fair value quarterly with any change in fair value recognized in our consolidated statements of operations as other expense, net. During the twelve months ended
December 31, 2016
, cash provided by foreign currency exchange settlements totaled
$5 million
and was included in net cash used in investing activities on our condensed consolidated statement of cash flows.
As of
December 31, 2016
, we received
$105 million
of gross sale proceeds relating to the aforementioned sale of our ownership interests to CITIC and therefore, settled or canceled remaining foreign currency exchange derivatives related to this hedged transaction, resulting in a current asset balance of zero. As of
December 31, 2015
, the fair value of the foreign currency exchange derivatives of
$6 million
, pre-tax, was recorded as a current asset.
We have also entered into foreign currency forwards to manage foreign currency exchange rate fluctuations associated with a series of fixed payments to be made by an international subsidiary through the end of 2017. This foreign currency forward is accounted for as a derivative instrument at fair value in our consolidated balance sheet with any changes in fair value recognized in our consolidated statements of operations as "Other expense, net." This derivative instrument was not material to our consolidated statement of operations nor was it material to our condensed consolidated balance sheet as of
December 31, 2016
.
Cash Conversion Option, Note Hedge and Contingent Interest features related to the 3.25% Cash Convertible Senior Notes
The cash conversion option was a derivative instrument which was recorded at fair value quarterly with any change in fair value being recognized in our consolidated statements of operations as non-cash convertible debt related expense. The note hedge was accounted for as a derivative instrument and, as such, was recorded at fair value quarterly with any change in fair value being recognized in our consolidated statements of operations as non-cash convertible debt related expense.
The 3.25% Notes matured on June 1, 2014. Upon maturity, we were required to pay
$83 million
to satisfy the obligation under the cash conversion option in addition to the principal amount of the 3.25% Notes. The note hedge settled for
$83 million
and effectively offset our exposure to the cash payments in excess of the principal amount made under the cash conversion option. The income recognized as a result of changes in the credit valuation adjustment related to the note hedge was not material.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Energy Price Risk
Following the expiration of certain long-term energy sales contracts, we may have exposure to market risk, and therefore revenue fluctuations, in energy markets. We have entered into contractual arrangements that will mitigate our exposure to short-term volatility through a variety of hedging techniques, and will continue to do so in the future. Our efforts in this regard will involve only mitigation of price volatility for the energy we produce, and will not involve taking positions (either long or short) on energy prices in excess of our physical generation. The amount of energy generation for which we have hedged under agreements with various financial institutions is indicated in the following table (in millions):
|
|
|
|
Calendar Year
|
|
Hedged MWh
|
2017
|
|
2.4
|
2018
|
|
1.0
|
Total
|
|
3.4
|
As of
December 31, 2016
, the net fair value of the energy derivatives of
$2 million
, pre-tax, was recorded as a
$3 million
current asset and a
$1 million
noncurrent liability and as a component of AOCI. As of
December 31, 2016
, the amount of hedge ineffectiveness was not material. The net fair value energy derivative balance of $2 million includes a natural gas hedge transaction of
1.3 million
British Thermal Units to mitigate exposure to short-term volatility in certain contracted steam prices during the 2017 calendar year. As of
December 31, 2015
, the fair value of the energy derivatives of
$21 million
, pre-tax, was recorded as a current asset and as a component of AOCI. The change in fair value was recorded as a component of comprehensive income.
During the
twelve
months ended
December 31, 2016
, cash provided by and used in energy derivative settlements of
$32 million
and
zero
, respectively, was included in net cash provided by operating activities on our consolidated statement of cash flows. During the
twelve
months ended
December 31, 2015
, cash provided by and used in energy derivative settlements of
$17 million
and
$7 million
, respectively, was included in the change in net cash provided by operating activities on our consolidated statement of cash flows.
Interest Rate Swaps
In order to hedge the risk of adverse variable interest rate fluctuations associated with the Dublin senior term loan, we have entered into floating to fixed rate swap agreements with various financial institutions maturing between
2017 and 2021
, denominated in Euros, for the full
€250 million
loan amount. This interest rate swap is designated as a cash flow hedge which is recorded at fair value with changes in fair value recorded as a component of AOCI. As of
December 31, 2016
, the fair value of the interest rate swap derivative of
$20 million
, pre-tax, was recorded as a
$2 million
and
$18 million
current and noncurrent liability, respectively. There was an immaterial amount of ineffectiveness recorded during the quarter recognized in our consolidated statements of operations as interest expense. As of
December 31, 2015
, the fair value of the interest rate swap derivative of $14 million, pre-tax, was recorded as a noncurrent liability.
NOTE 14. SUPPLEMENTARY INFORMATION
Other Operating Expense, net
Plymouth Energy-from-Waste Facility
In May 2016, our Plymouth energy-from-waste facility experienced a turbine generator failure. Damage to the turbine generator was extensive and operations at the facility were suspended promptly to assess the cause and extent of damage. The facility is capable of processing waste without utilizing the turbine generator to generate electricity, and we resumed waste processing operations in early June. The facility resumed generating electricity early in the first quarter of 2017, after the generator and other damaged equipment were replaced. The cost of replacement and business interruption losses were insured under the terms of applicable insurance policies, subject to deductibles. During the year ended December 31, 2106, we recorded insurance recoveries in our consolidated statements of operations, related to this matter, as follows (in millions):
|
|
|
|
|
Insurance recoveries for repair and reconstruction costs (net of write-down of assets, reduction to Other operating expense, net)
|
$
|
5
|
|
Insurance recoveries for business interruption and clean-up costs, net of costs incurred (reduction to Plant operating expense)
|
$
|
3
|
|
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Impairment Charges
The components of impairment charges are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
December 31,
|
|
2016
|
|
2015
|
|
2014
|
North America segment:
|
|
|
|
|
|
Impairment charges related to tangible and intangible assets
(1)
|
$
|
16
|
|
|
$
|
—
|
|
|
$
|
16
|
|
Impairment charges related to biomass facilities and biomass equity investment
(2)
|
—
|
|
|
43
|
|
|
34
|
|
Impairment charges - other
|
4
|
|
|
—
|
|
|
—
|
|
North America segment sub-total:
|
20
|
|
|
43
|
|
|
50
|
|
Other:
|
|
|
|
|
|
Impairment charge related to insurance business
(3)
|
—
|
|
|
—
|
|
|
14
|
|
Total impairment charges
|
$
|
20
|
|
|
$
|
43
|
|
|
$
|
64
|
|
|
|
(1)
|
Impairment charges related to tangible and intangible assets are related to the following:
|
|
|
•
|
During the year ended December 31, 2016, we recorded a non-cash impairment charge of
$13 million
, pre-tax, related to the previously planned closure of our Pittsfield EfW facility which is now expected to continue operating. For additional information see
Note 3.
New Business and Asset Management
. We also recorded a non-cash impairment charge of
$3 million
, pre-tax, related to a joint-venture project, see
Tartech Investment
discussion below.
|
|
|
•
|
On June 30, 2014, our service agreement with the Dutchess County Resource Recovery Agency under which we operated the Hudson Valley EfW facility expired. In 2014, we recorded a
$9 million
non-cash impairment charge of the intangible asset that was recorded upon acquisition in 2009 based on the expected cash flows over the remaining life of the contract utilizing Level 3 inputs.
|
|
|
•
|
On April 3, 2014, the Montgomery County (PA) Commissioners (the “County”) unanimously voted to dissolve the Waste System Authority of Eastern Montgomery County (the “WSA”). The Abington transfer station was constructed by the County and subsequently deeded to the WSA, which was responsible for its operation. We operated the transfer station through the end of the current contract, which expired on December 31, 2014. However, due to the dissolution of the WSA, it was not able to renew our current contract to operate the Abington transfer station. During the year ended December 31, 2014, we recorded a non-cash impairment charge of
$7 million
of the service contract intangible with the WSA that was recorded upon acquisition in 2009 based on the expected cash flows over the remaining life of the contract utilizing Level 3 inputs.
|
|
|
(2)
|
Impairments related to our biomass assets are as follows:
|
|
|
•
|
During the year ended 2015, we identified indicators of impairment associated with our biomass facilities, primarily due to a decline in energy market pricing. As a result of these developments, we recorded a non-cash impairment charge of
$43 million
, pre-tax, which was calculated based on a range of potential outcomes utilizing various estimated cash flows for these facilities utilizing Level 3 inputs.
|
|
|
•
|
During year ended December 31, 2014, we identified indicators of impairment associated with our California Biomass facilities, primarily that we were unsuccessful in securing new long-term power purchase agreements to replace the current power purchase agreements, which were approaching the end of their terms. Based on expected cash flows utilizing Level 3 inputs, we recorded a non-cash impairment charge of
$34 million
to reduce the carrying value of the California Biomass assets to their estimated fair value.
|
|
|
(3)
|
During 2014, we sold our insurance subsidiaries and recorded a non-cash impairment of
$14 million
comprised of the write-down of the carrying amount in excess of the realizable fair value of
$12 million
, plus
$2 million
in disposal costs.
|
Tartech Investment
We are party to a joint venture that was formed to recover and recycle metals from EfW ash monofills in North America. During the year ended December 31, 2016, due to operational difficulties and the decline in the scrap metal market, a valuation of the entity was conducted. As a result, we recorded a net impairment of our investment in this joint venture of
$3 million
, pre-tax, which represents our portion of the carrying value of the entity in excess of the fair value. Such amount was calculated based on the estimated liquidation value of the tangible equipment utilizing Level 3 inputs. For more information regarding fair value measurements, see
Note 12.
Financial Instruments
.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Non-Cash Convertible Debt Related Expense
The components of non-cash convertible debt related expense are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
December 31,
|
|
2016
|
|
2015
|
|
2014
|
Debt discount accretion related to the 3.25% Notes
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13
|
|
Fair value changes related to the cash convertible note hedge
|
—
|
|
|
—
|
|
|
(5
|
)
|
Fair value changes related to the cash conversion option derivative
|
—
|
|
|
—
|
|
|
5
|
|
Total non-cash convertible debt related expense
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13
|
|
Selected Supplementary Balance Sheet Information
Selected supplementary balance sheet information is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
Prepaid expenses
|
$
|
28
|
|
|
$
|
37
|
|
Hedge receivables
|
3
|
|
|
25
|
|
Spare parts
|
21
|
|
|
17
|
|
Renewable energy credits
|
3
|
|
|
15
|
|
Other
|
17
|
|
|
23
|
|
Total prepaid expenses and other current assets
|
$
|
72
|
|
|
$
|
117
|
|
Operating expenses, payroll and related expenses
|
$
|
164
|
|
|
$
|
114
|
|
Deferred revenue
|
16
|
|
|
13
|
|
Accrued liabilities to client communities
|
19
|
|
|
22
|
|
Interest payable
|
30
|
|
|
24
|
|
Dividends payable
|
35
|
|
|
34
|
|
Other
|
25
|
|
|
27
|
|
Total accrued expenses and other current liabilities
|
$
|
289
|
|
|
$
|
234
|
|
NOTE 15. INCOME TAXES
We file a federal consolidated income tax return with our eligible subsidiaries. Our federal consolidated income tax return also includes the taxable results of certain grantor trusts described below. The components of income tax expense were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
(2
|
)
|
|
$
|
(91
|
)
|
|
$
|
(1
|
)
|
State
|
|
6
|
|
|
16
|
|
|
4
|
|
Foreign
|
|
(2
|
)
|
|
2
|
|
|
3
|
|
Total current
|
|
2
|
|
|
(73
|
)
|
|
6
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
28
|
|
|
7
|
|
|
(4
|
)
|
State
|
|
(9
|
)
|
|
(11
|
)
|
|
16
|
|
Foreign
|
|
1
|
|
|
(7
|
)
|
|
(3
|
)
|
Total deferred
|
|
20
|
|
|
(11
|
)
|
|
9
|
|
Total income tax expense (benefit)
|
|
$
|
22
|
|
|
$
|
(84
|
)
|
|
$
|
15
|
|
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Domestic and foreign pre-tax income (loss) was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Domestic
|
|
$
|
26
|
|
|
$
|
6
|
|
|
$
|
14
|
|
Foreign
|
|
(12
|
)
|
|
(34
|
)
|
|
(10
|
)
|
Total
|
|
$
|
14
|
|
|
$
|
(28
|
)
|
|
$
|
4
|
|
The effective income tax rate was
150%
,
302%
, and
388%
for the years ended
December 31, 2016, 2015 and 2014
, respectively. The decrease in effective tax rate for the year ended December 31, 2016, compared to the year ended December 31, 2015 is primarily due to the combined effects of (i) the recognition of tax benefit due to the resolution of the IRS audit in 2015 and (ii) the fact that the Company turned from pre-tax loss in 2015 to pre-tax income in 2016, offset by the uncertain tax positions recorded in 2016. The decrease in the effective tax rate for the year ended December 31, 2015, compared to the year ended December 31, 2014 was primarily due to the recognition of tax benefit due to the resolution of the IRS audit in 2015 and non-recurring adjustments from the prior year.
A reconciliation of our income tax expense (benefit) at the federal statutory income tax rate of
35%
to income tax expense (benefit) at the effective tax rate is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Income tax expense (benefit) at the federal statutory rate
|
|
$
|
5
|
|
|
$
|
(10
|
)
|
|
$
|
1
|
|
State and other tax expense
|
|
1
|
|
|
1
|
|
|
8
|
|
Tax rate differential on foreign earnings
|
|
4
|
|
|
8
|
|
|
5
|
|
Permanent differences
|
|
4
|
|
|
4
|
|
|
4
|
|
Production tax credits/R&E tax credits
|
|
—
|
|
|
(3
|
)
|
|
(4
|
)
|
State ITC credit
|
|
(4
|
)
|
|
—
|
|
|
—
|
|
Change in valuation allowance
|
|
2
|
|
|
(7
|
)
|
|
3
|
|
Liability for uncertain tax positions
|
|
16
|
|
|
(82
|
)
|
|
5
|
|
Adjustment to deferred tax
|
|
(5
|
)
|
|
4
|
|
|
(9
|
)
|
Other
|
|
(1
|
)
|
|
1
|
|
|
2
|
|
Total income tax expense (benefit)
|
|
$
|
22
|
|
|
$
|
(84
|
)
|
|
$
|
15
|
|
We had consolidated federal NOLs estimated to be approximately
$288 million
for federal income tax purposes as of the end of
2016
. These consolidated federal NOLs will expire, if not used, in the following amounts in the following years (in millions):
|
|
|
|
|
|
|
|
Amount of
Carryforward
Expiring
|
2028
|
$
|
64
|
|
2030
|
29
|
|
2031
|
1
|
|
2032
|
1
|
|
2033
|
193
|
|
|
$
|
288
|
|
In addition to the consolidated federal NOLs, as of
December 31, 2016
, we had state NOL carryforwards of approximately
$291 million
, which expire between
2028
and
2035
, net foreign NOL carryforwards of approximately
$227 million
expiring between
2017
and
2036
. The federal tax credit carryforwards include production tax credits of
$47 million
expiring between
2024
and
2036
, and minimum tax credits of
$7 million
with no expiration. Additionally, we had state income tax credit of
$1 million
. The corresponding deferred tax assets are offset by a valuation allowance of approximately
$71 million
.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The tax effects of temporary differences that give rise to the deferred tax assets and liabilities are presented as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2016
|
|
2015
|
Deferred tax assets:
|
|
|
|
|
Capital loss carryforward
|
|
$
|
—
|
|
|
$
|
3
|
|
Net operating loss carryforwards
|
|
143
|
|
|
157
|
|
Accrued expenses
|
|
20
|
|
|
24
|
|
Prepaid and other costs
|
|
71
|
|
|
36
|
|
Deferred tax assets attributable to pass-through entities
|
|
17
|
|
|
17
|
|
Retirement benefits
|
|
3
|
|
|
—
|
|
Other
|
|
4
|
|
|
4
|
|
AMT and other credit carryforwards
|
|
55
|
|
|
67
|
|
Total gross deferred tax asset
|
|
313
|
|
|
308
|
|
Less: valuation allowance
|
|
(71
|
)
|
|
(73
|
)
|
Total deferred tax asset
|
|
242
|
|
|
235
|
|
Deferred tax liabilities:
|
|
|
|
|
Unbilled accounts receivable
|
|
3
|
|
|
4
|
|
Property, plant and equipment
|
|
780
|
|
|
725
|
|
Intangible assets
|
|
36
|
|
|
18
|
|
Deferred tax liabilities attributable to pass-through entities
|
|
22
|
|
|
26
|
|
Deferred gain on convertible debt
|
|
13
|
|
|
20
|
|
Swap income
|
|
—
|
|
|
2
|
|
Prepaid expenses
|
|
—
|
|
|
23
|
|
Other, net
|
|
5
|
|
|
11
|
|
Total gross deferred tax liability
|
|
859
|
|
|
829
|
|
Net deferred tax liability
|
|
$
|
617
|
|
|
$
|
594
|
|
Cumulative undistributed foreign earnings for which United States taxes were not provided were included in consolidated retained earnings in the amount of approximately
$257 million
and
$264 million
as of
December 31, 2016 and 2015
, respectively. Such amounts are considered permanently invested, therefore no provision for U.S. income taxes has been accrued. Determination of the unrecognized deferred tax liability for these undistributed foreign earnings is not practicable.
Deferred tax assets relating to employee stock based compensation deductions were reduced to reflect exercises of non-qualified stock option grants and vesting of restricted stock. Some exercises of non-qualified stock option grants and vesting of restricted stock resulted in tax deductions in excess of previously recorded benefits resulting in a "windfall". Although these additional deductions were reported on the corporate tax returns and increased NOLs, these related tax benefits were not recognized for financial reporting purposes. These windfalls will not be recognized until the related deductions result in a reduction of taxes payable and cash tax payments. Accordingly, since the tax benefit does not reduce our current taxes payable, these tax benefits were not reflected in deferred tax assets for financial reporting purposes as of
December 31, 2016 and 2015
. Such benefits included in NOLs but not reflected in deferred tax assets were approximately
$26 million
as of both
December 31, 2016 and 2015
.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):
|
|
|
|
|
Balance at December 31, 2013
|
$
|
128
|
|
Additions based on tax positions related to the current year
|
8
|
|
Additions for tax positions of prior years
|
—
|
|
Reductions for lapse in applicable statute of limitations
|
(3
|
)
|
Reductions for tax positions of prior years
|
—
|
|
Balance at December 31, 2014
|
133
|
|
Additions based on tax positions related to the current year
|
12
|
|
Additions for tax positions of prior years
|
—
|
|
Reductions for lapse in applicable statute of limitations
|
—
|
|
Reductions for tax positions of prior years
|
(109
|
)
|
Balance at December 31, 2015
|
36
|
|
Additions based on tax positions related to the current year
|
16
|
|
Additions for tax positions of prior years
|
4
|
|
Reductions for lapse in applicable statute of limitations
|
(3
|
)
|
Reductions for tax positions of prior years
|
(4
|
)
|
Payment
|
(6
|
)
|
Balance at December 31, 2016
|
$
|
43
|
|
The uncertain tax positions, exclusive of interest and penalties, were
$43 million
and
$36 million
as of
December 31, 2016 and 2015
, respectively, which also represent potential tax benefits that if recognized, would impact the effective tax rate.
We record interest accrued on liabilities for uncertain tax positions and penalties as part of the tax provision. As of
December 31, 2016 and 2015
, we had accrued interest and penalties associated with liabilities for uncertain tax positions of
$3 million
and
$1 million
, respectively. We continue to reflect interest accrued and penalties on uncertain tax positions as part of the tax provision.
Audits for federal income tax returns are closed for the years through 2009. However, the Internal Revenue Service ("IRS") can audit the NOL's generated during those years in the years that the NOL's are utilized.
State income tax returns are generally subject to examination for a period of three to six years after the filing of the respective tax return. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states. We have various state income tax returns in the process of examination, administrative appeals or litigation.
Our NOLs predominantly arose from our predecessor insurance entities, formerly named Mission Insurance Group, Inc., (“Mission”). These Mission insurance entities have been in state insolvency proceedings in California and Missouri since the late 1980's. The amount of NOLs available to us will be reduced by any taxable income or increased by any taxable losses generated by current members of our consolidated tax group, which include grantor trusts associated with the Mission insurance entities.
While we cannot predict what amounts, if any, may be includable in taxable income as a result of the final administration of these grantor trusts, substantial actions toward such final administration have been taken and we believe that neither arrangements with the California Commissioner of Insurance nor the final administration by the Missouri Director will result in a material reduction in available NOLs.
NOTE 16. EMPLOYEE BENEFIT PLANS
We sponsor various retirement plans covering the majority of our employees and retirees in the United States, as well as other postretirement benefit plans for a small number of retirees in the United States that include healthcare benefits and life insurance coverage. Employees in the United States not participating in our retirement plans generally participate in retirement plans offered by collective bargaining units of which these employees are members. The majority of our international employees participate in defined benefit or defined contribution retirement plans as required or available in accordance with local laws.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Defined Contribution Plans
Substantially all of our employees in the United States are eligible to participate in the defined contribution plans we sponsor. The defined contribution plans allow employees to contribute a portion of their compensation on a pre-tax basis in accordance with specified guidelines. We match a percentage of employee contributions up to certain limits. We also provide a company contribution to the defined contribution plans for eligible employees. Our costs related to defined contribution plans were
$17 million
,
$16 million
and
$16 million
for the years ended
December 31, 2016, 2015 and 2014
, respectively.
Pension and Postretirement Benefit Obligations
In 2012, the IRS approved our plan to terminate the qualified defined benefit pension plan. During 2013,
$35 million
of annuity contracts were purchased on behalf of participants who elected an annuity option and we recorded a pre-tax defined benefit pension plan settlement gain of
$6 million
, which was recorded as other operating income in our consolidated statements of operations. Such annuity purchase concluded the termination of the defined benefit pension plan, accordingly, we have no future obligations related to the qualified defined benefit pension plan.
The discount rate for the non-qualified pension plans was
4.10%
,
4.35%
and
4.05%
for the years ended
December 31, 2016, 2015 and 2014
, respectively.
For the other postretirement benefit plan, an annual rate of increase of
7.0%
in the per capita cost of health care benefits was assumed for
2016
for covered employees. An average increase of
7.0%
was assumed for 2017. The average increase was then projected to gradually decline to
5.0%
in
2022
and remain at that level. In general, assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage point change (either increase or decrease) in the assumed health care trend rate would have an immaterial (approximately
$0.2 million
) effect on either total service and interest cost components or postretirement benefit obligations.
For the pension plans with accumulated benefit obligations in excess of plan assets, the projected benefit obligation, accumulated benefit obligation, and fair value of plan assets were
$1 million
,
$1 million
and
$0
, respectively, as of
December 31, 2016
and
$4 million
,
$4 million
, and
$0
, respectively, as of
December 31, 2015
.
As of
December 31, 2016
, we estimate that the future benefits payable over the next ten years for the retirement and postretirement plans in place are
$1 million
for pension benefits,
$2 million
for other benefits (net of Medicare Part D subsidy) and
$0 million
for attributable to Medicare Part D subsidy.
Pension costs for our defined benefit plans and other post-retirement benefit plans were not material.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Obligation and Funded Status
The following table is a reconciliation of the changes in the benefit obligations and fair value of assets for our non-qualified defined benefit pension plan and other postretirement benefit plan, the funded status (using a December 31 measurement date) of the plans and the related amounts recognized in our consolidated balance sheets (in millions, except percentages as noted):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-qualified Pension Benefits
|
|
Other Benefits
|
|
|
For the Years Ended
December 31,
|
|
For the Years Ended
December 31,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
5
|
|
Actuarial gain
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
Benefits paid
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Benefit obligation at end of year
|
|
$
|
1
|
|
|
$
|
4
|
|
|
$
|
3
|
|
|
$
|
4
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
Plan assets at fair value at beginning of year
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Contributions
|
|
3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Benefits paid
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Plan assets at fair value at end of year
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Reconciliation of accrued benefit liability and net amount recognized:
|
|
|
|
|
|
|
|
|
Funded status of the plan
|
|
$
|
(1
|
)
|
|
$
|
(4
|
)
|
|
$
|
(3
|
)
|
|
$
|
(4
|
)
|
Unrecognized net gain
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net amount recognized
|
|
$
|
(1
|
)
|
|
$
|
(4
|
)
|
|
$
|
(3
|
)
|
|
$
|
(4
|
)
|
Accumulated other comprehensive income recognized:
|
|
|
|
|
|
|
|
|
Net actuarial gain
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(4
|
)
|
|
$
|
(4
|
)
|
Net prior service cost
|
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
Total as of December 31,
|
|
$
|
(1
|
)
|
|
$
|
(1
|
)
|
|
$
|
(4
|
)
|
|
$
|
(4
|
)
|
Weighted average assumptions used to determine net periodic benefit expense for years ending December 31:
|
|
|
|
|
|
|
|
|
Discount rate
|
|
4.35
|
%
|
|
4.05
|
%
|
|
3.75
|
%
|
|
3.50
|
%
|
Weighted average assumptions used to determine projected benefit obligations as of December 31:
|
|
|
|
|
|
|
|
|
Discount rate
|
|
4.10
|
%
|
|
4.35
|
%
|
|
3.55
|
%
|
|
3.75
|
%
|
|
|
|
|
|
|
|
|
|
NOTE 17. STOCK-BASED AWARD PLANS
Stock-Based Award Plans
In May 2014, the stockholders of the Company approved the Covanta Holding Corporation 2014 Equity Award Plan (the “Plan”) to provide incentive compensation to non-employee directors, officers and employees, and to consolidate the two previously existing equity compensation plans into a single plan: the Company’s Equity Award Plan for Employees and Officers (the “Former Employee Plan”) and the Company’s Equity Award Plan for Directors (the “Former Director Plan,” and together with the Former Employee Plan, the “Former Plans”). Shares that were available for issuance under the Former Plans will be available for issuance under the Plan. The stockholders of the Company also approved the authorization of
6 million
new shares of our common stock for issuance under the Plan.
The purpose of the Plan is to promote our interests (including our subsidiaries and affiliates) and our stockholders’ interests by using equity interests to attract, retain and motivate our management, non-employee directors and other eligible persons and to encourage and reward their contributions to our performance and profitability. The Plan provides for awards to be made in the form of (a) shares of restricted stock, (b) restricted stock units, (c) incentive stock options, (d) non-qualified stock options, (e) stock appreciation rights, (f) performance awards, or (g) other stock-based awards which relate to or serve a similar function to the awards described above. Awards may be made on a standalone, combination or tandem basis.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Stock-Based Compensation
We recognize compensation costs using the graded vesting attribution method over the requisite service period of the award, which is generally three to five years. We recognize compensation expense based on the number of stock options, restricted stock awards and restricted stock units expected to vest by using an estimate of expected forfeitures. We review the forfeiture rates at least annually and revise compensation expense, if necessary. During
2016
, the average forfeiture rates were
12%
for restricted stock awards and
15%
for restricted stock units. Stock-based compensation expense is as follows (in millions, except for weighted average years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
|
Total Compensation Expense
for the Years Ended December 31,
|
Unrecognized
stock-based
compensation expense
|
|
Weighted-average years to be recognized
|
|
|
2016
|
|
2015
|
|
2014
|
|
Restricted Stock Awards
|
|
$
|
10
|
|
|
$
|
11
|
|
|
$
|
11
|
|
|
$
|
7
|
|
|
1.4
|
Restricted Stock Units
|
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
8
|
|
|
2.1
|
Restricted Stock Awards
Restricted stock awards that have been issued to employees typically vest over a
three
-year period. Restricted stock awards are stock-based awards for which the employee or director does not have a vested right to the stock (“nonvested”) until the requisite service period has been rendered or the required financial performance factor has been reached for each pre-determined vesting date. Stock-based compensation expense for each financial performance factor is recognized beginning in the period when management has determined it is probable the financial performance factor will be achieved for the respective vesting period. The fair value of shares vested during the year was
$9 million
.
Restricted stock awards to employees are subject to forfeiture if the employee is not employed on the vesting date. Restricted stock awards issued to directors are not subject to forfeiture in the event a director ceases to be a member of the Board of Directors, except in limited circumstances. Restricted stock awards will be expensed over the requisite service period, subject to an estimated forfeiture rate. Prior to vesting, restricted stock awards have all of the rights of common stock (other than the right to sell or otherwise transfer, when issued). We calculate the fair value of share-based stock awards based on the closing price on the date the award was granted.
During 2016 we awarded certain employees
752,426
shares of restricted stock. The restricted stock awards will be expensed over the requisite service period, subject to an estimated
12%
average forfeiture rate. The terms of the restricted stock awards include vesting provisions based solely on continued service. If the service criteria are satisfied, the restricted stock awards vest generally during March of 2017, 2018, and 2019.
During 2016, we awarded
9,000
shares of restricted stock for annual director compensation. We determined that the service vesting condition of these restricted stock awards to be non-substantive and, in accordance with accounting principles for stock compensation, recorded the entire fair value of the award as compensation expense on the grant date.
Changes in nonvested restricted stock awards were as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
Number of
Shares
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
Number of
Shares
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
Number of
Shares
|
|
Weighted-
Average
Grant Date
Fair Value
|
Nonvested at the beginning of the year
|
|
1,060
|
|
|
$
|
19.79
|
|
|
1,240
|
|
|
$
|
17.67
|
|
|
1,166
|
|
|
$
|
17.85
|
|
Granted
|
|
761
|
|
|
$
|
15.14
|
|
|
573
|
|
|
$
|
21.88
|
|
|
721
|
|
|
$
|
17.20
|
|
Vested
|
|
(532
|
)
|
|
$
|
19.36
|
|
|
(661
|
)
|
|
$
|
17.69
|
|
|
(608
|
)
|
|
$
|
17.27
|
|
Forfeited
|
|
(69
|
)
|
|
$
|
17.51
|
|
|
(92
|
)
|
|
$
|
19.36
|
|
|
(39
|
)
|
|
$
|
17.80
|
|
Nonvested at the end of the year
|
|
1,220
|
|
|
$
|
17.20
|
|
|
1,060
|
|
|
$
|
19.79
|
|
|
1,240
|
|
|
$
|
17.67
|
|
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Restricted Stock Units
In 2010, we awarded restricted stock units (“RSUs”) to certain employees in connection with specified growth-based acquisitions or development projects. Vesting of the RSUs is based on the net present value of projected cash flows of the applicable acquisition or development project, calculated as of the award date versus the vesting date. Vesting will occur after at least
three
years have passed following an acquisition or upon the later of
three
years from the grant date or
one
year following the commencement of commercial operations for development projects. For certain stock unit awards, dividends accrue prior to vesting and are paid when the awards vest. We calculate the fair value of share-based stock awards based on the closing price on the date the award was granted.
In January, 2016, we awarded certain employees
356,622
RSUs related to a special retention bonus that will vest after a three-year period.
In March, 2016, we awarded certain employees
471,381
RSUs,
390,728
of which will vest based upon the Company’s cumulative Free Cash Flow per share over a three-year performance period.
In May, 2016, we awarded
54,591
restricted stock units for annual director compensation. We determined the service vesting condition of these restricted stock awards and restricted stock units to be non-substantive and, in accordance with accounting principles for stock compensation, recorded the entire fair value of the awards as compensation expense on the grant date.
In September, 2016, the Board of Directors appointed two new board members. We awarded
5,550
restricted stock units for the prorated portion of the annual director compensation with respect to these directors. We determined the service vesting condition of these restricted stock awards and restricted stock units to be non-substantive and, in accordance with accounting principles for stock compensation, recorded the entire fair value of the awards as compensation expense on the grant date.
Changes in nonvested restricted stock units were as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
Number of
Shares
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
Number of
Shares
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
Number of
Shares
|
|
Weighted-
Average
Grant Date
Fair Value
|
Nonvested at the beginning of the year
|
|
1,189
|
|
|
$
|
17.60
|
|
|
894
|
|
|
$
|
15.93
|
|
|
691
|
|
|
$
|
16.66
|
|
Granted
|
|
888
|
|
|
$
|
14.65
|
|
|
322
|
|
|
$
|
21.95
|
|
|
247
|
|
|
$
|
14.60
|
|
Vested
|
|
(51
|
)
|
|
$
|
20.24
|
|
|
(21
|
)
|
|
$
|
17.94
|
|
|
(44
|
)
|
|
$
|
16.51
|
|
Forfeited
|
|
(223
|
)
|
|
$
|
16.29
|
|
|
(6
|
)
|
|
$
|
21.99
|
|
|
—
|
|
|
$
|
—
|
|
Nonvested at the end of the year
|
|
1,803
|
|
|
$
|
16.25
|
|
|
1,189
|
|
|
$
|
17.60
|
|
|
894
|
|
|
$
|
15.93
|
|
Stock Options
We have also awarded stock options to certain employees and directors. Stock options awarded to directors vested immediately. Stock options awarded to employees have typically vested annually over
three
to
five
years and expire over
ten
years. We calculate the fair value of our share-based option awards using the Black-Scholes option pricing model which requires estimates of the expected life of the award and stock price volatility.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes activity and balance information of the options under the 2014 Stock Option Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
2014 Stock Option Plan
|
|
(in thousands, except per share amounts)
|
Outstanding at the beginning of the year
|
|
1,100
|
|
|
$
|
21.37
|
|
|
1,113
|
|
|
$
|
21.25
|
|
|
1,686
|
|
|
$
|
20.42
|
|
Granted
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
25
|
|
|
$
|
20.58
|
|
Exercised
|
|
—
|
|
|
$
|
—
|
|
|
(13
|
)
|
|
$
|
11.40
|
|
|
(532
|
)
|
|
$
|
18.53
|
|
Expired
|
|
(20
|
)
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
(66
|
)
|
|
$
|
20.52
|
|
Forfeited
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Outstanding at the end of the year
|
|
1,080
|
|
|
$
|
21.38
|
|
|
1,100
|
|
|
$
|
21.37
|
|
|
1,113
|
|
|
$
|
21.25
|
|
Options exercisable at year end
|
|
1,080
|
|
|
$
|
21.38
|
|
|
1,100
|
|
|
$
|
21.37
|
|
|
1,100
|
|
|
$
|
21.26
|
|
Options available for future grant
|
|
4,003
|
|
|
|
|
5,652
|
|
|
|
|
6,548
|
|
|
|
As of
December 31, 2016
, options for shares were in the following price ranges (in thousands, except years and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average
Remaining
Contractual Life
(Years)
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
Exercise Price Range
|
|
Number of
Shares
|
|
Weighted Average
Exercise Price
|
|
|
Number of
Shares
|
|
Weighted Average
Exercise Price
|
$20.52 — $20.58
|
|
850
|
|
|
$
|
20.52
|
|
|
0.4
|
|
850
|
|
|
$
|
20.52
|
|
$23.30 — $24.76
|
|
230
|
|
|
$
|
24.57
|
|
|
1.4
|
|
230
|
|
|
$
|
24.57
|
|
|
|
1,080
|
|
|
|
|
|
|
1,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total cash received from the exercise of stock options was
zero
, less than
$1 million
and
$10 million
, for the years ended
December 31, 2016, 2015 and 2014
, respectively. The tax benefits related to the exercise of the non-qualified stock options and the vesting of the restricted stock award were not recognized during the years ended
December 31, 2016, 2015 and 2014
due to our NOLs. When the NOLs have been fully utilized by us, we will recognize a tax benefit and an increase in additional paid-in capital for the excess tax deductions received on the exercised non-qualified stock options and vested restricted stock. Future realization of the tax benefit will be presented in cash flows from financing activities in the consolidated statements of cash flows in the period the tax benefit is recognized. Previously recorded tax benefits that are in excess of the realized tax benefit on a particular non-qualified stock option or restricted stock are recorded as an increase to income tax expense since there is no additional paid-in capital pool available to offset these reduced tax benefits.
The aggregate intrinsic value as of
December 31, 2016
for options exercisable was
$0
for options outstanding and options vested. All options outstanding as of
December 31, 2016
are fully vested. The aggregate intrinsic value represents the total pre-tax intrinsic value (the difference between the closing stock price on the last trading day of
2016
and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on the last trading day of
2016
(December 30, 2016). The intrinsic value changes based on the fair market value of our common stock. The total intrinsic value of options exercised for the years ended as of
December 31, 2016, 2015 and 2014
was
$0
,
$0
, and
$1 million
, respectively.
As of
December 31, 2016
, there were options to purchase
1 million
shares of common stock that had vested at a weighted average exercise price of
$21.38
.
NOTE 18. COMMITMENTS AND CONTINGENCIES
We and/or our subsidiaries are party to a number of claims, lawsuits and pending actions, most of which are routine and all of which are incidental to our business. We assess the likelihood of potential losses on an ongoing basis and when losses are considered probable and reasonably estimable, record as a loss an estimate of the outcome. If we can only estimate the range of a possible loss, an amount representing the low end of the range of possible outcomes is recorded. Our assessments are based on estimates and assumptions that have been deemed reasonable by management, but the assessment process relies on estimates and assumptions
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
that may prove to be incomplete or inaccurate, and unanticipated events or circumstances may occur that might cause us to change those estimates and assumptions. The final consequences of these proceedings are not presently determinable with certainty. As of December 31, 2016 and 2015, accruals for our loss contingencies approximated
$11 million
and
$1 million
, respectively.
Environmental Matters
Our operations are subject to environmental regulatory laws and environmental remediation laws. Although our operations are occasionally subject to proceedings and orders pertaining to emissions into the environment and other environmental violations, which may result in fines, penalties, damages or other sanctions, we believe that we are in substantial compliance with existing environmental laws and regulations.
We may be identified, along with other entities, as being among parties potentially responsible for contribution to costs associated with the correction and remediation of environmental conditions at disposal sites subject to federal and/or analogous state laws. In certain instances, we may be exposed to joint and several liabilities for remedial action or damages. Our liability in connection with such environmental claims will depend on many factors, including our volumetric share of waste, the total cost of remediation, and the financial viability of other companies that also sent waste to a given site and, in the case of divested operations, the contractual arrangement with the purchaser of such operations.
The potential costs related to the matters described below and the possible impact on future operations are uncertain due in part to the complexity of governmental laws and regulations and their interpretations, the varying costs and effectiveness of cleanup technologies, the uncertain level of insurance or other types of recovery and the questionable level of our responsibility. Although the ultimate outcome and expense of any litigation, including environmental remediation, is uncertain, we believe that the following proceedings will not have a material adverse effect on our consolidated financial position or results of operations.
Lower Passaic River Matter.
In August 2004, the United States Environmental Protection Agency (the “EPA”) notified Covanta Essex Company (“Essex”) that it was a potentially responsible party (“PRP”) for Superfund response actions in the Lower Passaic River Study Area, referred to as “LPRSA,” a 17 mile stretch of river in northern New Jersey. Essex’s LPRSA costs to date are not material to its financial position and results of operations; however, to date the EPA has not sought any LPRSA remedial costs or natural resource damages against PRPs. On March 3, 2016, the EPA released the Record of Decision (“ROD”) for its Focused Feasibility Study of the lower 8 miles of the LPRSA; the EPA’s selected remedy includes capping/dredging of sediment, institutional controls and long-term monitoring. The Essex facility started operating in 1990 and Essex does not believe there have been any releases to the LPRSA, but in any event believes any releases would have been de minimis considering the history of the LPRSA; however, it is not possible at this time to predict that outcome or to estimate the range of possible loss relating to Essex’s liability in the matter, including for LPRSA remedial costs and/or natural resource damages.
Tulsa Matter.
In January 2016, we were informed by the office of the United States Attorney for the Northern District of Oklahoma (“U.S. Attorney”) that our subsidiary, Covanta Tulsa Renewable Energy LLC, is the target of a criminal investigation being conducted by the EPA. We understand that the EPA plans to allege improprieties in the recording and reporting of emissions data during an October 2013 incident involving one of the three municipal waste combustion units at our Tulsa, Oklahoma facility. We believe that our operations in Tulsa were and are in compliance with existing laws and regulations in all material respects. While we can provide no assurance as to the outcome of this matter, we do not believe that the investigation or any issues arising therefrom will have a material adverse effect on our financial position, cash flows or results of operations.
Other Matters
Durham-York Contractor Arbitration
We are seeking to resolve outstanding disputes with our primary contractor for the Durham-York construction project regarding (i) claims by the contractor for change orders and other expense reimbursement and (ii) claims by us for charges and liquidated damages for project completion delays. Our contract with this contractor contemplates binding arbitration to resolve these disputes, which we expect may conclude in 2017. While we do not expect resolution of these disputes to have a material adverse impact on our financial position, it could be material to our results of operations and or cash flows in any given accounting period.
China Indemnification Claims
Subsequent to completing the exchange of our project ownership interests in China for a 15% ownership interest in Sanfeng Environment (see
Note 4. Dispositions, Assets Held for Sale and Discontinued Operations
), Sanfeng Environment made certain claims for indemnification under the agreement related to the condition of the facility in Taixing. To the extent that any payment is made related to these claims, such amount could reduce the gain recorded in a future period.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Other Commitments
Other commitments as of
December 31, 2016
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments Expiring by Period
|
|
|
Total
|
|
Less Than
One Year
|
|
More Than
One Year
|
Letters of credit issued under the Revolving Credit Facility
|
|
$
|
156
|
|
|
$
|
—
|
|
|
$
|
156
|
|
Letters of credit - other
|
|
61
|
|
|
—
|
|
|
61
|
|
Surety bonds
|
|
158
|
|
|
—
|
|
|
158
|
|
Total other commitments — net
|
|
$
|
375
|
|
|
$
|
—
|
|
|
$
|
375
|
|
The letters of credit were issued to secure our performance under various contractual undertakings related to our domestic and international projects or to secure obligations under our insurance program. Each letter of credit relating to a project is required to be maintained in effect for the period specified in related project contracts, and generally may be drawn if it is not renewed prior to expiration of that period.
We believe that we will be able to fully perform under our contracts to which these existing letters of credit relate, and that it is unlikely that letters of credit would be drawn because of a default of our performance obligations. If any of these letters of credit were to be drawn by the beneficiary, the amount drawn would be immediately repayable by us to the issuing bank. If we do not immediately repay such amounts drawn under letters of credit issued under the Revolving Credit Facility, unreimbursed amounts would be treated under the Credit Facilities as either additional term loans or as revolving loans.
The surety bonds listed in the table above relate primarily to construction and performance obligations and support for other obligations, including closure requirements of various energy projects when such projects cease operating. Were these bonds to be drawn upon, we would have a contractual obligation to indemnify the surety company.
We have certain contingent obligations related to the 7.25% Notes, 6.375% Notes, 5.875% Notes, and Tax-Exempt Bonds. Holders may require us to repurchase their 7.25% Notes, 6.375% Notes, 5.875% Notes and Tax-Exempt Bonds if a fundamental change occurs. For specific criteria related to the redemption features of the 5.875% Notes, 7.25% Notes or 6.375% Notes, see
Note 11.
Consolidated Debt
.
We have issued or are party to guarantees and related contractual support obligations undertaken pursuant to agreements to construct and operate waste and energy facilities. For some projects, such performance guarantees include obligations to repay certain financial obligations if the project revenue is insufficient to do so, or to obtain or guarantee financing for a project. With respect to our businesses, we have issued guarantees to municipal clients and other parties that our subsidiaries will perform in accordance with contractual terms, including, where required, the payment of damages or other obligations. Additionally, damages payable under such guarantees for our energy-from-waste facilities could expose us to recourse liability on project debt. If we must perform under one or more of such guarantees, our liability for damages upon contract termination would be reduced by funds held in trust and proceeds from sales of the facilities securing the project debt and is presently not estimable. Depending upon the circumstances giving rise to such damages, the contractual terms of the applicable contracts, and the contract counterparty’s choice of remedy at the time a claim against a guarantee is made, the amounts owed pursuant to one or more of such guarantees could be greater than our then-available sources of funds. To date, we have not incurred material liabilities under such guarantees.
Dublin EfW Facility
In connection with the financing of the Dublin EfW facility, Covanta Energy has made commitments for contingent support as follows: (1) lending commitments up to
€25 million
to fund working capital shortfalls in the project company under certain circumstances during operations; and (2) up to
€75 million
commitment in the aggregate to provide support payments to the project company, under certain circumstances, in the event waste revenue falls below minimum levels (set far below anticipated levels). For additional information on the Dublin EfW facility, see
Note 3.
New Business and Asset Management
and
Note 11.
Consolidated Debt
.
New York City Contract Investments
In 2013, New York City awarded us a contract to handle waste transport and disposal from two marine transfer stations located in Queens and Manhattan. Service for the Queens marine transfer station began in early 2015, service for the Manhattan marine transfer station is expected to follow pending notice to proceed to be issued by New York City which is anticipated in 2018. As of
December 31, 2016
, we expect to incur approximately
$33 million
of additional capital expenditures, primarily for transportation equipment.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 19. QUARTERLY DATA (UNAUDITED)
The following table presents quarterly unaudited financial data for the periods presented on the consolidated statements of operations (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calendar Quarter Ended
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Operating revenue
|
|
$
|
403
|
|
|
$
|
383
|
|
|
$
|
418
|
|
|
$
|
408
|
|
|
$
|
421
|
|
|
$
|
422
|
|
|
$
|
457
|
|
|
$
|
432
|
|
Operating (loss) income
(1)
|
|
$
|
(14
|
)
|
|
$
|
7
|
|
|
$
|
5
|
|
|
$
|
(15
|
)
|
|
$
|
60
|
|
|
$
|
74
|
|
|
$
|
58
|
|
|
$
|
43
|
|
Net (loss) income
|
|
$
|
(37
|
)
|
|
$
|
(37
|
)
|
|
$
|
(29
|
)
|
|
$
|
(6
|
)
|
|
$
|
54
|
|
|
$
|
34
|
|
|
$
|
8
|
|
|
$
|
78
|
|
Net (loss) income attributable to Covanta Holding Corporation
|
|
$
|
(37
|
)
|
|
$
|
(37
|
)
|
|
$
|
(29
|
)
|
|
$
|
(6
|
)
|
|
$
|
54
|
|
|
$
|
34
|
|
|
$
|
8
|
|
|
$
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Earnings per share attributable to Covanta Holding Corporation stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.29
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
0.42
|
|
|
$
|
0.26
|
|
|
$
|
0.06
|
|
|
$
|
0.59
|
|
Diluted
|
|
$
|
(0.29
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
0.42
|
|
|
$
|
0.25
|
|
|
$
|
0.06
|
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividend declared per share:
|
|
$
|
0.25
|
|
|
$
|
0.25
|
|
|
$
|
0.25
|
|
|
$
|
0.25
|
|
|
$
|
0.25
|
|
|
$
|
0.25
|
|
|
$
|
0.25
|
|
|
$
|
0.25
|
|
(1)
As restated for the quarters ending March 31, June 30, September 30 and December 31, 2015, for reclassification of Net interest expense (income) on project debt of
$2 million
,
$5 million
,
$3 million
, and
$(1) million
, respectively, to Interest expense, net on our consolidated statement of operations. As a result, Operating income (loss) increased (decreased) accordingly.
NOTE 20. SUBSEQUENT EVENTS
Southeast Connecticut Energy-from -Waste Facility
On February 22, 2017, we extended our agreement with the Southeastern Connecticut Regional Resource Recovery Authority for an additional four years. As a result, our Southeast Connecticut energy-from-waste facility is now operating under a tip fee structure.
Fairfax County Energy-from-Waste Facility
On February 2, 2017, our Fairfax County energy-from waste facility located in Lorton, Virginia experienced a fire in the front-end receiving portion of the facility. We are still investigating and evaluating the impact of the event, and once this effort is completed, we may have an asset impairment. The cost of repair or replacement, and business interruption losses, are insured, subject to applicable deductibles. We do not expect that this will have a significant impact on our 2017 financial results.