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, 2017
. Further information is included in
Item 8. Financial Statements And Supplementary Data — Note 11. Financial Instruments
and
Note 12. 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, 2017
, the net fair value of the energy derivatives of
$5 million
pre-tax, was recorded as a
$4 million
current liability and a
$1 million
non-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 $4 million and $5 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
76%
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
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%
. For details as to the various election options under the Credit Facility, see
Item 8. Financial Statements And Supplementary Data —
Note 10.
Consolidated Debt
. As of
December 31, 2017
, the outstanding balance of the Term Loan and the Revolving Credit Facility was
$191 million
and
$445 million
, respectively. We have not entered into any interest rate hedging arrangements against these balances. A hypothetical increase of 1% in the underlying
December 31, 2017
market interest rates would result in a potential reduction to twelve-month future pre-tax earnings and cash provided by operations of approximately
$6 million
, based on balances outstanding as of
December 31, 2017
. For details, see
Item 8. Financial Statements And Supplementary Data —
Note 10.
Consolidated Debt
.
In order to hedge the risk of adverse variable interest rate fluctuations associated with the Dublin Senior Loan, we have entered into floating to fixed rate swap agreements, denominated in Euros for the full €135 million loan amount with various financial institutions that terminate between 2018 and
2032
. 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, 2017
, the fair value of the interest rate swap derivative of
$7 million
pre-tax, was recorded as a noncurrent liability within "Liabilities held for sale" on our consolidated balance sheet. For additional information, see
Item 8. Financial Statements And Supplementary Data —
Note 12.
Derivative Instruments
.
Foreign Currency Exchange Rate Risk
We have operations in various foreign markets, including 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, 2017
, the fair value of the foreign currency derivatives is
zero
on our consolidated balance sheet. For additional information, see
Item 8. Financial Statements And Supplementary Data —
Note 12.
Derivative Instruments
.
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Covanta Holding Corporation
Opinion on Financial Statements
We have audited the accompanying consolidated balance sheets of Covanta Holding Corporation (the “Company”) as of
December 31, 2017 and 2016
, and the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the three years in the period ended
December 31, 2017
, and the related notes and financial statement schedule listed in the Index at Item 8 (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on the criteria establishes in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated
February 26, 2018
, expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2002.
Iselin, New Jersey
February 26, 2018
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(In millions, except per share amounts)
|
OPERATING REVENUE:
|
|
|
|
|
|
|
Waste and service revenue
|
|
$
|
1,231
|
|
|
$
|
1,187
|
|
|
$
|
1,104
|
|
Energy revenue
|
|
334
|
|
|
370
|
|
|
421
|
|
Recycled metals revenue
|
|
82
|
|
|
61
|
|
|
61
|
|
Other operating revenue
|
|
105
|
|
|
81
|
|
|
59
|
|
Total operating revenue
|
|
1,752
|
|
|
1,699
|
|
|
1,645
|
|
OPERATING EXPENSE:
|
|
|
|
|
|
|
Plant operating expense
|
|
1,271
|
|
|
1,177
|
|
|
1,129
|
|
Other operating expense, net
|
|
51
|
|
|
86
|
|
|
73
|
|
General and administrative expense
|
|
112
|
|
|
100
|
|
|
93
|
|
Depreciation and amortization expense
|
|
215
|
|
|
207
|
|
|
198
|
|
Impairment charges
|
|
2
|
|
|
20
|
|
|
43
|
|
Total operating expense
|
|
1,651
|
|
|
1,590
|
|
|
1,536
|
|
Operating income
|
|
101
|
|
|
109
|
|
|
109
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
Interest expense, net
|
|
(147
|
)
|
|
(138
|
)
|
|
(134
|
)
|
(Loss) gain on asset sales
|
|
(6
|
)
|
|
44
|
|
|
—
|
|
Loss on extinguishment of debt
|
|
(84
|
)
|
|
—
|
|
|
(2
|
)
|
Other expense, net
|
|
1
|
|
|
(1
|
)
|
|
(1
|
)
|
Total other expense
|
|
(236
|
)
|
|
(95
|
)
|
|
(137
|
)
|
(Loss) income before income tax benefit (expense) and equity in net income from unconsolidated investments
|
|
(135
|
)
|
|
14
|
|
|
(28
|
)
|
Income tax benefit (expense) (Note 14)
|
|
191
|
|
|
(22
|
)
|
|
84
|
|
Equity in net income from unconsolidated investments
|
|
1
|
|
|
4
|
|
|
13
|
|
NET INCOME (LOSS)
|
|
57
|
|
|
(4
|
)
|
|
69
|
|
Less: Net income attributable to noncontrolling interests in subsidiaries
|
|
—
|
|
|
—
|
|
|
1
|
|
NET INCOME (LOSS) ATTRIBUTABLE TO COVANTA HOLDING CORPORATION
|
|
$
|
57
|
|
|
$
|
(4
|
)
|
|
$
|
68
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding:
|
|
|
|
|
|
|
Basic
|
|
130
|
|
|
129
|
|
|
132
|
|
Diluted
|
|
131
|
|
|
129
|
|
|
133
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) Per Share Attributable to Covanta Holding Corporation Stockholders:
|
|
|
|
|
|
|
Basic
|
|
$
|
0.44
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.52
|
|
Diluted
|
|
$
|
0.44
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.51
|
|
|
|
|
|
|
|
|
Cash Dividend Declared Per Share:
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
The accompanying notes are an integral part of the consolidated financial statements.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(In millions)
|
Net income (loss)
|
|
$
|
57
|
|
|
$
|
(4
|
)
|
|
$
|
69
|
|
Foreign currency translation
|
|
17
|
|
|
(7
|
)
|
|
(22
|
)
|
Net unrealized (loss) gain on derivative instruments, net of tax (benefit) expense of $0, ($8) and $7, respectively
|
|
(10
|
)
|
|
(21
|
)
|
|
10
|
|
Other comprehensive income (loss) attributable to Covanta Holding Corporation
|
|
7
|
|
|
(28
|
)
|
|
(12
|
)
|
Comprehensive income (loss)
|
|
64
|
|
|
(32
|
)
|
|
57
|
|
Less: Net income attributable to noncontrolling interests in subsidiaries
|
|
—
|
|
|
—
|
|
|
1
|
|
Comprehensive income (loss) attributable to Covanta Holding Corporation
|
|
$
|
64
|
|
|
$
|
(32
|
)
|
|
$
|
56
|
|
The accompanying notes are an integral part of the consolidated financial statements.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2017
|
|
2016
|
|
(In millions, except per
share amounts)
|
ASSETS
|
|
|
|
Current:
|
|
|
|
Cash and cash equivalents
|
$
|
46
|
|
|
$
|
84
|
|
Restricted funds held in trust
|
43
|
|
|
56
|
|
Receivables (less allowances of $14 million and $9 million, respectively)
|
341
|
|
|
332
|
|
Prepaid expenses and other current assets
|
73
|
|
|
72
|
|
Assets held for sale
|
653
|
|
|
—
|
|
Total Current Assets
|
1,156
|
|
|
544
|
|
Property, plant and equipment, net
|
2,606
|
|
|
3,024
|
|
Restricted funds held in trust
|
28
|
|
|
54
|
|
Waste, service and energy contracts, net
|
251
|
|
|
263
|
|
Other intangible assets, net
|
36
|
|
|
34
|
|
Goodwill
|
313
|
|
|
302
|
|
Other assets
|
51
|
|
|
63
|
|
Total Assets
|
$
|
4,441
|
|
|
$
|
4,284
|
|
LIABILITIES AND EQUITY
|
|
|
|
Current:
|
|
|
|
Current portion of long-term debt
|
$
|
10
|
|
|
$
|
9
|
|
Current portion of project debt
|
23
|
|
|
22
|
|
Accounts payable
|
151
|
|
|
98
|
|
Accrued expenses and other current liabilities
|
313
|
|
|
289
|
|
Liabilities held for sale
|
540
|
|
|
—
|
|
Total Current Liabilities
|
1,037
|
|
|
418
|
|
Long-term debt
|
2,339
|
|
|
2,243
|
|
Project debt
|
151
|
|
|
361
|
|
Deferred income taxes
|
412
|
|
|
617
|
|
Other liabilities
|
75
|
|
|
176
|
|
Total Liabilities
|
4,014
|
|
|
3,815
|
|
Commitments and Contingencies (Note 16)
|
|
|
|
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 131 and 130, respectively)
|
14
|
|
|
14
|
|
Additional paid-in capital
|
822
|
|
|
807
|
|
Accumulated other comprehensive loss
|
(55
|
)
|
|
(62
|
)
|
Accumulated deficit
|
(353
|
)
|
|
(289
|
)
|
Treasury stock, at par
|
(1
|
)
|
|
(1
|
)
|
Total Equity
|
427
|
|
|
469
|
|
Total Liabilities and Equity
|
$
|
4,441
|
|
|
$
|
4,284
|
|
The accompanying notes are an integral part of the consolidated financial statements.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
OPERATING ACTIVITIES:
|
|
(In millions)
|
Net income (loss)
|
|
$
|
57
|
|
|
$
|
(4
|
)
|
|
$
|
69
|
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
215
|
|
|
207
|
|
|
198
|
|
Amortization of long-term debt deferred financing costs
|
|
7
|
|
|
6
|
|
|
8
|
|
Loss (gain) on asset sales
|
|
6
|
|
|
(44
|
)
|
|
—
|
|
Impairment charges
|
|
2
|
|
|
20
|
|
|
43
|
|
Loss on extinguishment of debt
|
|
84
|
|
|
—
|
|
|
2
|
|
Provision for doubtful accounts
|
|
9
|
|
|
2
|
|
|
1
|
|
Stock-based compensation expense
|
|
18
|
|
|
16
|
|
|
18
|
|
Equity in net income from unconsolidated investments
|
|
(1
|
)
|
|
(4
|
)
|
|
(13
|
)
|
Deferred income taxes
|
|
(193
|
)
|
|
21
|
|
|
(11
|
)
|
IRS audit settlement
|
|
—
|
|
|
—
|
|
|
(93
|
)
|
Change in restricted funds held in trust
|
|
1
|
|
|
22
|
|
|
28
|
|
Dividends from unconsolidated investments
|
|
2
|
|
|
2
|
|
|
5
|
|
Other, net
|
|
(13
|
)
|
|
(1
|
)
|
|
21
|
|
Change in working capital, net of effects of acquisitions:
|
|
|
|
|
|
|
Receivables
|
|
(27
|
)
|
|
(19
|
)
|
|
(12
|
)
|
Debt services billings in excess of revenue recognized
|
|
5
|
|
|
(1
|
)
|
|
5
|
|
Prepaid and other current assets
|
|
—
|
|
|
18
|
|
|
(1
|
)
|
Accounts payable and accrued expenses
|
|
59
|
|
|
45
|
|
|
(8
|
)
|
Deferred revenue
|
|
7
|
|
|
(2
|
)
|
|
(5
|
)
|
Changes in noncurrent assets and liabilities, net
|
|
5
|
|
|
2
|
|
|
(1
|
)
|
Net cash provided by operating activities
|
|
243
|
|
|
286
|
|
|
254
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
Purchase of property, plant and equipment
|
|
(277
|
)
|
|
(359
|
)
|
|
(376
|
)
|
Acquisition of businesses, net of cash acquired
|
|
(16
|
)
|
|
(9
|
)
|
|
(72
|
)
|
Proceeds from asset sales
|
|
4
|
|
|
109
|
|
|
—
|
|
Property insurance proceeds
|
|
8
|
|
|
3
|
|
|
1
|
|
Other, net
|
|
(8
|
)
|
|
2
|
|
|
(1
|
)
|
Net cash used in investing activities
|
|
(289
|
)
|
|
(254
|
)
|
|
(448
|
)
|
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW – (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(In millions)
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
Proceeds from borrowings on long-term debt
|
|
400
|
|
|
—
|
|
|
294
|
|
Proceeds from borrowings on revolving credit facility
|
|
952
|
|
|
744
|
|
|
895
|
|
Payments of equipment financing capital lease
|
|
(5
|
)
|
|
(4
|
)
|
|
(4
|
)
|
Proceeds from borrowings on project debt
|
|
—
|
|
|
—
|
|
|
59
|
|
Proceeds from borrowings on Dublin project financing
|
|
643
|
|
|
159
|
|
|
86
|
|
Payment related to Dublin interest rate swap
|
|
(17
|
)
|
|
—
|
|
|
—
|
|
Payments on the Dublin Convertible Preferred
|
|
(132
|
)
|
|
—
|
|
|
—
|
|
Principal payments on long-term debt
|
|
(415
|
)
|
|
(4
|
)
|
|
(196
|
)
|
Payments of borrowings on revolving credit facility
|
|
(850
|
)
|
|
(749
|
)
|
|
(692
|
)
|
Proceeds from equipment financing capital lease
|
|
—
|
|
|
—
|
|
|
15
|
|
Principal payments on project debt
|
|
(382
|
)
|
|
(51
|
)
|
|
(85
|
)
|
Payments of deferred financing costs
|
|
(21
|
)
|
|
(6
|
)
|
|
(11
|
)
|
Payment of Dublin financing costs
|
|
(19
|
)
|
|
—
|
|
|
—
|
|
Cash dividends paid to stockholders
|
|
(131
|
)
|
|
(131
|
)
|
|
(133
|
)
|
Common stock repurchased
|
|
—
|
|
|
(20
|
)
|
|
(30
|
)
|
Financing of insurance premiums, net
|
|
20
|
|
|
—
|
|
|
—
|
|
Change in restricted funds held in trust
|
|
(37
|
)
|
|
28
|
|
|
5
|
|
Other, net
|
|
(3
|
)
|
|
(10
|
)
|
|
—
|
|
Net cash provided by (used in) financing activities
|
|
3
|
|
|
(44
|
)
|
|
203
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
5
|
|
|
—
|
|
|
(4
|
)
|
Net (decrease) increase in cash and cash equivalents
|
|
(38
|
)
|
|
(12
|
)
|
|
5
|
|
Cash and cash equivalents at beginning of period
|
|
84
|
|
|
96
|
|
|
91
|
|
Cash and cash equivalents at end of period
|
|
46
|
|
|
84
|
|
|
96
|
|
Less: Cash and cash equivalents of assets held for sale at end of period
|
|
—
|
|
|
—
|
|
|
2
|
|
Cash and cash equivalents of continuing operations at end of period
|
|
$
|
46
|
|
|
$
|
84
|
|
|
$
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Paid for Interest and Income Taxes:
|
|
|
|
|
|
|
Interest
|
|
$
|
149
|
|
|
$
|
150
|
|
|
$
|
141
|
|
Income taxes, net of refunds
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
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, 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
|
|
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) income, net of income taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(28
|
)
|
|
(4
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(32
|
)
|
Balance as of December 31, 2016
|
|
136
|
|
|
$
|
14
|
|
|
$
|
807
|
|
|
$
|
(62
|
)
|
|
$
|
(289
|
)
|
|
6
|
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
469
|
|
Cumulative effect change in accounting for share based payments (Note 1)
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
10
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11
|
|
Stock-based compensation expense
|
|
—
|
|
|
—
|
|
|
18
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
18
|
|
Dividend declared
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(132
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(132
|
)
|
Shares issued in non-vested stock award
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Shares repurchased for tax withholdings for vested stock awards
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
Other
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Comprehensive loss, net of income taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7
|
|
|
57
|
|
|
|
|
|
—
|
|
|
—
|
|
|
64
|
|
Balance as of December 31, 2017
|
|
136
|
|
|
$
|
14
|
|
|
$
|
822
|
|
|
$
|
(55
|
)
|
|
$
|
(353
|
)
|
|
5
|
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
427
|
|
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
43
energy-from-waste facilities, which are primarily located in North America, and
five
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.
Outside of North America, we currently operate an energy-from-waste facility in Dublin, Ireland. We hold interests in energy-from-waste facilities in Ireland and Italy. For additional information on our reportable segment, see
Note 6.
Financial Information by Business Segments
.
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 our cost method investment in China, see
Note 4.
Dispositions and Assets Held for Sale
and
Note 18.
Subsequent Events.
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 public sector 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 public sector client reimbursements in our consolidated financial statements.
Pass through costs were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Pass through costs
|
$
|
59
|
|
|
$
|
41
|
|
|
$
|
52
|
|
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. The Tax Cuts and Jobs Act, which was enacted in December 2017, had a substantial impact on our income tax benefit for the year ended December 31, 2017. For additional information, see
Note 14.
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 15.
Stock-Based Award Plans
and
Note 1.
Organization and Summary of Significant Accounting Policies
- Accounting Pronouncements Recently Adopted.
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,
|
|
|
2017
|
|
2016
|
|
|
Current
|
|
Noncurrent
|
|
Current
|
|
Noncurrent
|
Debt service funds - principal
|
|
$
|
10
|
|
|
$
|
8
|
|
|
$
|
10
|
|
|
$
|
7
|
|
Debt service funds - interest
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
Total debt service funds
|
|
10
|
|
|
8
|
|
|
11
|
|
|
7
|
|
Revenue funds
|
|
4
|
|
|
—
|
|
|
3
|
|
|
—
|
|
Other funds
|
|
29
|
|
|
20
|
|
|
42
|
|
|
47
|
|
Total
|
|
$
|
43
|
|
|
$
|
28
|
|
|
$
|
56
|
|
|
$
|
54
|
|
Deferred Revenue
As of December 31, 2017 and 2016 deferred revenue included in "Accrued expenses and other current liabilities" on our consolidated balance sheet totaled
$14 million
and
$16 million
, respectively.
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 and 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,
|
|
|
2017
|
|
2016
|
Land
|
|
$
|
25
|
|
|
$
|
29
|
|
Facilities and equipment
|
|
4,312
|
|
|
4,188
|
|
Landfills (primarily for ash disposal)
|
|
67
|
|
|
63
|
|
Construction in progress
|
|
54
|
|
|
433
|
|
Total
|
|
4,458
|
|
|
4,713
|
|
Less: accumulated depreciation and amortization
|
|
(1,852
|
)
|
|
(1,689
|
)
|
Property, plant, and equipment — net
|
|
$
|
2,606
|
|
|
$
|
3,024
|
|
Depreciation and amortization expense related to property, plant and equipment was
$197 million
,
$185 million
, and
$177 million
, for the years ended
December 31, 2017, 2016 and 2015
, respectively. Non-cash investing activities related to capital expenditures totaled
$18 million
and
$41 million
as of
December 31, 2017 and 2016
, 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 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 13.
Supplementary Information
- Impairment Charges
.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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,
|
|
|
2017
|
|
2016
|
Beginning of period asset retirement obligation
|
|
$
|
25
|
|
|
$
|
30
|
|
Accretion expense
|
|
2
|
|
|
2
|
|
Net change
(1)
|
|
(1
|
)
|
|
(7
|
)
|
End of period asset retirement obligation
|
|
26
|
|
|
25
|
|
Less: current portion
|
|
(2
|
)
|
|
—
|
|
Noncurrent asset retirement obligation
|
|
$
|
24
|
|
|
$
|
25
|
|
|
|
(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, 2017
, 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 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, 2017, 2016 and 2015
.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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")
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 at 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 at December 31, 2016
|
$
|
(41
|
)
|
|
$
|
2
|
|
|
$
|
(23
|
)
|
|
$
|
(62
|
)
|
Net current period comprehensive income
(loss)
|
17
|
|
|
—
|
|
|
(10
|
)
|
|
7
|
|
Balance at December 31, 2017
|
$
|
(24
|
)
|
|
$
|
2
|
|
|
$
|
(33
|
)
|
|
$
|
(55
|
)
|
Amounts reclassified from accumulated other comprehensive (loss) income for the year ended December 31, 2016 consisted of foreign currency translation of
$5 million
, net of tax benefit of
zero
, which was reclassified to "Gain on asset sales" in the consolidated statement of operations. For additional information,
Note 4.
Dispositions and Assets Held for Sale
- China Investments.
Derivative Instruments
We recognize derivative instruments on the balance sheet at their fair value. 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 12.
Derivative Instruments
. The portion of Net Unrealized Loss on Derivatives balance in AOCI at December 31, 2017 related to interest rate swaps will be recognized within the anticipated net gain on sale of assets in our first quarter 2018 consolidated statement of operations, resulting from the joint venture transaction with GIG. For additional information see
Note 4. Dispositions and Assets Held for Sale
and
Note 18. Subsequent Events.
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.
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
$18 million
,
$17 million
and
$16 million
for the years ended
December 31, 2017, 2016 and 2015
, respectively.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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
As more fully described in
Note 4. Dispositions and Assets Held for Sale
, during the quarter ended December 31, 2017, we determined that the assets and liabilities associated with our Dublin EfW facility met the criteria for classification as assets held for sale. The assets and liabilities associated with these assets are presented in our consolidated balance sheets as current "Assets held for sale” and current "Liabilities held for sale” as of December 31, 2017.
Certain other amounts have been reclassified in our prior period consolidated statement of operations and consolidated balance sheet to conform to current year presentation and such amounts were not material to current and prior periods.
Accounting Pronouncements Recently Adopted
In March 2016, the Financial Accounting Standards Board ("FASB") issued accounting standards update ("ASU") 2016-09 Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting to simplify the accounting for employee share-based payments, including income tax impacts, classification on the statement of cash flows, and forfeitures. We adopted this guidance effective January 1, 2017. The new guidance requires excess tax benefits to be recognized in the statement of operations rather than in additional paid-in capital on the balance sheet. As a result of applying this change prospectively, we recognized
$1 million
of tax expense in our provision for income taxes during the
year ended
December 31, 2017
. In addition, adoption of the new guidance resulted in a
$11 million
decrease to Accumulated deficit as of January 1, 2017 to recognize the cumulative effect of deferred income taxes for U.S. Federal net operating loss and other carryforwards attributable to excess tax benefits. Excess tax benefits were not recognized for financial reporting purposes in the prior periods. We prospectively applied the guidance which requires presentation of excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. Cash paid on employees’ behalf related to shares withheld for tax purposes was retrospectively applied and required reclassifying
$4 million
and
$5 million
from "Net cash provided by operating activities" to "Net cash provided by financing activities" on our consolidated statement of cash flows as of
December 31, 2016
and 2015, respectively. We have elected to account for forfeitures as they occur, rather than to estimate them; adoption of this accounting policy election resulted in a
$1 million
increase to Accumulated deficit as of January 1, 2017 to recognize the cumulative-effect of removing the forfeiture estimate.
In the fourth quarter of 2017, we made a correction to the cumulative effect adjustment as of January 1, 2017, which is referred to in the paragraph above, of
$2 million
to account for certain amendments relating to prior years’ net operating losses attributable to excess tax benefits. We do not believe that this adjustment is material to our financial statements and had no impact for any periods prior to the year ended December 31, 2017.
In January 2017, the FASB issued ASU 2017-01—Business Combinations (Topic 805): Clarifying the Definition of a Business, which updated guidance regarding business combinations, specifically on clarifying the definition of a business and provided a screen to determine whether or not an integrated set of assets and activities constitutes a business. We are required to adopt the updates in this standard in the first quarter of 2018. The standard must be applied prospectively on or after the effective date, and no disclosures for a change in accounting principle are required at transition. Early adoption is permitted for transactions (i.e., acquisitions or dispositions) that occurred before the issuance date or effective date of the standard if the transactions were not reported in financial statements that have been issued or made available for issuance. We early adopted this guidance as of January 1, 2017. The adoption of this guidance did not have a material impact on our consolidated financial statements.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
The following table summarizes recent Accounting Standards Updates ("ASU's") issued by the Financial Accounting Standards Board ("FASB") that could have an impact on our consolidated financial statements.
|
|
|
|
|
Standard
|
Description
|
Effective Date
|
Effect on the financial statements or other significant matters
|
ASU 2017-12
Derivatives and Hedging
(Topic 815)
|
The amendments expand an entity’s ability to apply hedge accounting for nonfinancial and financial risk components and allow for a simplified approach for fair value hedging of interest rate risk. The guidance eliminates the need to separately measure and report hedge ineffectiveness and generally requires the entire change in fair value of a hedging instrument to be presented in the same income statement line as the hedged item. Additionally, ASU 2017-12 simplifies the hedge documentation and effectiveness assessment requirements under the previous guidance. For cash flow and net investment hedges existing at the date of adoption, a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings is required as of the beginning of the year of adoption. The amended presentation and disclosure guidance is required only prospectively.
|
First quarter of 2019, early adoption is permitted.
|
We are currently evaluating the impact this guidance will have on our consolidated financial statements and related disclosures.
|
ASU 2017-10
Service Concession Arrangements
(Topic 853): Determining the Customer of the Operation Services (a consensus of the FASB Emerging Issues Task Force)
|
The guidance provides clarity on determining the customer in a service concession arrangement.
|
First quarter of 2018, early adoption is permitted.
|
This guidance is not expected to have a material impact on our consolidated financial statements.
|
ASU 2017-09
Compensation—Stock Compensation
(Topic 718): Scope of Modification Accounting
|
Provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The amendments in this update should be applied prospectively to an award modified on or after the adoption date.
|
First quarter of 2018, early adoption is permitted.
|
This guidance is not expected to have a material impact on our consolidated financial statements.
|
ASU 2017-05,
Other Income: Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
|
The ASU provides guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. Specifically, the ASU clarifies the scope of an “in substance nonfinancial asset”, clarifies the treatment of partial sales of nonfinancial assets and clarifies guidance on accounting for contributions of nonfinancial assets to joint ventures and equity method investees. The ASU may be applied by either a full or modified retrospective approach.
|
First quarter of 2018, early adoption is permitted.
|
This guidance is not expected to have a material impact on our consolidated financial statements.
|
ASU 2017-04
Intangibles—Goodwill and Other
(Topic 350): Simplifying the Test for Goodwill Impairment
|
The standard updated guidance to eliminate the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge (referred to as 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.
|
First quarter of 2020, early adoption is permitted.
|
The impact of this guidance for the Company will depend on the outcomes of future goodwill impairment tests.
|
ASU 2017-03
Accounting Changes and Error Corrections (Topic 250) and Investments-Equity Method and Joint Ventures (Topic 323)
|
The portion of this ASU related to Topic 250 states that when a registrant does not know or cannot reasonably estimate the impact that future adoption of certain new accounting standards are expected to have on the financial statements, then in addition to making a statement to that effect, that registrant should consider additional qualitative financial statement disclosures addressing the significance of the impact the standard will have on the financial statements when adopted.
|
Effective upon issuance
|
We have included such disclosures for ASU 2014-09 and ASU 2018-01 but not for ASU 2016-02 since we have not yet performed sufficient analysis on future effects upon implementation of the new standards. We have concluded that the portion of this ASU related to Topic 323 is not applicable and, therefore, does not have a material impact on our consolidated financial statements.
|
ASU 2016-18
Statement of Cash Flows
(Topic 230): Restricted Cash
|
The standard requires 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 standard requires a retrospective adoption method.
|
First quarter of 2018, early adoption is permitted.
|
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 activities" and "Net cash provided by financing activities" on our consolidated statement of cash flows.
|
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
|
|
|
|
Standard
|
Description
|
Effective Date
|
Effect on the financial statements or other significant matters
|
ASU 2016-16
Income Taxes
(Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
|
The standard requires 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. The standard requires a modified retrospective basis adoption through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption.
|
First quarter of 2018, early adoption is permitted.
|
This guidance is not expected to have a material impact on our consolidated financial statements.
|
ASU 2016-15
Statement of Cash Flows
(Topic 230): Classification of Certain Cash Receipts and Cash Payments
|
The standard 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 standard requires a retrospective basis, unless it is impracticable to apply, in which case it should be applied prospectively as of the earliest date practicable.
|
First quarter of 2018, early adoption is permitted.
|
This guidance is not expected to have a material impact on our consolidated financial statements.
|
ASU 2016-13
Financial Instruments-Credit Losses
(Topic 326): Measurement of Credit Losses on Financial Instruments
|
The standard amends guidance on the impairment of financial instruments. The ASU estimates credit losses based on expected losses and provides for a simplified accounting model for purchased financial assets with credit deterioration. The standard requires a modified retrospective basis adoption through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption.
|
First quarter of 2020, early adoption is permitted.
|
We are currently evaluating the impact this guidance will have on our consolidated financial statements.
|
ASU 2016-02
Leases
(Topic 842) as amended by ASU 2018-01
|
These standards 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 standard requires a modified retrospective basis adoption.
The amendment permits an entity to elect an optional transition practical expedient to not evaluate land easements that exist or expired before the entity’s adoption of Topic 842 and that were not previously accounted for as leases under Topic 840.
|
First quarter of 2019, early adoption is permitted.
|
We are currently evaluating the guidance and its impact on our consolidated financial statements, but expect that it will result in a significant increase to our long-term assets and liabilities. We are also analyzing the impact of the new standard on our current accounting policies and internal controls.
|
ASU 2016-01
Financial Instruments—Overall
(Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
|
The standard requires 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. The standard requires a cumulative-effect adjustment to the balance sheet as of the beginning of the year of adoption. The amendments related to equity securities without readily determinable fair values should be applied prospectively.
|
First quarter of 2018, early adoption is prohibited.
|
This guidance is not expected to have a material impact on our consolidated financial statements.
|
ASU 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. The standard can be adopted using either a full retrospective or modified retrospective approach as of the date of adoption.
|
First quarter of 2018, early adoption is permitted.
|
We will adopt the standard using a modified retrospective approach, on January 1, 2018, which will result in an immaterial cumulative effect adjustment to the opening balance of retained earnings. Our implementation approach included 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. Adoption of the standard will not have a material effect on our consolidated financial statements.
|
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.
Environmental Services Acquisitions
During 2017, we acquired
three
environmental services businesses (one of which was accounted for as an asset purchase), in separate transactions, for approximately
$17 million
. 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
.
These acquisitions expanded 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.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Dublin EfW Facility
During 2017, we completed construction of the Dublin EfW facility, a
600,000
metric ton-per-year,
58
megawatt facility in Dublin, Ireland. Operational commencement began in October 2017. For additional information see
Green Investment Group Limited (“GIG”) Joint Venture
discussion below.
Green Investment Group Limited (“GIG”) Joint Venture
In December 2017, we entered into a strategic partnership with Green Investment Group Limited (“GIG”), a subsidiary of Macquarie Group Limited, to develop, fund and own EfW projects in the U.K. and Ireland. This partnership is structured as a 50/50 joint venture (“JV”) between Covanta and GIG and creates a platform to develop waste infrastructure projects and pursue new opportunities for EfW project development or acquisitions. As an initial step, GIG invested in our Dublin EfW facility, which began commercial operations in October 2017, acquiring
50%
ownership through the JV for €
136 million
, while we retained a
50%
equity interest in the project and retained our role as operations and maintenance ("O&M") service provider. GIG's investment in the Dublin EfW project closed on February 12, 2018, and we used proceeds from the transaction to repay borrowings under our Revolving Credit Facility. As development projects in the the JV's pipeline reach financial close and move into the construction phase, the JV will acquire the available ownership in each project, with a premium payable to the partner that originally developed and contributed the project to the JV. We will serve as the preferred O&M service provider for all JV projects on market competitive terms. For additional information see
Note 4. Dispositions and Assets Held
for Sale and
Note 18.
Subsequent Events.
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, 2017, 2016 and 2015
, we invested
$0
,
$3 million
and
$31 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.
NOTE 4. DISPOSITIONS AND ASSETS HELD FOR SALE
Dublin EfW Project
In December 2017, as part of the joint venture transaction with GIG, we announced a plan to sell a
50%
indirect interest in our Dublin project in exchange for
€136 million
. For additional information see
Note 3. Business Development and Asset Management - Green Investment Group Limited (“GIG”) Joint Venture
and
Note 18.
Subsequent Events - GIG Joint Venture.
Accordingly, during the fourth quarter of 2017, we determined that the assets and liabilities associated with our Dublin EfW facility met the criteria for classification as assets held for sale, but did not meet the criteria for classification as discontinued operations. The assets and liabilities associated with our Dublin facility are presented in our consolidated balance sheets as current "Assets held for sale” and current "Liabilities held for sale.”
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table sets forth the assets and liabilities of the "Assets held for sale" included in our consolidated balance sheets as of December 31, 2017 (in millions):
|
|
|
|
|
Restricted funds held in trust
|
$
|
77
|
|
Receivables
|
10
|
|
Property, plant and equipment, net
|
563
|
|
Other assets
|
3
|
|
Assets held for sale
|
$
|
653
|
|
Accounts payable
|
1
|
|
Accrued expenses and other liabilities
|
22
|
|
Project debt
(1)
|
510
|
|
Deferred income tax
|
7
|
|
Liabilities held for sale
|
$
|
540
|
|
|
|
(1)
|
See
Note 10.
Consolidated Debt - Dublin Project Refinancing
for further information.
|
China Investments
Prior to 2016, 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 ownership interests in China for a
15%
ownership interest in Chongqing Sanfeng Covanta Environmental Industrial Group, Co., Ltd ("Sanfeng Environment") and subsequently sold approximately
90%
of the aforementioned ownership interest in Sanfeng Environment to a third-party, a subsidiary of CITIC Limited ("CITIC"), a leading Chinese industrial conglomerate and investment company, pursuant to agreements entered into in July 2015. 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.
In 2016, 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 12. Derivative Instruments
.
Subsequent to completing the exchange, Sanfeng Environment made certain claims for indemnification under the agreement related to the condition of the facility in Taixing. During the year ended
December 31, 2017
, we recorded a
$6 million
charge related to these claims, which is included in "Loss on asset sales" on our consolidated statement of operations.
In September 2017, we entered into an agreement with CITIC to sell our remaining investment in Sanfeng Environment and on on February 9, 2018, the transaction was completed, for further information see
Note 18.
Subsequent Events - Sanfeng Environment sale to CITIC.
As such, our cost-method investment of
$6 million
is included as a component of "Prepaid expenses and other current assets" in our consolidated balance sheet as of
December 31, 2017
. There were no impairment indicators related to our cost-method investment during the
year
ended
December 31, 2017
.
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 15.
Stock-Based Award Plans
.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
During the years ended
December 31, 2017, 2016 and 2015
common shares repurchased and dividends declared were as follows (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Total repurchases
|
$
|
—
|
|
|
$
|
18
|
|
|
$
|
32
|
|
Shares repurchased
|
—
|
|
|
1.2
|
|
|
2.1
|
|
Weighted average cost per share
|
$
|
—
|
|
|
$
|
15.29
|
|
|
$
|
15.33
|
|
|
|
|
|
|
|
Dividends declared
|
$
|
132
|
|
|
$
|
132
|
|
|
$
|
133
|
|
Per share
|
$
|
1.00
|
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
As of
December 31, 2017
, there were
136 million
shares of common stock issued of which
131 million
shares were outstanding; the remaining
5 million
shares of common stock issued but not outstanding were held as treasury stock. As of
December 31, 2017
, there were
4 million
shares of common stock available for future issuance under equity plans.
As of
December 31, 2017
, 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 is 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):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Basic weighted average common shares outstanding
|
130
|
|
|
129
|
|
|
132
|
|
Dilutive effect of restricted stock and restricted stock units
(1)
|
1
|
|
|
—
|
|
|
1
|
|
Diluted weighted average common shares outstanding
|
131
|
|
|
129
|
|
|
133
|
|
(1)
Excludes the following securities because their inclusion would have been anti-dilutive (in millions):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Stock options
|
—
|
|
|
1
|
|
|
1
|
|
Restricted stock
|
—
|
|
|
1
|
|
|
1
|
|
Restricted stock units
|
—
|
|
|
1
|
|
|
—
|
|
|
|
|
|
|
|
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, 2017
|
|
|
|
|
|
Operating revenue
|
$
|
1,721
|
|
|
$
|
31
|
|
|
$
|
1,752
|
|
Depreciation and amortization expense
|
$
|
209
|
|
|
$
|
6
|
|
|
$
|
215
|
|
Impairment charges
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
2
|
|
Operating income
|
$
|
95
|
|
|
$
|
6
|
|
|
$
|
101
|
|
Equity in net income from unconsolidated investments
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
|
|
|
|
Total assets
|
$
|
3,753
|
|
|
$
|
688
|
|
|
$
|
4,441
|
|
Capital additions
|
$
|
155
|
|
|
$
|
122
|
|
|
$
|
277
|
|
|
|
|
|
|
|
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
|
|
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
|
|
Equity in net income from unconsolidated investments
|
$
|
—
|
|
|
$
|
13
|
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
(1)
|
All other includes the financial results of 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, 2017
|
$
|
1,705
|
|
|
$
|
47
|
|
|
$
|
1,752
|
|
Year Ended December 31, 2016
|
$
|
1,677
|
|
|
$
|
22
|
|
|
$
|
1,699
|
|
Year Ended December 31, 2015
|
$
|
1,589
|
|
|
$
|
56
|
|
|
$
|
1,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
Assets Held
for Sale
|
|
Other
|
|
Total
|
Total Assets:
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
$
|
3,727
|
|
|
$
|
653
|
|
|
$
|
61
|
|
|
$
|
4,441
|
|
Year Ended December 31, 2016
|
$
|
3,763
|
|
|
$
|
—
|
|
|
$
|
521
|
|
|
$
|
4,284
|
|
Year Ended December 31, 2015
|
$
|
3,847
|
|
|
$
|
97
|
|
|
$
|
290
|
|
|
$
|
4,234
|
|
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 and service contract liabilities, net are included as a component of "Other liabilities" on our consolidated balance sheet. Waste, service and energy contracts consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
As of December 31, 2016
|
|
|
Remaining Weighted Average Useful
Life
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
Waste, service and energy contracts (asset)
|
|
21 years
|
|
$
|
494
|
|
|
$
|
243
|
|
|
$
|
251
|
|
|
$
|
526
|
|
|
$
|
263
|
|
|
$
|
263
|
|
Waste and service contracts (liability)
|
|
3 years
|
|
$
|
(66
|
)
|
|
$
|
(62
|
)
|
|
$
|
(4
|
)
|
|
$
|
(131
|
)
|
|
$
|
(124
|
)
|
|
$
|
(7
|
)
|
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, 2017
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, 2015
|
$
|
25
|
|
|
$
|
(6
|
)
|
Year Ended December 31, 2016
|
$
|
21
|
|
|
$
|
(6
|
)
|
Year Ended December 31, 2017
|
$
|
14
|
|
|
$
|
(2
|
)
|
2018
|
$
|
13
|
|
|
$
|
(2
|
)
|
2019
|
13
|
|
|
(2
|
)
|
2020
|
13
|
|
|
—
|
|
2021
|
13
|
|
|
—
|
|
2022
|
13
|
|
|
—
|
|
Thereafter
|
186
|
|
|
—
|
|
Total
|
$
|
251
|
|
|
$
|
(4
|
)
|
The weighted average number of years prior to the next renewal period for contracts that we have an intangible recorded is
5
years.
NOTE 8. OTHER INTANGIBLE ASSETS AND GOODWILL
Other Intangible Assets
Other intangible assets consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
As of December 31, 2016
|
|
|
Remaining Weighted Average Useful
Life
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
Customer relationships and other
|
|
7 years
|
|
$
|
50
|
|
|
$
|
18
|
|
|
$
|
32
|
|
|
$
|
43
|
|
|
$
|
13
|
|
|
$
|
30
|
|
Permits
|
|
Indefinite
|
|
4
|
|
|
—
|
|
|
4
|
|
|
4
|
|
|
—
|
|
|
4
|
|
Other intangible assets, net
|
|
|
|
$
|
54
|
|
|
$
|
18
|
|
|
$
|
36
|
|
|
$
|
47
|
|
|
$
|
13
|
|
|
$
|
34
|
|
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table details the amount of the estimated amortization expense associated with other intangible assets as of
December 31, 2017
expected to be included in our consolidated statements of operations for each of the years indicated (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
Thereafter
|
|
Total
|
Annual remaining amortization
|
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
5
|
|
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
7
|
|
|
$
|
32
|
|
Amortization expense related to other intangible assets was
$6 million
,
$6 million
and
$2 million
for the years ended
December 31, 2017, 2016 and 2015
, 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,
2017
and determined that the fair value of our reporting units was not less than their relative carrying values. As of
December 31, 2017
, goodwill of approximately
$50 million
was deductible for federal income tax purposes.
The following table details the changes in carrying value of goodwill (in millions):
|
|
|
|
|
|
Total
|
Balance at December 31, 2015
|
$
|
301
|
|
Goodwill related to acquisitions
|
1
|
|
Balance at December 31, 2016
|
302
|
|
Goodwill related to acquisitions
|
11
|
|
Balance at December 31, 2017
|
$
|
313
|
|
NOTE 9. 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
$22 million
,
$19 million
, and
$16 million
, for the years ended
December 31, 2017, 2016 and 2015
, 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, 2017
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
Thereafter
|
|
Total
|
Future minimum rental payments
|
|
$
|
9
|
|
|
$
|
9
|
|
|
$
|
8
|
|
|
$
|
7
|
|
|
$
|
7
|
|
|
$
|
31
|
|
|
$
|
71
|
|
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 10. CONSOLIDATED DEBT
Consolidated debt is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
LONG-TERM DEBT:
|
|
|
|
Revolving credit facility (3.58% - 3.83%)
|
$
|
445
|
|
|
$
|
343
|
|
Term loan, net (3.12%)
|
191
|
|
|
195
|
|
Credit Facilities Sub-total
|
$
|
636
|
|
|
$
|
538
|
|
7.25% Senior notes due 2020
|
$
|
—
|
|
|
$
|
400
|
|
6.375% Senior notes due 2022
|
400
|
|
|
400
|
|
5.875% Senior notes due 2024
|
400
|
|
|
400
|
|
5.875% Senior notes due 2025
|
400
|
|
|
—
|
|
Less: deferred financing costs related to senior notes
|
(15
|
)
|
|
(14
|
)
|
Senior Notes Sub-total
|
$
|
1,185
|
|
|
$
|
1,186
|
|
4.00% - 5.25% Tax-exempt bonds due 2024 through 2045
|
$
|
464
|
|
|
$
|
464
|
|
Less: deferred financing costs related to tax-exempt bonds
|
(5
|
)
|
|
(5
|
)
|
Tax-Exempt Bonds Sub-total
|
$
|
459
|
|
|
$
|
459
|
|
3.48% - 6.61% Equipment financing capital leases due 2024 through 2028
|
69
|
|
|
69
|
|
Total long-term debt
|
$
|
2,349
|
|
|
$
|
2,252
|
|
Less: current portion
|
(10
|
)
|
|
(9
|
)
|
Noncurrent long-term debt
|
$
|
2,339
|
|
|
$
|
2,243
|
|
PROJECT DEBT:
|
|
|
|
North America project debt:
|
|
|
|
4.00% - 5.00% project debt related to service fee structures due 2018 through 2035
|
$
|
68
|
|
|
$
|
78
|
|
5.00% Union capital lease due 2018 through 2053
|
94
|
|
|
99
|
|
5.25% - 6.20% project debt related to tip fee structures due 2018 through 2020
|
9
|
|
|
16
|
|
Unamortized debt premium, net
|
4
|
|
|
4
|
|
Less: deferred financing costs related to North America project debt
|
(1
|
)
|
|
(1
|
)
|
Total North America project debt
|
$
|
174
|
|
|
$
|
196
|
|
Other project debt:
|
|
|
|
Dublin senior loan due 2021 (5.72% - 6.41%) ⁽¹⁾
(a)
|
$
|
—
|
|
|
$
|
155
|
|
Less: debt discount related to Dublin senior loan
(a)
|
—
|
|
|
(6
|
)
|
Less: deferred financing cost related to Dublin senior loan
(a)
|
—
|
|
|
(18
|
)
|
Dublin senior loan, net
(a)
|
$
|
—
|
|
|
$
|
131
|
|
Dublin junior loan due 2022 (9.23% - 9.73%)
(a)
|
$
|
—
|
|
|
$
|
58
|
|
Less: debt discount related to Dublin junior loan
(a)
|
—
|
|
|
(1
|
)
|
Less: deferred financing costs related to Dublin junior loan
(a)
|
—
|
|
|
(1
|
)
|
Dublin junior loan, net
|
$
|
—
|
|
|
$
|
56
|
|
Total other project debt, net
|
$
|
—
|
|
|
$
|
187
|
|
Total project debt
|
$
|
174
|
|
|
$
|
383
|
|
Less: Current portion
|
(23
|
)
|
|
(22
|
)
|
Noncurrent project debt
|
$
|
151
|
|
|
$
|
361
|
|
TOTAL CONSOLIDATED DEBT
|
$
|
2,523
|
|
|
$
|
2,635
|
|
Less: Current debt
|
(33
|
)
|
|
(31
|
)
|
TOTAL NONCURRENT CONSOLIDATED DEBT
|
$
|
2,490
|
|
|
$
|
2,604
|
|
(1)
Reflects hedged fixed rates.
|
|
|
(a)
|
During the fourth quarter of 2017 the Dublin project debt was repaid as part of a refinancing. As of December 31, 2017 the refinanced debt was classified as "Liabilities held for sale" on our consolidated balance sheet. For further information see
Note 4. Dispositions and Assets Held for Sale, Note 10. Consolidated Debt- Dublin Project Refinancing
and
Note 18.
Subsequent Events.
|
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
$191 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 U.S. Dollars on a same day basis for a short drawing period); and is available in U.S. 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.
Unutilized Capacity under Revolving Credit Facility
As of
December 31, 2017
, we had unutilized capacity under the Revolving Credit Facility as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Facility Commitment
|
|
Expiring
(1)
|
|
Direct Borrowings
|
|
Outstanding Letters of Credit
|
|
Unutilized Capacity
|
Revolving Credit Facility
|
$
|
1,000
|
|
|
2020
|
|
$
|
445
|
|
|
$
|
192
|
|
|
$
|
363
|
|
(1) The Tranche B commitment of
$50 million
expires in March 2019.
During the year ended
December 31, 2017
, we made aggregate cumulative direct borrowings of
$952 million
under the Revolving Credit Facility, and repaid
$850 million
prior to the end of the year.
Repayment Terms
As of
December 31, 2017
, the Term Loan has mandatory principal payments of approximately
$5 million
in each year for 2018 and 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, 2017
.
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 (“Credit Agreement Adjusted EBITDA”). The definition of Credit Agreement 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 Credit Agreement 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
Redemption of
7.25%
Senior Notes due 2020 (
7.25%
Senior Notes)
In 2010 we sold
$400 million
aggregate principal amounts of
7.25%
Senior Notes due 2020. On April 3, 2017, we redeemed our
7.25%
Senior Notes due 2020 using the net proceeds from the issuance of the
5.875%
Senior Notes due 2025 and borrowings under our Revolving Credit Facility. During the year ended
December 31, 2017
, as a result of the redemption, we recorded a prepayment charge of
$9 million
and a write-off of the remaining deferred financing costs of
$4 million
recognized in our consolidated statements of operations as a "Loss on extinguishment of debt."
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 were 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, some or all of the
6.375%
Notes were redeemable at a price equal to
100%
of their principal amount, plus accrued and unpaid interest, plus a “make-whole premium”.
The
6.375%
Notes are senior unsecured obligations, ranking equally in right of payment with any of the future senior unsecured indebtedness of Covanta Holding Corporation. The
6.375%
Notes are effectively junior to our existing and future secured indebtedness, including any guarantee of indebtedness under the Credit Facilities. The
6.375%
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.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The indenture for the
6.375%
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
6.375%
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
6.375%
Notes. The occurrence of specific kinds of changes in control will be a triggering event requiring us to offer to purchase from the holders all or a portion of the
6.375%
Notes at a price equal to
101%
of their principal amount, plus accrued and unpaid interest. 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
6.375%
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.
5.875%
Senior Notes due 2024 (the "2024
5.875%
Notes")
In March 2014, we sold
$400 million
aggregate principal amount of
5.875%
Senior Notes due
March 2024
. Interest on the 2024
5.875%
Notes is payable semi-annually on March 1 and September 1 of each year, commencing on
September 1, 2014
, and the 2024
5.875%
Notes will mature on
March 1, 2024
unless earlier redeemed or repurchased. Net proceeds from the sale of the 2024 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 2024
5.875%
Notes offering in part for the repayment of cash convertible notes which matured on
June 1, 2014
.
The 2024
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 2024
5.875%
Notes with the proceeds of certain equity offerings at a redemption price of
105.875%
of the principal amount of the 2024
5.875%
Notes plus accrued and unpaid interest. At any time prior to March 1, 2019, we may also redeem the 2024
5.875%
Notes, in whole but not in part, at a price equal to
100%
of the principal amount of the 2024
5.875%
Notes, plus accrued and unpaid interest and a “make-whole premium.”
Other terms and conditions of the 2024
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 the
6.375%
Notes.
5.875%
Senior Notes due 2025 (the "2025
5.875%
Notes")
In March 2017, we sold
$400 million
aggregate principal amount of
5.875%
Senior Notes due July 2025. Interest on the 2025
5.875%
Notes is payable semi-annually on January 1 and July 1 of each year, commencing on July 1, 2017, and the 2025
5.875%
Notes will mature on July 1, 2025 unless earlier redeemed or repurchased. Net proceeds from the sale of the 2025
5.875%
Notes were approximately
$393 million
, consisting of gross proceeds of
$400 million
net of approximately
$7 million
in offering expenses. On April 3, 2017, we used a portion of the net proceeds of the 2025
5.875%
Notes offering to fund the redemption of the
7.25%
Senior Notes due 2020. For additional information see
Redemption of
7.25%
Senior Notes due 2020
above
.
The 2025
5.875%
Notes are subject to redemption at our option, at any time on or after July 1, 2020, 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 July 1, 2020, we may redeem up to
35%
of the original principal amount of the 2025
5.875%
Notes with the proceeds of certain equity offerings at a redemption price of
105.875%
of the principal amount of the 2025
5.875%
Notes plus accrued and unpaid interest. At any time prior to July 1, 2020, we may also redeem the 2025
5.875%
Notes, in whole but not in part, at a price equal to
100%
of the principal amount of the 2025
5.875%
Notes, plus accrued and unpaid interest and a “make-whole premium.”
Other terms and conditions of the 2025
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 the
6.375%
Notes.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
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.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Union County EfW Facility 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, 2017
, the outstanding borrowings under the capital lease have mandatory amortization payments remaining as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
Thereafter
|
Annual Remaining Amortization
|
|
$
|
5
|
|
|
$
|
5
|
|
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
66
|
|
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, 2017
, and have mandatory amortization payments remaining as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
Thereafter
|
Annual Remaining Amortization
|
|
$
|
5
|
|
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
40
|
|
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, 2017
are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
Thereafter
|
|
Total
|
|
Less:
Current
Portion
|
|
Total
Noncurrent
Project Debt
|
Debt
|
|
$
|
23
|
|
|
$
|
18
|
|
|
$
|
8
|
|
|
$
|
8
|
|
|
$
|
8
|
|
|
$
|
106
|
|
|
$
|
171
|
|
|
$
|
(23
|
)
|
|
$
|
148
|
|
Premium and deferred financing costs
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
3
|
|
|
—
|
|
|
3
|
|
Total
(1)
|
|
$
|
23
|
|
|
$
|
18
|
|
|
$
|
8
|
|
|
$
|
8
|
|
|
$
|
8
|
|
|
$
|
109
|
|
|
$
|
174
|
|
|
$
|
(23
|
)
|
|
$
|
151
|
|
(1) Amounts include the Union Capital lease discussed above
.
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.
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, 2017
, such revenue bonds were collateralized by property, plant and equipment with a net carrying value of
$616 million
and restricted funds held in trust of approximately
$25 million
.
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, 2017, 2016 and 2015
amortization of deferred financing costs included as a component of interest expense totaled
$7 million
,
$6 million
and
$8 million
, respectively.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Capitalized Interest
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. Total interest expense capitalized was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Capitalized interest
|
$
|
17
|
|
|
$
|
26
|
|
|
$
|
10
|
|
Dublin Project Refinancing
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 included: (i)
€300 million
of project debt under a credit facility agreement with various lenders which consisted of a
€250 million
senior secured term loan (the “Dublin Senior Term Loan due 2021”) and a
€50 million
second lien term loan (the “Dublin Junior Term Loan due 2022”), and (ii) a
€75 million
convertible preferred investment (the “Dublin Convertible Preferred”), which was committed by a leading global energy infrastructure investor.
On December 14, 2017, we executed agreements for project financing totaling
€446 million
(
$534 million
) to refinance the existing project debt and the Dublin Convertible Preferred. The new financing package included: (i)
€396 million
(
$474 million
) of senior secured project debt under a credit facility agreement between Dublin Waste to Energy Limited and various lenders (the “Dublin Senior Loan”) and (ii) a
€50 million
(
$60 million
) second lien term loan between Dublin Waste to Energy Group (Holdings) Limited and various lenders (the “Dublin Junior Loan”). The proceeds of the loans, along with other sources of funds, were utilized to repay (i) Dublin Senior Term Loan due 2021, (ii) the Dublin Junior Term Loan due 2022, (iii) the Dublin Convertible Preferred and (iv) transaction related fees and expenses.
During the year ended December 31, 2017, as a result of the Dublin project refinancing, we recorded the following charges to "Loss on extinguishment of debt" on our consolidated statement of operations: (i) a "make whole" payment on the Dublin Convertible Preferred of
$41 million
, (ii)
$19 million
of third party fees incurred in connection with the refinance and a write-off of part of the remaining deferred financing costs and (iii) unamortized debt discount and deferred financing costs of
$11 million
.
Unamortized debt discount and deferred financing costs of
$13 million
related to the remaining portion of the previous debt that was considered a debt modification will continue to be amortized over the term of the refinanced debt. Debt discount and fees incurred in connection with the refinance totaling
$11 million
were deferred and will be amortized over the life of the refinanced debt as a debt discount.
As of December 31, 2017 the Dublin project debt was classified as "Liabilities held for sale" on our consolidated balance sheet. For further information see
Note 4. Dispositions and Assets Held for Sale
and
Note 18.
Subsequent Events.
Debt included in "Liabilities held for sale" on our consolidated balance sheet of December 31, 2017 is as follows:
|
|
|
|
|
Project debt included in Liabilities held for sale:
|
|
Dublin Senior Loan due 2032 (2.77% - 3.57%) ⁽¹⁾
|
$
|
474
|
|
Less: debt discount related to Dublin Senior Loan
|
(10
|
)
|
Less: deferred financing costs related to Dublin Senior Loan
|
(13
|
)
|
Dublin Senior Loan, net
|
451
|
|
Dublin Junior Loan due 2032 (4.23%-5.36%)
|
$
|
60
|
|
Less: debt discount related to Dublin Junior Loan
|
—
|
|
Less: deferred financing costs related to Dublin Junior Loan
|
(1
|
)
|
Dublin Junior Loan, net
|
59
|
|
Total project debt included in Liabilities held for sale, net
|
$
|
510
|
|
(1)
Reflects hedged fixed rates.
|
|
Dublin Senior Loan due 2032
As of December 31, 2017, the
€396 million
(
$474 million
) Dublin Senior Loan was fully drawn and is included in "Liabilities held for sale" on our consolidated balance sheet. The Dublin Senior Loan is comprised of three tranches as follows: i) a
€94 million
(
$113 million
) fixed rate Tranche A, (ii) a
€167 million
(
$199 million
) fixed rate Tranche B and (iii) a
€135 million
(
$162 million
) floating rate Tranche C.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Key commercial terms of the Dublin Senior Term Loan include:
|
|
•
|
Final maturity on November 24, 2032 (approximately 15 years after the operational commencement date of the facility).
|
|
|
•
|
Scheduled repayments will be made semi-annually according to a 15-year amortization profile, beginning in 2018. The Dublin Senior Loan is pre-payable at our option, subject to potential prepayment costs under Tranche A and B.
|
|
|
•
|
Borrowings will bear interest as follows:
|
|
|
•
|
Tranche A: At a fixed rate equal to
3.00%
|
|
|
•
|
Tranche B: At a fixed rate equal to
2.77%
|
|
|
•
|
Tranche C: At the 6-month Euro Interbank Offered Rate ("EURIBOR") plus
2.15%
. We entered into interest rate swap agreements in order to hedge our exposure to adverse variable interest rate fluctuations under Tranche C.
|
|
|
•
|
The Dublin Senior 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.
|
|
|
•
|
The Dublin Senior Loan 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 Loan and to make cash distributions to common equity 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 Loan.
|
Dublin Junior Loan due 2032
As of December 31, 2017, the
€50 million
Dublin Junior Loan (
$60 million
) was fully drawn and is included in "Liabilities held for sale" on our consolidated balance sheet. The Dublin Junior Loan is comprised of two tranches: (i) a
€21 million
(
$25 million
) floating rate Tranche A and (ii) a
€29 million
(
$35 million
) fixed rate Tranche B.
Key commercial terms of the Dublin Junior Loan include:
|
|
•
|
Final maturity on December 24, 2032 (one month after the maturity of the Dublin Senior Loan).
|
|
|
•
|
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 subject to potential prepayment costs under Tranche B. The loan shall also be reduced by an incremental amount equal to
10%
of Excess Cashflow, as defined in the credit agreement, on each of the Repayment Dates occurring between October 31, 2026 through April 30, 2029 and
20%
of Excess Cashflow thereafter.
|
|
|
•
|
Tranche A borrowings will bear interest at the 6-month Euro Interbank Offered Rate ("EURIBOR") plus
4.50%
|
|
|
•
|
Tranche B borrowings will bear interest at a fixed rate equal to
5.358%
.
|
|
|
•
|
The Dublin Junior 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 Loan is non-recourse to us and our subsidiary Covanta Energy.
|
|
|
•
|
Under the Dublin Junior Loan credit agreement, our ability 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 on the Dublin Junior Loan.
|
NOTE 11. 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.
|
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
|
•
|
The fair value of our interest rate swaps are determined by applying the Euribor forward curve observable in the market to the contractual terms of our floating to fixed rate swap agreements. Prior to the Dublin Project Refinancing, the fair value for interest rate swaps was 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 is adjusted to reflect counterparty risk of non-performance, and is 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 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, 2017
. Such amounts have not been comprehensively revalued for purposes of these financial statements since
December 31, 2017
, and current estimates of fair value may differ significantly from the amounts presented herein.
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, 2017 and 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
Financial Instruments Recorded at Fair Value on a Recurring Basis:
|
|
Fair Value Measurement Level
|
|
2017
|
|
2016
|
|
|
|
|
(In millions)
|
Assets:
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
Bank deposits and certificates of deposit
|
|
1
|
|
$
|
37
|
|
|
$
|
79
|
|
Money market funds
|
|
1
|
|
9
|
|
|
5
|
|
Total cash and cash equivalents:
|
|
|
|
46
|
|
|
84
|
|
Restricted funds held in trust:
|
|
|
|
|
|
|
Bank deposits and certificates of deposit
|
|
1
|
|
6
|
|
|
12
|
|
Money market funds
|
|
1
|
|
25
|
|
|
36
|
|
U.S. Treasury/agency obligations
(1)
|
|
1
|
|
10
|
|
|
14
|
|
State and municipal obligations
|
|
1
|
|
11
|
|
|
46
|
|
Commercial paper/guaranteed investment contracts/repurchase agreements
|
|
1
|
|
19
|
|
|
2
|
|
Total restricted funds held in trust:
|
|
|
|
71
|
|
|
110
|
|
Restricted funds held in trust included in assets held for sale:
(2)
|
|
|
|
|
|
|
Bank deposits and certificates of deposit
|
|
1
|
|
77
|
|
|
—
|
|
Total restricted funds held in trust included in assets held for sale
|
|
|
|
77
|
|
|
—
|
|
Investments:
|
|
|
|
|
|
|
Mutual and bond funds
(3)
|
|
1
|
|
2
|
|
|
2
|
|
Derivative asset — energy hedges
(4)
|
|
2
|
|
—
|
|
|
3
|
|
Total assets:
|
|
|
|
$
|
196
|
|
|
$
|
199
|
|
Liabilities:
|
|
|
|
|
|
|
Derivative liability — energy hedges
(5) (6)
|
|
2
|
|
$
|
5
|
|
|
$
|
1
|
|
Derivative liability — interest rate swaps
(5) (6)
|
|
2
|
|
—
|
|
|
20
|
|
Derivative liability — interest rate swaps included in liabilities held for sale
(2)
|
|
2
|
|
7
|
|
|
—
|
|
Total liabilities:
|
|
|
|
$
|
12
|
|
|
$
|
21
|
|
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following financial instruments are recorded at their carrying amount (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
As of December 31, 2016
|
Financial Instruments Recorded at Carrying Amount:
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
Assets:
|
|
|
|
|
|
|
|
|
Accounts receivables
(7)
|
|
$
|
342
|
|
|
$
|
342
|
|
|
$
|
333
|
|
|
$
|
333
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
2,349
|
|
|
$
|
2,371
|
|
|
$
|
2,252
|
|
|
$
|
2,237
|
|
Project debt
|
|
$
|
174
|
|
|
$
|
179
|
|
|
$
|
383
|
|
|
$
|
387
|
|
Project debt included in liabilities held for sale
(2)
|
|
$
|
510
|
|
|
$
|
510
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
(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)
|
As of December 31, 2017, assets and liabilities related to our Dublin EfW facility met the criteria to be classified as held for sale on our consolidated balance sheet. For further information see
Note 4. Dispositions and Assets Held for Sale
and
Note 18.
Subsequent Events.
|
|
|
(3)
|
Included in other noncurrent assets in the consolidated balance sheets.
|
|
|
(4)
|
Included in prepaid expenses and other current assets in the consolidated balance sheets.
|
|
|
(5)
|
Included in accrued expenses and other current liabilities in the consolidated balance sheets.
|
|
|
(6)
|
Included in other noncurrent liabilities in the consolidated balance sheets.
|
|
|
(7)
|
Includes
$1 million
of noncurrent receivables in other noncurrent assets in the consolidated balance sheets as of
December 31, 2017 and 2016
.
|
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 13.
Supplementary Information
- Impairment Charges
for additional information.
NOTE 12. DERIVATIVE INSTRUMENTS
The following disclosures summarize the fair value of derivative instruments not designated as hedging instruments in the on the consolidated statements of operations (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of (Loss) Gain 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
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Foreign currency hedge
|
|
Other expense, net
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
$
|
6
|
|
Foreign Currency Hedge
During 2016, in order to hedge the risk of adverse foreign currency exchange rate fluctuations impacting the sale proceeds from our equity transfer agreement in China (See
Note 4.
Dispositions and Assets Held for Sale
), 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 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
.
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 was 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 and had a
zero
value on our consolidated balance sheet as of
December 31, 2017
.
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
|
2018
|
|
2.9
|
2019
|
|
0.6
|
Total
|
|
3.5
|
As of
December 31, 2017
, the net fair value of the energy derivatives of
$5 million
, pre-tax, was recorded as a
$4 million
current liability and a
$1 million
noncurrent liability and as a component of AOCI. As of
December 31, 2017
, the amount of hedge ineffectiveness was not material. The net fair value energy derivative balance of
$5 million
includes a natural gas hedge transaction of
1.0 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, 2016
, the 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. The change in fair value was recorded as a component of comprehensive income.
During the
twelve
months ended
December 31, 2017
, cash provided by and used in energy derivative settlements of
$17 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, 2016
, cash provided by and used in energy derivative settlements of
$32 million
and
zero
, 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 Loan, we have entered into floating to fixed rate swap agreements with various financial institutions to hedge the variable interest rate fluctuations associated with floating rate portion
€135 million
of the loan, expiring in
2032
. For further information see
Note 10.
Consolidated Debt
. 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, 2017
, the fair value of the interest rate swap derivative of
$7 million
, pre-tax, was recorded within "Liabilities held for sale" on our consolidated balance sheet. There was
$1 million
, pre-tax, of ineffectiveness recorded during the fourth quarter recognized in our consolidated statements of operations as interest expense resulting from the execution of certain off-market swaps. 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.
NOTE 13. SUPPLEMENTARY INFORMATION
Other Operating Expense, net
Insurance Recoveries
Fairfax County Energy-from-Waste Facility
In February 2017, our Fairfax County energy-from-waste facility experienced a fire in the front-end receiving portion of the facility. During the first quarter of 2017, we completed our evaluation of the impact of this event and recorded an immaterial asset impairment, which we have since recovered from insurance proceeds. The facility resumed operations in December 2017. We expect receipt of remaining insurance recoveries for both property loss and business interruption to in 2018.
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 of 2016. The facility resumed generating electricity early in the first quarter of 2017 after the generator and other damaged equipment were replaced.
The cost of repair or replacement of assets and business interruption losses for the above matters are insured under the terms of applicable insurance policies, subject to deductibles.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
We recorded insurance gains, as a reduction to "Other operating expense, net" in our consolidated statement of operations as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Insurance gains for property and clean-up costs, net of impairment charges
|
$
|
7
|
|
|
$
|
1
|
|
|
$
|
—
|
|
Insurance gains for business interruption costs, net of costs incurred
|
$
|
23
|
|
|
$
|
4
|
|
|
$
|
—
|
|
We recorded insurance recoveries, as a reduction to "Plant operating expense" in our consolidated statement of operations as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Insurance recoveries for business interruption and clean-up costs, net of costs incurred
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
Hennepin
County Legal Settlement
On September 25, 2017, we settled a dispute with Hennepin County, Minnesota regarding extension provisions in our service contract to operate the Hennepin Energy Recovery Center. We received
$8 million
in connection with the settlement and will continue to operate the facility through March 2018. During the year ended December 31, 2017, we recorded a gain on settlement of
$8 million
as a reduction of "Other operating expense, net" in our consolidated statement of operations.
Impairment Charges
Impairment charges are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
North America segment:
|
|
|
|
|
|
Impairment charges
|
$
|
2
|
|
|
$
|
20
|
|
|
$
|
43
|
|
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 we now continue to operate. Such amount was calculated based on the estimated liquidation value of the tangible equipment utilizing Level 3 inputs.
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.
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.
For more information regarding fair value measurements, see
Note 11.
Financial Instruments
.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Selected Supplementary Balance Sheet Information
Selected supplementary balance sheet information is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2017
|
|
2016
|
Prepaid expenses
|
$
|
22
|
|
|
$
|
28
|
|
Hedge receivables
|
—
|
|
|
3
|
|
Spare parts
|
22
|
|
|
21
|
|
Renewable energy credits
|
6
|
|
|
3
|
|
Other
|
23
|
|
|
17
|
|
Total prepaid expenses and other current assets
|
$
|
73
|
|
|
$
|
72
|
|
|
|
|
|
Operating expenses, payroll and related expenses
|
$
|
145
|
|
|
$
|
164
|
|
Deferred revenue
|
14
|
|
|
16
|
|
Accrued liabilities to client communities
|
17
|
|
|
19
|
|
Interest payable
|
37
|
|
|
30
|
|
Dividends payable
|
36
|
|
|
35
|
|
Other
|
64
|
|
|
25
|
|
Total accrued expenses and other current liabilities
|
$
|
313
|
|
|
$
|
289
|
|
NOTE 14. INCOME TAXES
The Tax Cuts and Jobs Act (the "Act") was enacted on December 22, 2017. The Act reduces the U.S. Federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. At December 31, 2017, we have not completed our accounting for the tax effects of enactment of the Act; however, in certain cases, as described below, we have made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax. For the transition tax for which we were able to determine a reasonable estimate, we recognized a provisional amount of
$21 million
, which is included as a component of income tax expense from continuing operations with a corresponding reduction of deferred tax asset related to the utilization of gross NOL of approximately
$59 million
. Accordingly no tax liability will be incurred. Also, we continue to evaluate the method and the impact of accounting for the global intangible low-taxed income (“GILTI”) in accordance with the Act.
Deferred tax assets and liabilities: We re-measured our U.S. deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally
21%
. However, we are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the re-measurement of our deferred tax balance was a tax benefit of
$204 million
.
Foreign tax effects: The one-time transition tax is based on our total post-1986 earnings and profits (E&P) that we previously deferred from U.S. income taxes. We recorded a provisional amount for our one-time transition tax liability, resulting in an increase in income tax expense of
$21 million
. We have not yet completed our calculation of the total post-1986 E&P for these foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when we finalize the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalize the amounts held in cash or other specified assets. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
4
|
|
|
$
|
(2
|
)
|
|
$
|
(91
|
)
|
State
|
|
2
|
|
|
6
|
|
|
16
|
|
Foreign
|
|
(1
|
)
|
|
(2
|
)
|
|
2
|
|
Total current
|
|
5
|
|
|
2
|
|
|
(73
|
)
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
(204
|
)
|
|
28
|
|
|
7
|
|
State
|
|
(2
|
)
|
|
(9
|
)
|
|
(11
|
)
|
Foreign
|
|
10
|
|
|
1
|
|
|
(7
|
)
|
Total deferred
|
|
(196
|
)
|
|
20
|
|
|
(11
|
)
|
Total income tax (benefit) expense
|
|
$
|
(191
|
)
|
|
$
|
22
|
|
|
$
|
(84
|
)
|
Domestic and foreign pre-tax income (loss) was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Domestic
|
|
$
|
(43
|
)
|
|
$
|
26
|
|
|
$
|
6
|
|
Foreign
|
|
(92
|
)
|
|
(12
|
)
|
|
(34
|
)
|
Total
|
|
$
|
(135
|
)
|
|
$
|
14
|
|
|
$
|
(28
|
)
|
The effective income tax rate was
142%
,
150%
, and
302%
for the years ended
December 31, 2017, 2016 and 2015
, respectively.
The decrease in the effective tax rate for the year ended December 31, 2017, compared to the year ended December 31, 2016 is primarily due to the combined effects of (i) the recognition of tax benefit from the re-measurement of the deferred taxes and the estimated transition tax due to the enactment of the Act and (ii) the change from pre-tax income in 2016 to pre-tax loss in 2017.
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.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Income tax expense (benefit) at the federal statutory rate
|
|
$
|
(47
|
)
|
|
$
|
5
|
|
|
$
|
(10
|
)
|
State and other tax expense
|
|
(2
|
)
|
|
1
|
|
|
1
|
|
Tax rate differential on foreign earnings
|
|
10
|
|
|
4
|
|
|
8
|
|
Permanent differences
|
|
4
|
|
|
4
|
|
|
4
|
|
Income from Grantor Trust
|
|
(8
|
)
|
|
—
|
|
|
—
|
|
Production tax credits/R&E tax credits
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
State ITC credit
|
|
1
|
|
|
(4
|
)
|
|
—
|
|
Change in valuation allowance
|
|
31
|
|
|
2
|
|
|
(7
|
)
|
Liability for uncertain tax positions
|
|
—
|
|
|
16
|
|
|
(82
|
)
|
Adjustment to deferred tax
|
|
(1
|
)
|
|
(5
|
)
|
|
4
|
|
Impact of deferred tax re-measurement for federal tax rate change
|
|
(204
|
)
|
|
—
|
|
|
—
|
|
Tax reform transition tax
|
|
21
|
|
|
—
|
|
|
—
|
|
Expiration of non-qualified stock options
|
|
3
|
|
|
—
|
|
|
—
|
|
Other
|
|
1
|
|
|
(1
|
)
|
|
1
|
|
Total income tax expense (benefit)
|
|
$
|
(191
|
)
|
|
$
|
22
|
|
|
$
|
(84
|
)
|
We had consolidated federal NOLs estimated to be approximately
$240 million
for federal income tax purposes as of the end of
2017
. These consolidated federal NOLs will expire, if not used, in the following amounts in the following years (in millions):
|
|
|
|
|
|
|
|
Amount of
Carryforward
Expiring
|
2028
|
$
|
10
|
|
2030
|
29
|
|
2031
|
1
|
|
2032
|
1
|
|
2033
|
197
|
|
2035
|
1
|
|
2036
|
1
|
|
|
$
|
240
|
|
In addition to the consolidated federal NOLs, as of
December 31, 2017
, we had state NOL carryforwards of approximately
$389 million
, which expire between
2028
and
2037
, net foreign NOL carryforwards of approximately
$287 million
with some expiring between
2018
and
2037
. The federal tax credit carryforwards include production tax credits of
$47 million
expiring between
2024
and
2036
, and research and experimentation tax credits of
$1 million
expiring between
2027
and
2033
. Additionally, we had state income tax credits of
$3 million
. The corresponding deferred tax assets are offset by a valuation allowance of approximately
$77 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,
|
|
|
2017
|
|
2016
|
Deferred tax assets:
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
119
|
|
|
$
|
143
|
|
Accrued expenses
|
|
15
|
|
|
20
|
|
Prepaid and other costs
|
|
48
|
|
|
71
|
|
Deferred tax assets attributable to pass-through entities
|
|
10
|
|
|
17
|
|
Retirement benefits
|
|
2
|
|
|
3
|
|
Other
|
|
3
|
|
|
4
|
|
AMT and other credit carryforwards
|
|
48
|
|
|
55
|
|
Total gross deferred tax asset
|
|
245
|
|
|
313
|
|
Less: valuation allowance
|
|
(77
|
)
|
|
(71
|
)
|
Total deferred tax asset
|
|
168
|
|
|
242
|
|
Deferred tax liabilities:
|
|
|
|
|
Unbilled accounts receivable
|
|
3
|
|
|
3
|
|
Property, plant and equipment
|
|
538
|
|
|
780
|
|
Intangible assets
|
|
33
|
|
|
36
|
|
Deferred tax liabilities attributable to pass-through entities
|
|
8
|
|
|
22
|
|
Deferred gain on convertible debt
|
|
4
|
|
|
13
|
|
Swap income
|
|
—
|
|
|
—
|
|
Prepaid expenses
|
|
—
|
|
|
—
|
|
Other, net
|
|
1
|
|
|
5
|
|
Total gross deferred tax liability
|
|
587
|
|
|
859
|
|
Net deferred tax liability, including deferred tax liability held for sale
|
|
419
|
|
|
617
|
|
Less: Deferred tax liability held for sale
(1)
|
|
7
|
|
|
—
|
|
Net deferred tax liability
|
|
$
|
412
|
|
|
$
|
617
|
|
|
|
(1)
|
As of December 31, 2017, assets and liabilities related to our Dublin EfW facility met the criteria to be classified as held for sale on our consolidated balance sheet. For further information see
Note 4. Dispositions and Assets Held for Sale
and
Note 18.
Subsequent Events.
|
Cumulative undistributed foreign earnings for which United States taxes were not provided were included in consolidated retained earnings in the amount of approximately
zero
and
$257 million
as of
December 31, 2017 and 2016
, respectively. This is due to the one time transition tax on the cumulative undistributed foreign earnings as of December 31, 2017 that was included in the tax provision as the result of the Act. Such amounts were considered permanently invested, therefore no provision for U.S. income taxes was accrued in 2016.
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, the related tax benefits were not previously recognized for financial reporting purposes. The Company adopted ASU 2016-09 in 2017, as a result, the related tax benefits, if applicable, will now be recognized for financial statement purposes. The historical benefit of
$11 million
was recorded as a decrease to Accumulated deficit and an an increase to our deferred tax asset balance as of January 1, 2017 to recognize the cumulative effect of adoption of the new standard.
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, 2014
|
$
|
133
|
|
Additions based on tax positions related to the current year
|
12
|
|
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
|
|
Additions based on tax positions related to the current year
|
1
|
|
Additions for tax positions of prior years
|
6
|
|
Reductions for lapse in applicable statute of limitations
|
(1
|
)
|
Reductions for tax positions of prior years
|
(2
|
)
|
Additions due to acquisitions
|
1
|
|
Balance at December 31, 2017
|
$
|
48
|
|
The uncertain tax positions, exclusive of interest and penalties, were
$48 million
and
$43 million
as of
December 31, 2017 and 2016
, 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, 2017 and 2016
, we had accrued interest and penalties associated with liabilities for uncertain tax positions of
$5 million
and
$3 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 2010. 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 15. 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.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
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. Forfeitures are accounted for as they occur. Stock-based compensation expense is as follows (in millions, except for weighted average years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
|
Total Compensation Expense
Year Ended December 31,
|
Unrecognized
stock-based
compensation expense
|
|
Weighted-average years to be recognized
|
|
|
2017
|
|
2016
|
|
2015
|
|
Restricted Stock Awards
|
|
$
|
11
|
|
|
$
|
10
|
|
|
$
|
11
|
|
|
$
|
8
|
|
|
1.4
|
Restricted Stock Units
|
|
$
|
7
|
|
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
5
|
|
|
1.4
|
Tax benefit related to compensation expense
|
|
$
|
10
|
|
|
$
|
10
|
|
|
$
|
15
|
|
|
|
|
|
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.
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. 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 the
year
ended
December 31, 2017
we awarded certain employees grants of
813,816
shares of restricted stock. The restricted stock awards will be expensed over the requisite service period. 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 will generally vest during March of
2018
,
2019
, and
2020
.
In May 2017, we awarded
14,286
shares of restricted stock for annual director compensation. We determined 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 awards as compensation expense on the grant date.
During the
year
ended
December 31, 2017
, we withheld
235,066
shares of our common stock in connection with tax withholdings for vested stock awards.
Changes in nonvested restricted stock awards as of December 31, 2017 were as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted-Average Grant Date Fair Value
|
Nonvested at the beginning of the year
|
|
1,220
|
|
|
$
|
17.20
|
|
Granted
|
|
828
|
|
|
$
|
16.22
|
|
Vested
|
|
(585
|
)
|
|
$
|
16.53
|
|
Forfeited
|
|
(74
|
)
|
|
$
|
17.67
|
|
Nonvested at the end of the year
|
|
1,389
|
|
|
$
|
16.46
|
|
The weighted-average grant-date fair value of RSAs granted during the years ended December 31
2017
,
2016
, and
2015
was
$16.22
,
$15.14
, and
$21.88
respectively. The total fair value of shares vested during the years ended December 31,
2017
,
2016
, and
2015
, was
$10 million
,
$9 million
, and
$9 million
, respectively.
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.
Annually we award units for which the employee does not have a vested right to the stock (“nonvested”) until the required financial performance metric has been reached for each pre-determined vesting date. Stock-based compensation expense for each financial performance metric is recognized beginning in the period when management has determined it is probable the financial performance metric will be achieved for the respective vesting period.
During the
year
ended
December 31, 2017
we awarded certain employees grants of
78,636
RSUs. The RSUs will be expensed over the requisite service period. The terms of the RSUs include vesting provisions based solely on continued service. If the service criteria are satisfied the RSUs will generally vest during March of
2018
,
2019
, and
2020
.
During the
year
, ended
December 31, 2017
, we awarded certain employees grants of
440,070
performance based RSUs that will vest based upon the Company’s cumulative Free Cash Flow per share over a
three
year performance period. Stock-based compensation expense for each financial performance metric is recognized beginning in the period when management has determined that it is probable the performance objectives will be achieved.
During the year ended
December 31, 2017
we awarded
82,144
RSUs for annual director compensation and
23,151
RSUs, for quarterly director fees for certain of our directors who elected to receive RSUs in lieu of cash payments. We determined the service vesting condition of these 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 as of December 31, 2017 were as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted-Average
Grant Date Fair Value
|
Nonvested at the beginning of the year
|
|
1,803
|
|
|
$
|
16.25
|
|
Granted
|
|
624
|
|
|
$
|
15.94
|
|
Vested
|
|
(71
|
)
|
|
$
|
18.35
|
|
Forfeited
|
|
(541
|
)
|
|
$
|
17.09
|
|
Nonvested at the end of the year
|
|
1,815
|
|
|
$
|
15.80
|
|
The weighted-average grant-date fair value of RSUs granted during the years ended December 31
2017
,
2016
, and
2015
was
$15.94
,
$14.65
, and
$21.95
, respectively. The total fair value of shares vested during the years ended December 31,
2017
,
2016
, and
2015
, was
$1 million
,
$1 million
, and
zero
, respectively.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
The following table summarizes activity and balance information of the options under the 2014 Stock Option Plan as of December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-Average Exercise Price
|
|
Weighted-Average Remaining Contractual Term (Years)
|
|
Aggregate Intrinsic Value
(2)
|
2014 Stock Option Plan
|
|
(in thousands, except per share amounts)
|
Outstanding at the beginning of the year
|
|
1,080
|
|
|
$
|
21.38
|
|
|
|
|
|
Granted
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Exercised
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Expired
|
|
(855
|
)
|
|
$
|
20.62
|
|
|
|
|
|
Forfeited
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Outstanding at the end of the year
(1)
|
|
225
|
|
|
$
|
24.30
|
|
|
1.06
|
|
$
|
—
|
|
Options exercisable at year end
|
|
225
|
|
|
$
|
24.30
|
|
|
1.06
|
|
$
|
—
|
|
|
|
(1)
|
All options outstanding as of
December 31, 2017
are fully vested.
|
|
|
(2)
|
The aggregate intrinsic value represents the total pre-tax intrinsic value (the difference between the closing stock price on the last trading day of
2017
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
2017
(December 29, 2017). The intrinsic value changes based on the fair market value of our common stock.
|
Effective January 1, 2017 we adopted FASB issued ASU2016-09 Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting to simplify the accounting for employee share-based payments, including income tax impacts, classification on the statement of cash flows, and forfeitures. For additional information see
Note 1.
Organization and Summary of Significant Accounting Policies
The new guidance requires excess tax benefits and deficiencies to be recognized in the statement of operations. We recognized tax expense in our provision for income taxes during the
year ended
December 31, 2017
. Excess tax benefits were not recognized
$1 million
for financial reporting purposes in the prior periods. 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.
NOTE 16. 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 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, 2017
and
2016
, accruals for our loss contingencies approximated
$18 million
and
$11 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.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 results of operations, financial position or cash flows.
Lower Passaic River Matter.
In August 2004, the United States Environmental Protection Agency (the “EPA”) notified our subsidiary, 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 eight 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 is focused on alleged 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 consolidated results of operations, financial position or cash flows.
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 will conclude in 2018. 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, Sanfeng Environment made certain claims for indemnification under the agreement related to the condition of the facility in Taixing. For additional information, see
Note 4.
Dispositions and Assets Held for Sale
and
Note 18.
Subsequent Events.
Other Commitments
Other commitments as of
December 31, 2017
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
|
|
$
|
192
|
|
|
$
|
20
|
|
|
$
|
172
|
|
Letters of credit - other
|
|
70
|
|
|
70
|
|
|
—
|
|
Surety bonds
|
|
196
|
|
|
—
|
|
|
196
|
|
Total other commitments — net
|
|
$
|
458
|
|
|
$
|
90
|
|
|
$
|
368
|
|
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.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 6.375% Notes, the 5.875% Notes due 2024, the 5.875% Notes due 2025, and Tax-Exempt Bonds. Holders may require us to repurchase their 6.375% Notes, 5.875% Notes due 2024, 5.875% Notes due 2025 and Tax-Exempt Bonds if a fundamental change occurs. For specific criteria related to the redemption features of the 6.375% Notes, 5.875% Notes due 2024, 5.875% Notes due 2025 and Tax-Exempt Bonds, see
Note 10.
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 public sector 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.
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 and 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. We expect to incur approximately
$30 million
of additional capital expenditures, primarily for the purchase of transportation equipment, following receipt of notice to proceed.
NOTE 17. 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Operating revenue
|
|
$
|
404
|
|
|
$
|
403
|
|
|
$
|
424
|
|
|
$
|
418
|
|
|
$
|
429
|
|
|
$
|
421
|
|
|
$
|
495
|
|
|
$
|
457
|
|
Operating (loss) income
|
|
$
|
(23
|
)
|
|
$
|
(14
|
)
|
|
$
|
20
|
|
|
$
|
5
|
|
|
$
|
46
|
|
|
$
|
60
|
|
|
$
|
58
|
|
|
$
|
58
|
|
Net (loss) income
|
|
$
|
(52
|
)
|
|
$
|
(37
|
)
|
|
$
|
(37
|
)
|
|
$
|
(29
|
)
|
|
$
|
15
|
|
|
$
|
54
|
|
|
$
|
131
|
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share:
|
Basic
|
|
$
|
(0.41
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
0.11
|
|
|
$
|
0.42
|
|
|
$
|
1.02
|
|
|
$
|
0.06
|
|
Diluted
|
|
$
|
(0.41
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
0.11
|
|
|
$
|
0.42
|
|
|
$
|
1.01
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividend declared per share:
|
|
$
|
0.25
|
|
|
$
|
0.25
|
|
|
$
|
0.25
|
|
|
$
|
0.25
|
|
|
$
|
0.25
|
|
|
$
|
0.25
|
|
|
$
|
0.25
|
|
|
$
|
0.25
|
|
Net income for the quarter ended December 31, 2017 includes a net benefit of
$183 million
or
$1.39
per diluted share associated with the enactment of the Tax Cuts and Jobs Act discussed further in
Note 14.
Income Taxes
.
NOTE 18. SUBSEQUENT EVENTS
GIG Joint Venture
On February 12, 2018 as part of our partnership with GIG to develop, fund and own EfW projects in the U.K. and Ireland, GIG purchased a 50% indirect interest in our Dublin EfW project.
For additional information on the transaction see
Note 3. New Business and Asset Management
and
Note 4. Dispositions and Assets Held for Sale
. We received proceeds of
$167 million
and expect to record a gain on sale of assets in our first quarter 2018 consolidated statement of operations. Our
50%
ownership in the joint venture will be accounted for under the equity method of accounting. Therefore, subsequent to the sale, our proportional share of net income from the joint venture will be reflected as "Equity in income from unconsolidated investments" on our consolidated statement of operations and cash distributions from the joint venture will be reflected as "Dividends from
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
unconsolidated investments" on our consolidated statement of cash flows. The results of our wholly-owned O&M subsidiary will continue to be consolidated.
Sanfeng Environment sale to CITIC
On February 9, 2018 we sold our remaining investment in Sanfeng Environment and received proceeds of approximately
$7 million
, net of a settlement payment for certain indemnification claims related to the previous sale of our ownership interests in China. For further information see
Note 4. Dispositions and Assets Held for Sale - China Investments.
We expect to record a gain on sale of assets in our first quarter 2018 consolidated statement of operations.