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, 2018
. Further information is included in
Item 8. Financial Statements And Supplementary Data —
Note 12. Financial Instruments
and
Note 14. Derivative Instruments
.
Commodity Price Risk
Waste Price Risk
We have some protection against fluctuations in fuel (municipal waste) price risk because approximately
75%
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, certain 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.
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.
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
$6 million
and
$4 million
for ferrous and non-ferrous, respectively. We are currently unable to mitigate this exposure effectively either via long-term pricing contracts or with hedging instruments as there are limited options to enter into such arrangements for this segment of the market.
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 16. Consolidated Debt
. As of
December 31, 2018
, the outstanding balance of the Term Loan and the Revolving Credit Facility was
$394 million
and
$212 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, 2018
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, 2018
. For details, see
Item 8. Financial Statements And Supplementary Data —
Note 16. Consolidated Debt
.
Foreign Currency Exchange Rate Risk
We have operations and investments in various foreign markets, including Canada, Ireland, the UK 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. See
Item 8. Financial Statements And Supplementary Data —
Note 13. Equity Method Investments
for further discussion.
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Covanta Holding Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Covanta Holding Corporation and subsidiaries (the Company) as of
December 31, 2018 and 2017
, 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, 2018
, and the related notes and financial statement schedule listed in the Index at Item 15a (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2018 and 2017, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, 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, 2018, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated
February 19, 2019
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 19, 2019
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
(In millions, except per share amounts)
|
OPERATING REVENUE:
|
|
|
|
|
|
|
Waste and service revenue
|
|
$
|
1,327
|
|
|
$
|
1,231
|
|
|
$
|
1,187
|
|
Energy revenue
|
|
343
|
|
|
334
|
|
|
370
|
|
Recycled metals revenue
|
|
95
|
|
|
82
|
|
|
61
|
|
Other operating revenue
|
|
103
|
|
|
105
|
|
|
81
|
|
Total operating revenue
|
|
1,868
|
|
|
1,752
|
|
|
1,699
|
|
OPERATING EXPENSE:
|
|
|
|
|
|
|
Plant operating expense
|
|
1,321
|
|
|
1,271
|
|
|
1,177
|
|
Other operating expense, net
|
|
65
|
|
|
51
|
|
|
86
|
|
General and administrative expense
|
|
115
|
|
|
112
|
|
|
100
|
|
Depreciation and amortization expense
|
|
218
|
|
|
215
|
|
|
207
|
|
Impairment charges
|
|
86
|
|
|
2
|
|
|
20
|
|
Total operating expense
|
|
1,805
|
|
|
1,651
|
|
|
1,590
|
|
Operating income
|
|
63
|
|
|
101
|
|
|
109
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
Interest expense
|
|
(145
|
)
|
|
(147
|
)
|
|
(138
|
)
|
Gain (loss) on sale of business
|
|
217
|
|
|
(6
|
)
|
|
44
|
|
Loss on extinguishment of debt
|
|
(15
|
)
|
|
(84
|
)
|
|
—
|
|
Other (expense) income, net
|
|
(3
|
)
|
|
1
|
|
|
(1
|
)
|
Total other income (expense)
|
|
54
|
|
|
(236
|
)
|
|
(95
|
)
|
Income (loss) before income tax benefit (expense) and equity in net income from unconsolidated investments
|
|
117
|
|
|
(135
|
)
|
|
14
|
|
Income tax benefit (expense) (Note 11)
|
|
29
|
|
|
191
|
|
|
(22
|
)
|
Equity in net income from unconsolidated investments
|
|
6
|
|
|
1
|
|
|
4
|
|
NET INCOME (LOSS)
|
|
$
|
152
|
|
|
$
|
57
|
|
|
$
|
(4
|
)
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding:
|
|
|
|
|
|
|
Basic
|
|
130
|
|
|
130
|
|
|
129
|
|
Diluted
|
|
132
|
|
|
131
|
|
|
129
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) Per Share:
|
|
|
|
|
|
|
Basic
|
|
$
|
1.17
|
|
|
$
|
0.44
|
|
|
$
|
(0.03
|
)
|
Diluted
|
|
$
|
1.15
|
|
|
$
|
0.44
|
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
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,
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
(In millions)
|
Net income (loss)
|
|
$
|
152
|
|
|
$
|
57
|
|
|
$
|
(4
|
)
|
Foreign currency translation, net of tax expense of $0, $0 and $0, respectively
|
|
1
|
|
|
17
|
|
|
(7
|
)
|
Net unrealized gain (loss) on derivative instruments, net of tax benefit of $2, $0 and $8, respectively
|
|
21
|
|
|
(10
|
)
|
|
(21
|
)
|
Other comprehensive income (loss)
|
|
22
|
|
|
7
|
|
|
(28
|
)
|
Comprehensive income (loss)
|
|
$
|
174
|
|
|
$
|
64
|
|
|
$
|
(32
|
)
|
The accompanying notes are an integral part of the consolidated financial statements.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2018
|
|
2017
|
|
(In millions, except per
share amounts)
|
ASSETS
|
|
|
|
Current:
|
|
|
|
Cash and cash equivalents
|
$
|
58
|
|
|
$
|
46
|
|
Restricted funds held in trust
|
39
|
|
|
43
|
|
Receivables (less allowances of $8 and $14, respectively)
|
338
|
|
|
341
|
|
Prepaid expenses and other current assets
|
62
|
|
|
73
|
|
Assets held for sale
|
2
|
|
|
653
|
|
Total Current Assets
|
499
|
|
|
1,156
|
|
Property, plant and equipment, net
|
2,514
|
|
|
2,606
|
|
Restricted funds held in trust
|
8
|
|
|
28
|
|
Intangible assets, net
|
279
|
|
|
287
|
|
Goodwill
|
321
|
|
|
313
|
|
Other assets
|
222
|
|
|
51
|
|
Total Assets
|
$
|
3,843
|
|
|
$
|
4,441
|
|
LIABILITIES AND EQUITY
|
|
|
|
Current:
|
|
|
|
Current portion of long-term debt
|
$
|
15
|
|
|
$
|
10
|
|
Current portion of project debt
|
19
|
|
|
23
|
|
Accounts payable
|
76
|
|
|
151
|
|
Accrued expenses and other current liabilities
|
333
|
|
|
313
|
|
Liabilities held for sale
|
—
|
|
|
540
|
|
Total Current Liabilities
|
443
|
|
|
1,037
|
|
Long-term debt
|
2,327
|
|
|
2,339
|
|
Project debt
|
133
|
|
|
151
|
|
Deferred income taxes
|
378
|
|
|
412
|
|
Other liabilities
|
75
|
|
|
75
|
|
Total Liabilities
|
3,356
|
|
|
4,014
|
|
Commitments and Contingencies (Note 17)
|
|
|
|
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 shares)
|
14
|
|
|
14
|
|
Additional paid-in capital
|
841
|
|
|
822
|
|
Accumulated other comprehensive loss
|
(33
|
)
|
|
(55
|
)
|
Accumulated deficit
|
(334
|
)
|
|
(353
|
)
|
Treasury stock, at par
|
(1
|
)
|
|
(1
|
)
|
Total Equity
|
487
|
|
|
427
|
|
Total Liabilities and Equity
|
$
|
3,843
|
|
|
$
|
4,441
|
|
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,
|
|
|
2018
|
|
2017
|
|
2016
|
OPERATING ACTIVITIES:
|
|
(In millions)
|
Net income (loss)
|
|
$
|
152
|
|
|
$
|
57
|
|
|
$
|
(4
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
218
|
|
|
215
|
|
|
207
|
|
Amortization of long-term debt deferred financing costs
|
|
5
|
|
|
7
|
|
|
6
|
|
(Gain) loss on sale of business
|
|
(217
|
)
|
|
6
|
|
|
(44
|
)
|
Impairment charges
|
|
86
|
|
|
2
|
|
|
20
|
|
Loss on extinguishment of debt
|
|
15
|
|
|
84
|
|
|
—
|
|
Provision for doubtful accounts
|
|
2
|
|
|
9
|
|
|
2
|
|
Stock-based compensation expense
|
|
24
|
|
|
18
|
|
|
16
|
|
Equity in net income from unconsolidated investments
|
|
(6
|
)
|
|
(1
|
)
|
|
(4
|
)
|
Deferred income taxes
|
|
(31
|
)
|
|
(193
|
)
|
|
21
|
|
Dividends from unconsolidated investments
|
|
13
|
|
|
2
|
|
|
2
|
|
Other, net
|
|
(10
|
)
|
|
(13
|
)
|
|
(1
|
)
|
Change in working capital, net of effects of acquisitions:
|
|
|
|
|
|
|
Receivables
|
|
7
|
|
|
(27
|
)
|
|
(19
|
)
|
Prepaid and other current assets
|
|
(3
|
)
|
|
5
|
|
|
17
|
|
Accounts payable and accrued expenses
|
|
(16
|
)
|
|
66
|
|
|
43
|
|
Changes in noncurrent assets and liabilities, net
|
|
(1
|
)
|
|
5
|
|
|
2
|
|
Net cash provided by operating activities
|
|
238
|
|
|
242
|
|
|
264
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
Purchase of property, plant and equipment
|
|
(206
|
)
|
|
(277
|
)
|
|
(359
|
)
|
Acquisition of businesses, net of cash acquired
|
|
(50
|
)
|
|
(16
|
)
|
|
(9
|
)
|
Proceeds from asset sales
|
|
128
|
|
|
4
|
|
|
109
|
|
Property insurance proceeds
|
|
18
|
|
|
8
|
|
|
3
|
|
Payment of indemnification claim from sale of asset
|
|
(7
|
)
|
|
—
|
|
|
—
|
|
Investment in equity affiliate
|
|
(16
|
)
|
|
—
|
|
|
—
|
|
Other, net
|
|
(6
|
)
|
|
(8
|
)
|
|
2
|
|
Net cash used in investing activities
|
|
(139
|
)
|
|
(289
|
)
|
|
(254
|
)
|
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW – (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
(In millions)
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
Proceeds from borrowings on long-term debt
|
|
1,165
|
|
|
400
|
|
|
—
|
|
Proceeds from borrowings on revolving credit facility
|
|
740
|
|
|
952
|
|
|
744
|
|
Proceeds from insurance premium financing
|
|
25
|
|
|
24
|
|
|
—
|
|
Payments of equipment financing capital lease
|
|
(5
|
)
|
|
(5
|
)
|
|
(4
|
)
|
Proceeds from borrowings on Dublin project financing
|
|
—
|
|
|
643
|
|
|
159
|
|
Payment related to Dublin interest rate swap
|
|
—
|
|
|
(17
|
)
|
|
—
|
|
Payments on the Dublin Convertible Preferred
|
|
—
|
|
|
(132
|
)
|
|
—
|
|
Payments on long-term debt
|
|
(939
|
)
|
|
(415
|
)
|
|
(4
|
)
|
Payments on revolving credit facility
|
|
(973
|
)
|
|
(850
|
)
|
|
(749
|
)
|
Payments on project debt
|
|
(23
|
)
|
|
(382
|
)
|
|
(51
|
)
|
Payments of deferred financing costs
|
|
(16
|
)
|
|
(21
|
)
|
|
(6
|
)
|
Payment of Dublin financing costs
|
|
—
|
|
|
(19
|
)
|
|
—
|
|
Cash dividends paid to stockholders'
|
|
(134
|
)
|
|
(131
|
)
|
|
(131
|
)
|
Common stock repurchased
|
|
—
|
|
|
—
|
|
|
(20
|
)
|
Payment of insurance premium financing
|
|
(24
|
)
|
|
(4
|
)
|
|
—
|
|
Other, net
|
|
(5
|
)
|
|
(3
|
)
|
|
(10
|
)
|
Net cash (used in) provided by financing activities
|
|
(189
|
)
|
|
40
|
|
|
(72
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
1
|
|
|
7
|
|
|
—
|
|
Net decrease in cash, cash equivalents and restricted cash
|
|
(89
|
)
|
|
—
|
|
|
(62
|
)
|
Cash, cash equivalents and restricted cash at beginning of period
|
|
194
|
|
|
194
|
|
|
256
|
|
Cash, cash equivalents and restricted cash at end of period
|
|
105
|
|
|
194
|
|
|
194
|
|
Less: cash, cash equivalents and restricted cash of assets held for sale at end of period
|
|
—
|
|
|
77
|
|
|
—
|
|
Cash, cash equivalents and restricted cash at end of period
|
|
$
|
105
|
|
|
$
|
117
|
|
|
$
|
194
|
|
|
|
|
|
|
|
|
Reconciliation of cash, cash equivalents and restricted cash:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
58
|
|
|
$
|
46
|
|
|
$
|
84
|
|
Restricted funds held in trust- short term
|
|
39
|
|
|
43
|
|
|
56
|
|
Restricted funds held in trust- long term
|
|
8
|
|
|
28
|
|
|
54
|
|
Total cash, cash equivalents and restricted cash
|
|
$
|
105
|
|
|
$
|
117
|
|
|
$
|
194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Paid for Interest and Income Taxes:
|
|
|
|
|
|
|
Interest
|
|
$
|
136
|
|
|
$
|
149
|
|
|
$
|
150
|
|
Income taxes, net of refunds
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
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, 2015
|
|
136
|
|
|
$
|
14
|
|
|
$
|
801
|
|
|
$
|
(34
|
)
|
|
$
|
(143
|
)
|
|
5
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
640
|
|
Stock-based compensation expense
|
|
—
|
|
|
—
|
|
|
16
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16
|
|
Dividend declared
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(132
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(132
|
)
|
Common stock repurchased
|
|
—
|
|
|
—
|
|
|
(6
|
)
|
|
—
|
|
|
(11
|
)
|
|
1
|
|
|
(1
|
)
|
|
—
|
|
|
(18
|
)
|
Shares repurchased for tax withholdings for vested stock awards
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
Exchange of China equity investments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
(2
|
)
|
Other
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Comprehensive loss, net of income taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(28
|
)
|
|
(4
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(32
|
)
|
Balance as of December 31, 2016
|
|
136
|
|
|
$
|
14
|
|
|
$
|
807
|
|
|
$
|
(62
|
)
|
|
$
|
(289
|
)
|
|
6
|
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
469
|
|
Cumulative effect change in accounting for share based payments
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
10
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11
|
|
Stock-based compensation expense
|
|
—
|
|
|
—
|
|
|
18
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
18
|
|
Dividend declared
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(132
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(132
|
)
|
Shares repurchased for tax withholdings for vested stock awards
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
Shares issued in non-vested stock award
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Other
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Comprehensive income, net of income taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7
|
|
|
57
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
64
|
|
Balance as of December 31, 2017
|
|
136
|
|
|
$
|
14
|
|
|
$
|
822
|
|
|
$
|
(55
|
)
|
|
$
|
(353
|
)
|
|
5
|
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
427
|
|
Cumulative effect change in accounting for revenue recognition (Note 1)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Stock-based compensation expense
|
|
—
|
|
|
—
|
|
|
24
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
24
|
|
Dividend declared
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(133
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(133
|
)
|
Shares repurchased for tax withholdings for vested stock awards
|
|
—
|
|
|
—
|
|
|
(6
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6
|
)
|
Other
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
(1
|
)
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Comprehensive income, net of income taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
22
|
|
|
152
|
|
|
|
|
|
—
|
|
|
—
|
|
|
174
|
|
Balance as of December 31, 2018
|
|
136
|
|
|
$
|
14
|
|
|
$
|
841
|
|
|
$
|
(33
|
)
|
|
$
|
(334
|
)
|
|
5
|
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
487
|
|
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
22 million
tons of solid waste annually. We operate and/or have ownership positions in
44
EfW facilities, which are primarily located in North America. 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
which is comprised of our entire operating business.
For additional information on our reportable segment, see
Note 6.
Business Segment and Geographic Information
.
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. Under the equity method of accounting, the investment is initially recorded at cost, then our proportional share of the underlying net income or loss is recorded as
Equity in net income from unconsolidated investments
in our statement of operations with a corresponding increase or decrease to the carrying value of the investment. Distributions received from the investee reduce our carrying value of the investment and are recorded in the consolidated statements of cash flows using the cumulative earnings approach. These investments are evaluated for impairment if events or circumstances arise that indicate that the carrying amount of such assets may not be recoverable. There were no indicators of impairment related to our equity method investments for the years ended
December 31, 2018
and
2017
.
Investments in entities over which we neither have significant influence nor control are accounted for using the cost method. Under the cost method, we record the investment at cost and recognize income for any dividends declared from distribution of the investments earnings. We review the cost method investments for impairment whenever events or changes in circumstances indicate that the carrying value may no longer be recoverable. We impair our cost method investments when we determine that there has been an “other-than temporary” decline in the investments' fair value compared to its carrying value. The fair value of the investment would then become the new cost basis of the investment. There were no indicators of impairment related to our cost method investments for the years ended
December 31, 2018
and
2017
.
Revenue Recognition
Our EfW projects generate revenue from three primary sources: 1) fees charged for operating facilities or for receiving waste for disposal (waste and service revenue); 2) the sale of electricity and/or steam (energy revenue); and 3) the sale of ferrous and non-ferrous metals that are recovered from the waste stream as part of the EfW process (recycled metals revenue). We may also
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
generate other operating revenue from the construction, expansion or upgrade of a facility, when a public-sector client owns the facility. Our customers for waste services or facility operations are principally public-sector entities, though we also market disposal capacity at certain facilities to commercial customers.
We also operate and/or have ownership positions in environmental services businesses, transfer stations and landfills (primarily for ash disposal) that are ancillary and complementary to our EfW projects and generate additional revenue from disposal or service fees.
Revenue is allocated to the performance obligations in a contract on a relative standalone selling price basis. To the extent that we sell the good or service related to the performance obligation separately in the same market, the standalone selling price is the observable price that we sell the good or service separately in similar circumstances and to similar customers. The fees charged for our services are generally defined in our service agreements and vary based on contract-specific terms.
Waste and Service Revenue
Service Fee
Service fee revenue is generated from the operations and maintenance services that we provide to owned and operated EfW facilities. We provide multiple waste disposal services aimed at operating and maintaining the facilities. Service fee revenue is generally based on an expected annual operating fee in relation to annual guaranteed waste processing and excess tonnage fees. The fees charged represent one performance obligation to operate and maintain each facility. Variable consideration primarily consists of fees earned for processing excess tonnage above a minimum specified in the contract. We act as the agent in contracts for the sale of energy and metals in service fee facilities that we operate and accordingly record revenues net for those contracts.
Tip Fee
Tip fees are generated from the sale of waste disposal services at EfW facilities that we own. We earn a per ton “tipping fee”, generally under long term contractual obligations with our host community and contractual obligations with municipal and commercial waste customers. The tipping fee is generally subject to an annual escalation. The performance obligation in these agreements is to provide waste disposal services for tons of acceptable waste. Revenue is recognized when the waste is delivered to the facility.
Energy Sales
Typical energy sales consist of: (a) electricity generation, (b) capacity and (c) steam. We primarily sell electricity either to utilities at contracted rates or at prevailing market rates in regional markets and in some cases, sell steam directly to industrial users. We sell a portion of electricity and other energy product outputs pursuant to contracts. As these contracts expire, we intend to sell an increasing portion of the energy output in competitive energy markets or pursuant to short-term contracts.
Recycled Metals Revenue
Recycled metals revenue represents the sale of recovered ferrous and non-ferrous metals to processors and end-users. The majority of our metals contracts are based on both an unspecified variable unit (i.e. tonnage) and variable forward market price index, while some contracts contain a fixed unit or fixed rate to form the basis of our overall transaction price. We recognize recycled metal revenue when control transfers to the customer.
Other Operating Revenue (Construction)
We generate additional revenue from the construction, expansion or upgrade of a facility, when a municipal client owns the facility and we provide the construction services. We generally use the cost incurred measure of progress for our construction contracts because it best depicts the transfer of control to the customer. Under the cost incurred measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation.
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 as a reduction to Plant operating expense in our consolidated statement of operations.
Pass through costs were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Pass through costs
|
$
|
57
|
|
|
$
|
59
|
|
|
$
|
41
|
|
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.
Stock-Based Compensation
Stock-based compensation awards to employees are accounted for as compensation expense based on their grant date fair values. For additional information, see
Note 8. Stock-Based Award Plans
.
Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and highly liquid investments having maturities of three months or less from the date of purchase. These short-term investments are stated at cost, which approximates fair value. Balances held by our international subsidiaries are not generally available for near-term liquidity in our domestic operations.
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,
|
|
|
2018
|
|
2017
|
|
|
Current
|
|
Noncurrent
|
|
Current
|
|
Noncurrent
|
Debt service funds - principal
|
|
$
|
16
|
|
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
8
|
|
Debt service funds - interest
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total debt service funds
|
|
16
|
|
|
—
|
|
|
10
|
|
|
8
|
|
Revenue funds
|
|
4
|
|
|
—
|
|
|
4
|
|
|
—
|
|
Other funds
|
|
19
|
|
|
8
|
|
|
29
|
|
|
20
|
|
Total
|
|
$
|
39
|
|
|
$
|
8
|
|
|
$
|
43
|
|
|
$
|
28
|
|
Receivables and Allowance for Doubtful Accounts
Receivables 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.
Property, Plant and Equipment, net
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, net consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2018
|
|
2017
|
Land
|
|
$
|
26
|
|
|
$
|
25
|
|
Facilities and equipment
|
|
4,367
|
|
|
4,312
|
|
Landfills (primarily for ash disposal)
|
|
75
|
|
|
67
|
|
Construction in progress
|
|
71
|
|
|
54
|
|
Total
|
|
4,539
|
|
|
4,458
|
|
Less: accumulated depreciation and amortization
|
|
(2,025
|
)
|
|
(1,852
|
)
|
Property, plant, and equipment — net
|
|
$
|
2,514
|
|
|
$
|
2,606
|
|
Depreciation and amortization expense related to property, plant and equipment was
$199 million
,
$197 million
, and
$185 million
, for the years ended
December 31, 2018, 2017 and 2016
, respectively. Non-cash investing activities related to capital expenditures totaled
$37 million
,
$18 million
and
$41 million
as of
December 31, 2018, 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. As of
December 31,
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2018
, we recognized an impairment on our property, plant and equipment of
$63 million
. For additional information, see
Note 10.
Supplementary Information
- Impairment Charges
.
Asset Retirement Obligation
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,
|
|
|
2018
|
|
2017
|
Beginning of period asset retirement obligation
|
|
$
|
26
|
|
|
$
|
25
|
|
Accretion expense
|
|
3
|
|
|
2
|
|
Net change
(1)
|
|
—
|
|
|
(1
|
)
|
End of period asset retirement obligation
|
|
29
|
|
|
26
|
|
Less: current portion
|
|
(5
|
)
|
|
(2
|
)
|
Noncurrent asset retirement obligation
|
|
$
|
24
|
|
|
$
|
24
|
|
|
|
(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 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.
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, 2018
, we recognized an impairment on our intangible assets of
$22 million
. For additional information, see
Note 10.
Supplementary Information
- Impairment Charges
and
Note 15.
Intangible Assets and Goodwill
.
Goodwill
Goodwill is the excess of our purchase price 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. The evaluation of goodwill requires the use of estimates of future cash flows to determine the estimated fair value of the reporting unit. All goodwill is related to our one 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 which has been determined to be one level below our chief operating decision maker. For additional information see,
Note 6. Business Segment and Geographic Information
. If the carrying value of the reporting unit exceeds the fair value, an impairment charge is recognized to reduce the carrying value to the fair value. On October 1, 2018 we adopted ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, as discussed below under
Accounting Pronouncements Recently Adopted.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
We performed the required annual impairment review of our recorded goodwill for each reporting unit as of October 1,
2018
and determined that the fair value of our reporting units was not less than their relative carrying values. For additional information, see
Note 15.
Intangible Assets and Goodwill
.
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, 2016
|
$
|
(41
|
)
|
|
$
|
2
|
|
|
$
|
(23
|
)
|
|
$
|
(62
|
)
|
Other comprehensive income (loss) before reclassifications
|
17
|
|
|
—
|
|
|
(10
|
)
|
|
7
|
|
Balance at December 31, 2017
|
$
|
(24
|
)
|
|
$
|
2
|
|
|
$
|
(33
|
)
|
|
$
|
(55
|
)
|
Other comprehensive loss before reclassifications
|
(1
|
)
|
|
—
|
|
|
(6
|
)
|
|
(7
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
2
|
|
|
—
|
|
|
27
|
|
|
29
|
|
Net current period comprehensive income
|
1
|
|
|
—
|
|
|
21
|
|
|
22
|
|
Balance at December 31, 2018
|
$
|
(23
|
)
|
|
$
|
2
|
|
|
$
|
(12
|
)
|
|
$
|
(33
|
)
|
|
|
|
|
|
|
|
|
Amount Reclassified from Accumulated Other Comprehensive Income
|
Accumulated Other Comprehensive Income Component
|
|
Year Ended December 31, 2018
|
|
Affected Line Item in the Consolidated Statement of Operations
|
|
|
|
|
|
Foreign currency translation
|
|
$
|
2
|
|
|
Gain (loss) on sale of assets
(1)
|
Interest rate swap
|
|
27
|
|
|
Gain (loss) on sale of assets
(1)
|
|
|
29
|
|
|
Total before tax
|
|
|
—
|
|
|
Tax benefit
|
Total reclassifications
|
|
$
|
29
|
|
|
Net of tax
|
(1)
For additional information see,
Note 3. New Business and Asset Management.
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 14.
Derivative Instruments
.
Foreign Currency Translation
For foreign operations, assets and liabilities are translated at year-end exchange rates and revenue and expense are translated at
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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
,
$18 million
and
$17 million
for the years ended
December 31, 2018, 2017 and 2016
, respectively.
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, valuation allowance for deferred taxes, liabilities related to uncertain tax positions, allowances for uncollectible receivables, and liabilities related to employee medical benefit obligations, workers’ compensation, severance and certain litigation.
Reclassifications
As discussed below under
Accounting Pronouncements Recently Adopted
, certain amounts have been reclassified in our prior period consolidated statements of cash flows to conform to current year presentation. Certain other amounts have been reclassified in our prior period consolidated balance sheet to conform to current year presentation. As a result,
$251 million
of intangible assets related to waste service and energy contracts, net, previously shown separately, are now classified within Intangible assets, net on our consolidated balance sheet as of December 31, 2017.
Accounting Pronouncements Recently Adopted
In August 2018, the Securities and Exchange Commission ("SEC") adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders’ equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders’ equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. The final rule is effective on November 5, 2018, as such, the Company plans to use the new presentation of a condensed consolidated statement of stockholders' equity within its interim financial statements beginning in its Form 10-Q for the quarter ending March 31, 2019. Other than the new presentation, we do not anticipate any material impact to our consolidated financial statements and related disclosures upon adoption.
In March 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2017-07, Presentation of Net Periodic Pension and Postretirement Benefit Cost, to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The amendments require that the service cost component of the net periodic benefit
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
cost be presented in the same operating income line items as other compensation costs arising from services rendered by employees during the period. The non-service costs (e.g., interest cost, expected return on plan assets, amortization of actuarial gains/losses, settlements) should be presented in the income statement outside of operating income. The amendments also allow only the service cost component to be eligible for capitalization when applicable. We adopted this guidance on January 1, 2018. The amendments have been applied retrospectively for the income statement presentation requirements and prospectively for the limit on costs eligible for capitalization. The line item classification changes required by the new guidance did not have a material impact on our consolidated statement of operations.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This new standard eliminates Step 2 from the goodwill impairment test. Instead, an entity should compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to the reporting unit. We adopted this guidance on October 1, 2018. We performed our goodwill impairment test in the fourth quarter of 2018 in accordance with ASU 2017-04 and determined that the fair value of the goodwill exceeded its carrying value. The adoption of ASU 2017-04 had no impact on the result of our impairment test.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) — Restricted Cash, which 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 and restricted cash equivalents. With this standard, amounts generally described as restricted cash or restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the statement of cash flows. We adopted this guidance on January 1, 2018, and the guidance has been retrospectively applied to all periods presented. The total of cash, cash equivalents and restricted cash is described in a supplemental table to the consolidated statements of cash flows. The changes to the beginning of period balance presented in our consolidated statement of cash flows are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
|
As adjusted
|
|
As previously reported
|
|
As adjusted
|
|
As previously reported
|
Cash and cash equivalents
|
|
$
|
46
|
|
|
$
|
46
|
|
|
$
|
84
|
|
|
$
|
84
|
|
Restricted funds classified as held for sale
|
|
77
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Restricted funds held in trust- short term
|
|
43
|
|
|
—
|
|
|
56
|
|
|
—
|
|
Restricted funds held in trust- long term
|
|
28
|
|
|
—
|
|
|
54
|
|
|
—
|
|
Beginning of period balance presented in the statement of cash flows
|
|
$
|
194
|
|
|
$
|
46
|
|
|
$
|
194
|
|
|
$
|
84
|
|
The following table illustrates the effect of adoption of ASU 2016-18 on our consolidated statements of cash flows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
Year Ended December 31, 2016
|
|
|
As adjusted
|
|
As previously reported
|
|
As adjusted
|
|
As previously reported
|
Cash provided by operating activities
|
|
$
|
242
|
|
|
$
|
243
|
|
|
$
|
264
|
|
|
$
|
286
|
|
Cash used in investing activities
|
|
$
|
(289
|
)
|
|
$
|
(289
|
)
|
|
$
|
(254
|
)
|
|
$
|
(254
|
)
|
Cash provided by financing activities
|
|
$
|
40
|
|
|
$
|
3
|
|
|
$
|
(72
|
)
|
|
$
|
(44
|
)
|
In October 2016, the FASB issued ASU 2016-16, Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory, which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The new standard must be adopted using a modified retrospective transition method, with the cumulative effect recognized as of the date of initial adoption. Effective January 1, 2018, we adopted this standard. The adoption of this new guidance did not have a material impact on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) which supersedes nearly all existing revenue recognition guidance. Subsequent to the issuance of Topic 606, the FASB clarified the guidance through several ASUs; hereinafter the collection of revenue guidance is referred to as Accounting Standards Codification (“ASC") 606. The core principle of ASC 606 is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
On January 1, 2018, we adopted ASC 606 using the modified retrospective method. Results for reporting periods beginning January 1, 2018 are presented under ASC 606, while prior period amounts were not adjusted and continue to be reported in accordance with the historic accounting guidance under ASC Topic 605, Revenue Recognition.
We recorded a net decrease of
$1 million
to beginning accumulated deficit as of January 1, 2018 due to the cumulative impact of adopting ASC 606. The impact to beginning accumulated deficit resulted from recognizing revenue evenly over the contract year for certain of our service fee contracts that are based on a contract year that is different from our calendar year. Contract acquisition costs are not material. For the
year ended
December 31, 2018
, waste and service revenue increased
$1 million
, as a result of the adoption of ASC 606. Therefore, comparisons of revenue and operating income between periods are not materially affected by the adoption of ASC 606. Refer to
Note 7. Revenue
for additional disclosures required by ASC 606.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
The following table summarizes recent ASU's issued by the FASB that could have an impact on our consolidated financial statements.
|
|
|
|
|
Standard
|
Description
|
Effective Date
|
Effect on the financial statements
or other significant matters
|
Update 2018-13—Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement
|
Entities are no longer required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy. The update also eliminates the requirement to disclose policy for timing of transfers between levels of the fair value hierarchy. Public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 measurements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date.
|
First quarter of 2020, early adoption is permitted.
|
We are currently evaluating the impact this guidance will have on our consolidated financial statements.
|
ASU 2018-02
Income Statement—Reporting Comprehensive Income
(Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
|
The amendments in this update allow a reclassification from accumulated other comprehensive income ("AOCI") to retained earnings for adjustments to the tax effect of items in AOCI, that were originally recognized in other comprehensive income, related to the new statutory rate prescribed in the Tax Cuts and Jobs Act enacted on December 22, 2017, which reduces the US federal corporate tax rate from 35% to 21%. The amendments in this update should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the US federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized.
|
First quarter of 2019, early adoption is permitted, including adoption in any interim period.
|
We are currently evaluating the impact this guidance will have 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 and ASU 2018-11
|
These standards amended guidance for lease arrangements 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 in ASU 2018-01 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.
The amendment in ASU 2018-11 provides entities with an additional and optional transition method in adopting the new leases standard and providing lessors with a practical expedient to not separate nonlease components from the associated lease component, similar to Topic 842 expedients for lessees.
|
First quarter of 2019, early adoption is permitted.
|
As part of our impact assessment, we performed a scoping exercise and determined our lease population. Based on an evaluation of the population, we determined the 1/1/2019 ROU Asset and ROU Liability balance to be in the range of $60-$70 million for operating leases.
Additionally, we are in the process of implementing a lease accounting system and refining our internal controls and processes related to both the implementation and ongoing compliance of the new guidance. We plan to adopt the new guidance using a modified retrospective approach and upon adoption, there will be an increase to our long-term assets and liabilities reflecting the present value of our minimum lease obligations, which are disclosed in Note 9.
|
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 3. NEW BUSINESS AND ASSET MANAGEMENT
The acquisitions discussed 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
2018
, we acquired
one
environmental services business located in Toronto, Canada, for approximately
$4 million
. 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 businesses, in separate transactions, for a total of
$9 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.
Palm Beach Resource Recovery Acquisition
In September 2018, we acquired the Palm Beach Resource Recovery Corporation ("PBRRC") for
$46 million
.
PBRRC holds long-term contracts for the operation and maintenance of two EfW facilities located in Palm Beach County, Florida.
The purchase consideration and allocation are still considered preliminary pending management's final assessment of fair values and settlement of a working capital true-up.
Green Investment Group Limited (“GIG”) Joint Ventures
Dublin EfW
During 2017, we completed construction of the Dublin EfW facility ("Dublin EfW"), a
600,000
metric ton-per-year,
58
megawatt facility in Dublin, Ireland. Operational commencement began in October 2017.
In December 2017, we entered into a strategic partnership with GIG, a subsidiary of Macquarie Group Limited, to develop EfW projects in the UK and Ireland. Our first investment with GIG, Covanta Europe Assets, Ltd ("CEAL"), is structured as a 50/50 joint venture between Covanta and GIG. As an initial step, we contributed
100%
of Dublin EfW into CEAL, and GIG acquired a
50%
ownership in CEAL for
€136 million
(
$167 million
). We retained a
50%
equity interest in CEAL and retained our role as operations and maintenance ("O&M") service provider for the Dublin EfW.
On February 12, 2018, GIG's investment in CEAL closed and we received gross proceeds of
$167 million
(
$98 million
, net of existing restricted cash), which we used to repay borrowings under our revolving credit facility. The sale resulted in our loss of a controlling interest in Dublin EfW, which required the entity to be deconsolidated from our financial statements as of the sale date. For the
year
ended
December 31, 2018
, we recorded a gain on the loss of a controlling interest of the business of
$204 million
which is included in
Gain (loss) on sale of assets
on our consolidated statement of operations. The gain resulted from the excess of proceeds received plus the fair value of our non-controlling interest in Dublin EfW over our carrying value.
Our
50%
equity interest in CEAL is accounted for under the equity method of accounting. As of
December 31, 2018
, our equity investment of
$149 million
is included in Other assets on our consolidated balance sheet. The fair value of our investment was determined by the fair value of the consideration received for the
50%
acquired by GIG. There were
no
basis differences between the fair value of the acquired investment in CEAL and the carrying amounts of the underlying net assets as they were fair valued contemporaneously as of the sale date. For further information, see
Note 13. Equity Method Investments
.
Earls Gate Energy Centre
In December of 2018, financial close was reached on our second project with GIG, the Earls Gate Energy Centre project ("Earls Gate"), an EfW facility to be built in Grangemouth, Scotland. GIG and Covanta together will hold a 50% equity ownership in the project company, through a 50/50 joint venture, Covanta Jersey Assets Ltd., with co-investor and developer Brockwell Energy owning the remaining 50% stake. The Earls Gate facility is expected to commence operations in late 2021. We will account for our 50% ownership of the joint venture, which gives us a 25% indirect ownership of the project company, under the equity method
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
of accounting. As of
December 31, 2018
, an equity investment of
$10 million
and a shareholder loan of
$6 million
related to this project are included in Other assets on our consolidated balance sheet. For further information, see
Note 13. Equity Method Investments
.
New York City Waste Transport and Disposal Contract
In March 2018, we received the notice to proceed from New York City's Department Sanitation ("DSNY") to develop the infrastructure supporting the East 91st Street Marine Transfer Station ("MTS"). We expect to commence operations in the second quarter of 2019. The MTS is the second in a pair of marine transfer stations under a 20-year waste transport and disposal agreement between Covanta and DSNY.
NOTE 4. DISPOSITIONS AND ASSETS HELD FOR SALE
Sale of Hydro Facility Investment
In July 2018, we sold our equity interests in a hydroelectric facility located in the state of Washington for proceeds of approximately
$12 million
. For the year ended
December 31, 2018
, we recorded a gain of
$7 million
related to this transaction which is included in
Gain (loss) on sale of assets
on our consolidated statement of operations.
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.
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.
On February 9, 2018 we sold our remaining investment in Sanfeng Environment to CITIC for proceeds of
$13 million
and recorded a gain on the sale of
$6 million
, which is included in
Gain (loss) on sale of assets
on our condensed consolidated statement of operations for the
year
ended
December 31, 2018
.
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
. The transaction was completed in February 2018. For additional information see
Note 3. New Business and Asset Management
- Green Investment Group Limited (“GIG”) Joint Ventures.
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 as the deconsolidation did not represent a strategic shift in our business. The assets and liabilities associated with our Dublin EfW 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 16.
Consolidated Debt - Dublin Project Refinancing
for further information.
|
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 8.
Stock-Based Award Plans
.
Common shares repurchased were as follows (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Total repurchases
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18
|
|
Shares repurchased
|
—
|
|
|
—
|
|
|
1.2
|
|
Weighted average cost per share
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15.29
|
|
As of
December 31, 2018
, 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, 2018
, there were
3 million
shares of common stock available for future issuance under equity plans.
As of
December 31, 2018
, 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 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. 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,
|
|
2018
|
|
2017
|
|
2016
|
Basic weighted average common shares outstanding
|
130
|
|
|
130
|
|
|
129
|
|
Dilutive effect of stock options, restricted stock and restricted stock units
|
2
|
|
|
1
|
|
|
—
|
|
Diluted weighted average common shares outstanding
|
132
|
|
|
131
|
|
|
129
|
|
Anti-dilutive stock options, restricted stock and restricted stock units excluded from the calculation of EPS
|
—
|
|
|
—
|
|
|
3
|
|
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 6. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
Our reportable segment reflects the manner in which our Chief Operating Decision Maker ("CODM") reviews results and allocates resources and does not reflect the aggregation of multiple operating segments.
We have
one
reportable segment which comprises our entire operating business. Prior to the first quarter 2018, our reportable segment, North America, was comprised exclusively of waste and energy services located in North America. During the first quarter of 2018, we contributed
100%
of our Dublin EfW facility into CEAL, a joint venture with GIG, which resulted in our loss of control. See
Note 3. New Business and Asset Management
-
Green Investment Group Limited (“GIG”) Joint Ventures
for further information. Subsequent to the sale, results from our equity method investment in CEAL and our O&M contract to operate the Dublin EfW facility are now being reviewed by our CODM on a consolidated basis with our North America results. Therefore, we now include the results of our international operations, which consist primarily of our interests in Dublin, in our
one
reportable segment. The results of our reportable segment are consistent with our consolidated results as presented on our consolidated statements of operations for the years ended
December 31, 2018, 2017 and 2016
. See
Note 1. Organization and Summary of Significant Accounting Policies
for a description of our organization.
Our operations are principally located in the United States. 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, 2018
|
|
$
|
1,785
|
|
|
$
|
83
|
|
|
$
|
1,868
|
|
Year Ended December 31, 2017
|
|
$
|
1,705
|
|
|
$
|
47
|
|
|
$
|
1,752
|
|
Year Ended December 31, 2016
|
|
$
|
1,677
|
|
|
$
|
22
|
|
|
$
|
1,699
|
|
|
|
|
Assets Held
for Sale
|
|
United States
|
|
Other
|
|
Total
|
Total Assets:
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
$
|
2
|
|
|
$
|
3,633
|
|
|
$
|
208
|
|
|
$
|
3,843
|
|
As of December 31, 2017
|
|
$
|
653
|
|
|
$
|
3,727
|
|
|
$
|
61
|
|
|
$
|
4,441
|
|
As of December 31, 2016
|
|
$
|
—
|
|
|
$
|
3,763
|
|
|
$
|
521
|
|
|
$
|
4,284
|
|
NOTE 7. REVENUES
Disaggregation of revenue
A disaggregation of revenue from contracts with customers is presented on our consolidated statements of operations for the
year ended
December 31, 2018, 2017 and 2016
. See
Note 6. Business Segment and Geographic Information
for a discussion of our reportable segment.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Performance Obligations and Transaction Price Allocated to Remaining Performance Obligations
The following summarizes our performance obligations, a description of how transaction price is allocated to future performance obligations and the practical expedients applied:
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Type
|
|
Timing
|
|
Performance Obligations
|
|
Measure of Progress
|
|
Type
|
|
Practical Expedients
|
Service Fee
|
|
Over time
|
|
Operations/waste disposal
|
|
Time elapsed
|
|
Fixed
& Variable
|
|
Constrained
(1)
& Series
(2)
|
Tip Fee
|
|
Over time
|
|
Waste disposal
|
|
Units delivered
|
|
Fixed
& Variable
|
|
Right to invoice
|
Energy
|
|
Over time
|
|
Energy
|
|
Units delivered
|
|
Fixed
& Variable
|
|
Right to invoice
& Series
(2)
|
Capacity
|
|
Time elapsed
|
|
Steam
|
|
Units delivered
|
|
Metals
|
|
Point in time
|
|
Sale of ferrous &
non-ferrous metals
|
|
Units delivered
|
|
Variable
|
|
Less than 1 year
|
Other (Construction)
|
|
Over time
|
|
Construction
services
|
|
Costs incurred
|
|
Fixed
& Variable
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
(1) The amount of variable consideration that is included in the transaction price may be constrained, and is included only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. We estimate our variable service fee using the expected value method.
|
(2) Service Fee and Energy contracts have been determined to have an annual and monthly series, respectively.
|
ASC 606 requires disclosure of the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of
December 31, 2018
. The guidance provides certain conditions (identified as "practical expedients") that limit this disclosure requirement. We have contracts that meet the following practical expedients provided by ASC 606:
|
|
1.
|
The performance obligation is part of a contract that has an original expected duration of one year or less.
|
|
|
2.
|
Revenue is recognized from the satisfaction of the performance obligations in the amount billable to our customer that corresponds directly with the value to the customer of our performance completed to date (i.e. “right-to-invoice” practical expedient).
|
|
|
3.
|
The variable consideration is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct service or a series of distinct services that are substantially the same and that have the same pattern of transfer to our customer (i.e. “series practical expedient”).
|
The following table shows our remaining performance obligations which primarily consists of the fixed consideration contained in our contracts as of
December 31, 2018
(dollars in millions):
|
|
|
|
|
|
Total
|
Total Remaining performance obligation
|
$
|
6,147
|
|
Percentage expected to be recognized:
|
|
2019
|
11
|
%
|
2020
|
9
|
%
|
Contract Balances
The following table reflects the balance in our contract assets, which we classify as “Accounts receivable unbilled” and present net in Accounts receivable, and our contract liabilities, which we classify as deferred revenue and present in “Accrued expenses and other current liabilities” in our consolidated balance sheet (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2018
|
|
December 31,
2017
|
Unbilled receivables
|
|
$
|
16
|
|
|
$
|
13
|
|
Deferred revenue
|
|
$
|
15
|
|
|
$
|
14
|
|
For the
year
ended
December 31, 2018
, revenue recognized that was included in deferred revenue on our consolidated balance sheet at the beginning of the period totaled
$7 million
.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Accounts receivable are recorded when the right to consideration becomes unconditional and we typically receive payments from customers monthly. The timing of our receipt of cash from construction projects is generally based upon our reaching completion milestones as set forth in the applicable contracts, and the timing and size of these milestone payments can result in material working capital variability between periods. We had no asset impairment charges related to these assets in the period.
NOTE 8. 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 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, 2018
|
|
|
Total Compensation Expense
Year Ended December 31,
|
Unrecognized
stock-based
compensation expense
|
|
Weighted-average years to be recognized
|
|
|
2018
|
|
2017
|
|
2016
|
|
Restricted Stock Awards
|
|
$
|
5
|
|
|
$
|
11
|
|
|
$
|
10
|
|
|
$
|
2
|
|
|
0.9
|
Restricted Stock Units
|
|
$
|
19
|
|
|
$
|
7
|
|
|
$
|
6
|
|
|
$
|
12
|
|
|
1.7
|
Tax benefit related to compensation expense
|
|
$
|
18
|
|
|
$
|
10
|
|
|
$
|
10
|
|
|
|
|
|
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, 2018
, we awarded
13,158
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, 2018
, we withheld
375,673
shares of our common stock in connection with tax withholdings
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
for vested stock awards.
Changes in nonvested restricted stock awards as of
December 31, 2018
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
|
|
1,389
|
|
|
$
|
16.46
|
|
Granted
|
|
13
|
|
|
$
|
15.20
|
|
Vested
|
|
(638
|
)
|
|
$
|
17.09
|
|
Forfeited
|
|
(37
|
)
|
|
$
|
16.01
|
|
Nonvested at the end of the year
|
|
727
|
|
|
$
|
15.90
|
|
The weighted-average grant-date fair value of RSAs granted during the years ended December 31,
2018
,
2017
, and
2016
was
$15.20
,
$16.22
, and
$15.14
respectively. The total fair value of shares vested during the years ended December 31,
2018
,
2017
, and
2016
, was
$11 million
,
$10 million
, and
$9 million
, respectively.
Restricted Stock Units
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, 2018
we awarded certain employees grants of
1,208,711
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
2019
,
2020
, and
2021
.
During the
year
, ended
December 31, 2018
, we awarded certain employees grants of
385,464
performance based RSUs of which 50% will vest based upon our cumulative Free Cash Flow per share target over a
three
year performance period and the other 50% will vest based on a total shareholder return ("TSR") against metrics consistent with market practices and our peers with vesting determined by our relative TSR percentile rank versus the companies in our peer group.
During the year ended
December 31, 2018
we awarded
79,268
RSUs for annual director compensation and
31,531
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, 2018
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
|
|
1,815
|
|
|
$
|
15.80
|
|
Granted
|
|
1,705
|
|
|
$
|
15.01
|
|
Vested
|
|
(467
|
)
|
|
$
|
17.52
|
|
Forfeited
|
|
(55
|
)
|
|
$
|
14.79
|
|
Nonvested at the end of the year
|
|
2,998
|
|
|
$
|
15.11
|
|
The weighted-average grant-date fair value of RSUs granted during the years ended December 31,
2018
,
2017
, and
2016
was
$15.01
,
$15.94
, and
$14.65
, respectively. The total fair value of shares vested during the years ended December 31,
2018
,
2017
, and
2016
, was
$8 million
,
$1 million
, and
$1 million
, 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, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
225
|
|
|
$
|
24.30
|
|
|
|
|
|
Granted
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Exercised
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Expired
|
|
(200
|
)
|
|
$
|
24.76
|
|
|
|
|
|
Forfeited
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Outstanding at the end of the year
(1)
|
|
25
|
|
|
$
|
20.58
|
|
|
5.52
|
|
$
|
—
|
|
Options exercisable at year end
|
|
25
|
|
|
$
|
20.58
|
|
|
5.52
|
|
$
|
—
|
|
|
|
(1)
|
All options outstanding as of
December 31, 2018
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
2018
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
2018
. The intrinsic value changes based on the fair market value of our common stock.
|
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. Rental expense was
$23 million
,
$22 million
, and
$19 million
, for the years ended
December 31, 2018, 2017 and 2016
, 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, 2018
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Thereafter
|
|
Total
|
Future minimum rental payments
|
|
$
|
11
|
|
|
$
|
9
|
|
|
$
|
8
|
|
|
$
|
7
|
|
|
$
|
7
|
|
|
$
|
36
|
|
|
$
|
78
|
|
NOTE 10. 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 to receive the remaining insurance recoveries for both property loss and business interruption during the first quarter of 2019.
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
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
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,
|
|
2018
|
|
2017
|
|
2016
|
Insurance gains for property and clean-up costs, net of impairment charges
|
$
|
18
|
|
|
$
|
7
|
|
|
$
|
1
|
|
Insurance gains for business interruption costs, net of costs incurred
|
$
|
19
|
|
|
$
|
23
|
|
|
$
|
4
|
|
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. 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,
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
|
|
|
Impairment charges
|
$
|
86
|
|
|
$
|
2
|
|
|
$
|
20
|
|
During the year ended
December 31, 2018
, we identified an indicator of impairment associated with certain of our EfW facilities where the current expectation is that, more likely than not, the assets will not be operated through their previously estimated economic useful life. We performed recoverability tests to determine if these facilities were impaired as of the respective balance sheet date. As a result, based on expected cash flows utilizing Level 3 inputs, we recorded a non-cash impairment charge for the year ended
December 31, 2018
of
$86 million
, to reduce the carrying value of the assets to their estimated fair value.
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.
For more information regarding fair value measurements, see
Note 12.
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,
|
|
2018
|
|
2017
|
Prepaid expenses
|
$
|
22
|
|
|
$
|
22
|
|
Spare parts
|
21
|
|
|
22
|
|
Renewable energy credits
|
7
|
|
|
6
|
|
Other
|
12
|
|
|
23
|
|
Total prepaid expenses and other current assets
|
$
|
62
|
|
|
$
|
73
|
|
|
|
|
|
Operating expenses, payroll and related expenses
|
$
|
150
|
|
|
$
|
145
|
|
Deferred revenue
|
10
|
|
|
14
|
|
Accrued liabilities to client communities
|
26
|
|
|
17
|
|
Interest payable
|
38
|
|
|
37
|
|
Dividends payable
|
36
|
|
|
36
|
|
Other
|
73
|
|
|
64
|
|
Total accrued expenses and other current liabilities
|
$
|
333
|
|
|
$
|
313
|
|
NOTE 11. INCOME TAXES
The Tax Cuts and Jobs Act (the "Act") was enacted on December 22, 2017. The Act reduces the US 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. As of December 2018, in accordance with Staff Accounting Bulletin 118, we completed our accounting for the tax effects of the enactment of the Act, any true up adjustments, as described below, are included in our income tax provision. We made an accounting policy election to account for the global intangible low-taxed income (“GILTI”) as current period expense.
Deferred tax assets and liabilities: We re-measured our US federal deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally
21%
. The provisional amount recorded as of December 31, 2017 related to the re-measurement of the deferred tax balance was a tax benefit of
$204 million
, this amount was materially correct and no material adjustment was recorded to this amount for the year ended December 31, 2018.
Foreign tax effects: The one-time transition tax is based on our total post-1986 earnings and profits ("E&P") previously deferred from US income taxes. As of December 31, 2017, we recorded a provisional amount for our one-time transition tax liability, resulting in an increase in income tax expense of
$21 million
with a corresponding reduction of deferred tax asset related to the utilization of our gross NOL. During the year ended December 31, 2018, we completed our calculation of the total post 1986 E&P for the foreign subsidiaries and based on the final amounts held in cash we recorded a
$1 million
true up to the transition tax with a reduction to the deferred tax assets on the net operating loss carryforward, resulting in no additional tax liability.
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,
|
|
|
2018
|
|
2017
|
|
2016
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
(2
|
)
|
State
|
|
1
|
|
|
2
|
|
|
6
|
|
Foreign
|
|
1
|
|
|
(1
|
)
|
|
(2
|
)
|
Total current
|
|
2
|
|
|
5
|
|
|
2
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
(1
|
)
|
|
(204
|
)
|
|
28
|
|
State
|
|
(25
|
)
|
|
(2
|
)
|
|
(9
|
)
|
Foreign
|
|
(5
|
)
|
|
10
|
|
|
1
|
|
Total deferred
|
|
(31
|
)
|
|
(196
|
)
|
|
20
|
|
Total income tax (benefit) expense
|
|
$
|
(29
|
)
|
|
$
|
(191
|
)
|
|
$
|
22
|
|
Domestic and foreign pre-tax income (loss) was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Domestic
|
|
$
|
(43
|
)
|
|
$
|
(43
|
)
|
|
$
|
26
|
|
Foreign
|
|
160
|
|
|
(92
|
)
|
|
(12
|
)
|
Total
|
|
$
|
117
|
|
|
$
|
(135
|
)
|
|
$
|
14
|
|
The effective income tax rate was
(25)%
,
142%
, and
150%
for the years ended
December 31, 2018, 2017 and 2016
, respectively.
The decrease in the effective tax rate for the year ended December 31, 2018, compared to the year ended December 31, 2017 is primarily due to the combined effects of (i) in 2017 there was a significant deferred tax revaluation due to tax reform which did not occur in 2018 (ii) no income tax associated with the gain from sale of our joint venture with GIG; (iii) the discrete tax benefits attributable to the New Jersey State Tax Law change and a state audit settlement.
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.
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
21%
to income tax expense (benefit) at the effective tax rate is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Income tax expense (benefit) at the federal statutory rate
|
|
$
|
25
|
|
|
$
|
(47
|
)
|
|
$
|
5
|
|
State and other tax expense
|
|
(1
|
)
|
|
(2
|
)
|
|
1
|
|
Tax rate differential on foreign earnings
|
|
1
|
|
|
10
|
|
|
4
|
|
Income from grantor trust
|
|
—
|
|
|
(8
|
)
|
|
—
|
|
Gain on sale of business
|
|
(44
|
)
|
|
—
|
|
|
—
|
|
Permanent differences
|
|
3
|
|
|
4
|
|
|
4
|
|
Foreign currency exchange gain
|
|
2
|
|
|
—
|
|
|
—
|
|
Impact of state tax law change
|
|
(13
|
)
|
|
—
|
|
|
—
|
|
State ITC credit
|
|
1
|
|
|
1
|
|
|
(4
|
)
|
Change in valuation allowance
|
|
—
|
|
|
31
|
|
|
2
|
|
Liability for uncertain tax positions
|
|
(4
|
)
|
|
—
|
|
|
15
|
|
Adjustment to deferred tax
|
|
—
|
|
|
(1
|
)
|
|
(5
|
)
|
Impact of deferred tax re-measurement for federal tax rate change
|
|
—
|
|
|
(204
|
)
|
|
—
|
|
Tax reform transition tax
|
|
1
|
|
|
21
|
|
|
—
|
|
Expiration of non-qualified stock options
|
|
—
|
|
|
3
|
|
|
—
|
|
Other
|
|
—
|
|
|
1
|
|
|
—
|
|
Total income tax (benefit) expense
|
|
$
|
(29
|
)
|
|
$
|
(191
|
)
|
|
$
|
22
|
|
We had consolidated federal NOLs estimated to be approximately
$197 million
for federal income tax purposes as of the end of
2018
. These consolidated federal NOLs will expire, if not used, in the following amounts in the following years (in millions):
|
|
|
|
|
|
|
|
Amount of
Carryforward
Expiring
|
2033
|
$
|
194
|
|
2035
|
1
|
|
2036
|
1
|
|
2037
|
1
|
|
|
$
|
197
|
|
In addition to the consolidated federal NOLs, as of
December 31, 2018
, we had state NOL carryforwards of approximately
$360 million
, which expire between
2028
and
2037
, net foreign NOL carryforwards of approximately
$173 million
with some expiring between
2019
and
2038
. The federal tax credit carryforwards include production tax credits of
$60 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
$1 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,
|
|
|
2018
|
|
2017
|
Deferred tax assets:
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
90
|
|
|
$
|
119
|
|
Accrued expenses
|
|
13
|
|
|
15
|
|
Prepaid and other costs
|
|
48
|
|
|
48
|
|
Deferred tax assets attributable to pass-through entities
|
|
10
|
|
|
10
|
|
Retirement benefits
|
|
1
|
|
|
2
|
|
State adjustment
|
|
5
|
|
|
—
|
|
Hedging
|
|
4
|
|
|
—
|
|
Other
|
|
1
|
|
|
3
|
|
Unbilled accounts
|
|
1
|
|
|
—
|
|
Interest expense
|
|
12
|
|
|
—
|
|
AMT and other credit carryforwards
|
|
49
|
|
|
48
|
|
Total gross deferred tax asset
|
|
234
|
|
|
245
|
|
Less: valuation allowance
|
|
(73
|
)
|
|
(77
|
)
|
Total deferred tax asset
|
|
161
|
|
|
168
|
|
Deferred tax liabilities:
|
|
|
|
|
Unbilled accounts receivable
|
|
—
|
|
|
3
|
|
Property, plant and equipment
|
|
521
|
|
|
538
|
|
Intangible assets
|
|
12
|
|
|
33
|
|
Deferred tax liabilities attributable to pass-through entities
|
|
5
|
|
|
8
|
|
Deferred gain on convertible debt
|
|
—
|
|
|
4
|
|
Other, net
|
|
1
|
|
|
1
|
|
Total gross deferred tax liability
|
|
539
|
|
|
587
|
|
Net deferred tax liability, including deferred tax liability held for sale
|
|
378
|
|
|
419
|
|
Less: Deferred tax liability held for sale
(1)
|
|
—
|
|
|
7
|
|
Net deferred tax liability
|
|
$
|
378
|
|
|
$
|
412
|
|
|
|
(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
.
|
Cumulative undistributed foreign earnings for which United States taxes were not provided were included in consolidated retained earnings in the amount of approximately
zero
as of
December 31, 2018 and 2017
, respectively. For 2018, foreign undistributed earnings were considered permanently invested, therefore no provision for US income taxes was accrued. For 2017, after the application of the tax impact of the Act, no additional tax was included in the provision related to the cumulative undistributed foreign earnings as of December 31, 2017.
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".
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, 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
|
|
Additions based on tax positions related to the current year
|
2
|
|
Additions for tax positions of prior years
|
1
|
|
Reductions for lapse in applicable statute of limitations
|
(2
|
)
|
Reductions for tax positions of prior years
|
(8
|
)
|
Balance at December 31, 2018
|
$
|
41
|
|
The uncertain tax positions, exclusive of interest and penalties, were
$41 million
and
$48 million
as of
December 31, 2018 and 2017
, 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, 2018 and 2017
, we had accrued interest and penalties associated with liabilities for uncertain tax positions of
$5 million
. 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 12. FINANCIAL INSTRUMENTS
Fair Value Measurements
Authoritative guidance associated with fair value measurements provides a framework for measuring fair value and establishes a fair value hierarchy that prioritizes the inputs used to measure fair value, giving the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs), then significant other observable inputs (Level 2 inputs) and the lowest priority to significant unobservable inputs (Level 3 inputs). The following methods and assumptions were used to
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
estimate the fair value of each class of financial instruments:
|
|
•
|
For marketable securities, the carrying value of these amounts is a reasonable estimate of their fair value.
|
|
|
•
|
Fair values for long-term debt and project debt are determined using quoted market prices (Level 1).
|
|
|
•
|
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 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 and are based on pertinent information available to us as of
December 31, 2018
. Such amounts have not been comprehensively revalued for purposes of these financial statements 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, 2018 and 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
Financial Instruments Recorded at Fair Value on a Recurring Basis:
|
|
Fair Value Measurement Level
|
|
2018
|
|
2017
|
|
|
|
|
(In millions)
|
Assets:
|
|
|
|
|
|
|
Investments — mutual and bond funds
(1)
|
|
1
|
|
$
|
2
|
|
|
$
|
2
|
|
Total assets:
|
|
|
|
$
|
2
|
|
|
$
|
2
|
|
Liabilities:
|
|
|
|
|
|
|
Derivative liability — energy hedges
(2)
|
|
2
|
|
$
|
13
|
|
|
$
|
5
|
|
Derivative liability — interest rate swaps included in liabilities held for sale
(3)
|
|
2
|
|
—
|
|
|
7
|
|
Total liabilities:
|
|
|
|
$
|
13
|
|
|
$
|
12
|
|
|
|
(1)
|
Included in other noncurrent assets in the consolidated balance sheets.
|
|
|
(2)
|
The short-term balance is included in Accrued expenses and other current liabilities and the long-term balance is included in Other liabilities in the consolidated balance sheets.
|
|
|
(3)
|
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
.
|
The following financial instruments are recorded at their carrying amount (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
As of December 31, 2017
|
Financial Instruments Recorded at Carrying Amount:
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
Liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
2,342
|
|
|
$
|
2,245
|
|
|
$
|
2,349
|
|
|
$
|
2,371
|
|
Project debt
|
|
$
|
152
|
|
|
$
|
154
|
|
|
$
|
174
|
|
|
$
|
179
|
|
Project debt included in liabilities held for sale
(1)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
510
|
|
|
$
|
510
|
|
|
|
(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
.
|
We are required to disclose the fair value of financial instruments for which it is practicable to estimate that value. The fair value of short-term financial instruments such as cash and cash equivalents, restricted cash, accounts receivables, prepaid expenses and other assets, accounts payable and accrued expenses approximates their carrying value on the consolidated balance sheets due to their short-term nature.
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. Long-lived assets, such as property and equipment and identifiable intangibles with finite useful lives, are periodically evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Assets are grouped and evaluated for impairment at the lowest level of which there are identifiable cash flows, which is generally at the facility level. Assets are reviewed using factors including, but not limited to, our future operating plans and projected cash flows. The determination of whether impairment has occurred is based on the assets
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
fair value as compared to the carrying value. Fair value is generally determined using an income approach, which requires discounting the estimated future cash flows associated with the asset. If the asset carrying amount exceeds its fair value, an impairment charge is recognized in the amount by which the carrying amount exceeds the fair value of the asset.
NOTE 13. EQUITY METHOD INVESTMENTS
Investments in investees and joint ventures accounted for under the equity method of
$160 million
and
$5 million
are included as Other assets in our consolidated balance sheet of
December 31, 2018
and 2017, respectively. A shareholder loan of
$6 million
related to the Earls Gate project is included in Other assets in our consolidated balance sheet of
December 31, 2018
. For additional information on our equity investments in Ireland and the UK, see
Note 3. New Business and Asset Management
- Green Investment Group Limited (“GIG”) Joint Ventures.
Our ownership percentages in our investments in investees and joint ventures are as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
Ownership interest:
|
|
2018
|
|
2017
|
Dublin EfW (Ireland)
(1)
|
|
50
|
%
|
|
—
|
%
|
Ambiente 2000 S.r.l. (Italy)
|
|
40
|
%
|
|
40
|
%
|
Earls Gate (UK)
(2)
|
|
25
|
%
|
|
—
|
%
|
South Fork Plant (US)
|
|
50
|
%
|
|
50
|
%
|
Koma Kulshan Plant (US)
|
|
—
|
%
|
|
50
|
%
|
Tartech (US)
|
|
—
|
%
|
|
50
|
%
|
|
|
(1)
|
We have a
50%
indirect ownership of Dublin EfW, through our 50/50 joint venture with GIG, Covanta Europe Assets Ltd.
|
|
|
(2)
|
We have a
25%
indirect ownership of Earls Gate, through our 50/50 joint venture with GIG, Covanta Green Jersey Assets Ltd., which owns
50%
of Earls Gate.
|
Summarized financial information of our equity method investments is presented as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2018
|
|
2017
|
Balance Sheet:
|
|
|
|
|
|
|
Current assets
|
|
|
|
$
|
80
|
|
|
$
|
7
|
|
Long-term assets
|
|
|
|
$
|
834
|
|
|
$
|
17
|
|
Current liabilities
|
|
|
|
$
|
69
|
|
|
$
|
9
|
|
Long-term liabilities
|
|
|
|
$
|
521
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Statement of Operations:
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
112
|
|
|
$
|
17
|
|
|
$
|
19
|
|
Operating income (loss)
|
|
$
|
31
|
|
|
$
|
1
|
|
|
$
|
(7
|
)
|
Net income (loss)
|
|
$
|
13
|
|
|
$
|
1
|
|
|
$
|
(7
|
)
|
We serve as the O&M service provider for the Dublin EfW facility which is owned by CEAL, our joint venture with GIG, under market competitive terms. For the period from February 12, 2018 through
December 31, 2018
we recognized
$27 million
in revenues related to this agreement.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 14. DERIVATIVE INSTRUMENTS
Energy Price Risk
We have entered into a variety of contractual hedging arrangements, designated as cash flow hedges, in order to mitigate our exposure to energy market risk, and will continue to do so in the future. Our efforts in this regard involve only mitigation of price volatility for the energy we produce and do 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 on a forward basis under agreements with various financial institutions as of
December 31, 2018
is indicated in the following table (in millions):
|
|
|
|
Calendar Year
|
|
Hedged MWh
|
2019
|
|
2.8
|
2020
|
|
0.2
|
Total
|
|
3.0
|
As of
December 31, 2018
, the fair value of the energy derivative liability was
$13 million
. The effective portion of the change in fair value was recorded as a component of AOCI. As of
December 31, 2018
, the amount of hedge ineffectiveness was
not material
.
As of
December 31, 2017
, the fair value of the energy derivative liability was
$5 million
. The effective portion of the change in fair value was recorded as a component of AOCI. As of
December 31, 2017
, the amount of hedge ineffectiveness was not material.
During the
year
ended
December 31, 2018
, cash provided by and used in energy derivative settlements of
$8 million
and
$24 million
, respectively, was included in net cash provided by operating activities on our consolidated statement of cash flows.
During the
year
ended
December 31, 2017
, cash provided by and used in energy derivative settlements of
$17 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 2017, in order to hedge the risk of adverse variable interest rate fluctuations associated with the senior secured term loan previously held by Dublin EfW, we entered into floating to fixed rate swap agreements with various financial institutions to hedge the variable interest rate fluctuations associated with the floating rate portion of the loan, expiring in 2032. The interest rate swap was designated as a cash flow hedge which was recorded at fair value with changes in fair value recorded as a component of AOCI. The unrealized loss was included within
Gain (loss) on sale of assets
upon deconsolidation.
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 in our consolidated balance sheet and was subsequently sold as part of the transaction with GIG. See
Note 4. Dispositions and Assets Held for Sale
.
NOTE 15. INTANGIBLE ASSETS AND GOODWILL
Our intangible assets and liabilities 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 sheets.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Intangible assets consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
As of December 31, 2017
|
|
|
Remaining Weighted Average Useful
Life
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
Waste, service and energy contracts
|
|
19 years
|
|
$
|
522
|
|
|
$
|
271
|
|
|
$
|
251
|
|
|
$
|
494
|
|
|
$
|
243
|
|
|
$
|
251
|
|
Customer relationships, permits and other
|
|
5 years
|
|
$
|
52
|
|
|
$
|
24
|
|
|
$
|
28
|
|
|
$
|
54
|
|
|
$
|
18
|
|
|
36
|
|
Intangible assets, net
|
|
|
|
$
|
574
|
|
|
$
|
295
|
|
|
$
|
279
|
|
|
$
|
548
|
|
|
$
|
261
|
|
|
$
|
287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Waste and service contracts (liability)
|
|
13 years
|
|
$
|
(72
|
)
|
|
$
|
(64
|
)
|
|
$
|
(8
|
)
|
|
$
|
(66
|
)
|
|
$
|
(62
|
)
|
|
$
|
(4
|
)
|
The following table details the amount of amortization expense and contra-expense associated with our intangible assets and liabilities that was included in our consolidated statements of operations for each of the years indicated (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Intangible assets, net
|
|
$
|
20
|
|
|
$
|
20
|
|
|
$
|
27
|
|
Waste and service contracts (contra-expense)
|
|
$
|
(2
|
)
|
|
$
|
(2
|
)
|
|
$
|
(6
|
)
|
The following table details the amount of estimated amortization expense and contra-expense associated with our intangible assets and liabilities expected to be included in our consolidated statements of operations for each of the years indicated as of
December 31, 2018
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
Intangible assets, net
|
|
26
|
|
|
30
|
|
|
28
|
|
|
16
|
|
|
13
|
|
Waste and service contracts (contra-expense)
|
|
(2
|
)
|
|
$
|
(1
|
)
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
The weighted average number of years prior to the next renewal period for contracts that we have an intangible recorded is
6
years.
Goodwill
The following table details the changes in carrying value of goodwill (in millions):
|
|
|
|
|
|
Total
|
Balance at December 31, 2016
|
$
|
302
|
|
Goodwill related to acquisitions
|
11
|
|
Balance at December 31, 2017
|
313
|
|
Goodwill related to acquisitions
|
8
|
|
Balance at December 31, 2018
|
$
|
321
|
|
As of
December 31, 2018
, goodwill of approximately
$48 million
was deductible for federal income tax purposes.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 16. CONSOLIDATED DEBT
Consolidated debt is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Rate
|
|
December 31, 2018
|
|
December 31, 2017
|
LONG-TERM DEBT:
|
|
|
|
Revolving credit facility
|
4.19
|
%
|
|
$
|
212
|
|
|
$
|
445
|
|
Term loan, net due 2019
|
3.12
|
%
|
|
—
|
|
|
191
|
|
Term loan, net due 2023
|
4.27
|
%
|
|
394
|
|
|
—
|
|
Credit Facilities Sub-total
|
|
|
$
|
606
|
|
|
$
|
636
|
|
Senior Notes
|
|
|
1,200
|
|
|
1,200
|
|
Less: deferred financing costs related to senior notes
|
|
|
(16
|
)
|
|
(15
|
)
|
Senior Notes Sub-total
|
|
|
$
|
1,184
|
|
|
$
|
1,185
|
|
Tax-exempt bonds
|
|
|
$
|
494
|
|
|
$
|
464
|
|
Less: deferred financing costs related to tax-exempt bonds
|
|
|
(6
|
)
|
|
(5
|
)
|
Tax-Exempt Bonds Sub-total
|
|
|
$
|
488
|
|
|
$
|
459
|
|
Equipment financing capital leases due 2024 through 2028
|
|
|
64
|
|
|
69
|
|
Total long-term debt
|
|
|
$
|
2,342
|
|
|
$
|
2,349
|
|
Less: current portion
|
|
|
(15
|
)
|
|
(10
|
)
|
Noncurrent long-term debt
|
|
|
$
|
2,327
|
|
|
$
|
2,339
|
|
PROJECT DEBT:
|
|
|
|
|
|
Project debt related to service fee structures
|
|
|
$
|
58
|
|
|
$
|
68
|
|
Union capital lease
|
|
|
89
|
|
|
94
|
|
Project debt related to tip fee structures
|
|
|
3
|
|
|
9
|
|
Unamortized debt premium, net
|
|
|
3
|
|
|
4
|
|
Less: deferred financing costs
|
|
|
(1
|
)
|
|
(1
|
)
|
Total project debt
|
|
|
$
|
152
|
|
|
$
|
174
|
|
Less: Current portion
|
|
|
(19
|
)
|
|
(23
|
)
|
Noncurrent project debt
|
|
|
$
|
133
|
|
|
$
|
151
|
|
TOTAL CONSOLIDATED DEBT
|
|
|
$
|
2,494
|
|
|
$
|
2,523
|
|
Less: Current debt
|
|
|
(34
|
)
|
|
(33
|
)
|
TOTAL NONCURRENT CONSOLIDATED DEBT
|
|
|
$
|
2,460
|
|
|
$
|
2,490
|
|
Credit Facility Refinancing
In 2018, our subsidiary, Covanta Energy, entered into an amended and restated
$1.3 billion
senior secured credit agreement, which provides for a
$900 million
revolving credit facility (the “Revolving Credit Facility”) and a
$400 million
term loan (the “Term Loan”) both expiring August 2023 (collectively referred to as the "Credit Facilities").
The refinancing transaction:
|
|
•
|
reduced the aggregate commitment amount of the Revolving Credit Facility by
$100 million
to
$900 million
and adjusted the pricing grid such that the initial applicable margin was reduced by 25 basis points as compared to the previous Revolving Credit Facility;
|
|
|
•
|
refinanced Covanta Energy's previous
$200 million
Term Loan with a new
$400 million
Term Loan; and
|
|
|
•
|
extended the maturity date of both the Term Loan and Revolving Credit Facility from March 2020 to August 2023.
|
We incurred approximately
$7 million
in financing costs related to these amendments which will be deferred and amortized over the five year term of the Credit Facilities. In addition, the remaining unamortized deferred costs of
$4 million
on the previous Revolver and Term Loan collectively will also be deferred and amortized over the revised term of 5 years. A portion of the net proceeds of the new Term Loan were used to repay direct borrowings under the previous Revolving Credit Facility and pay transaction fees and expenses.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Revolving Credit Facility is available for the issuance of letters of credit of up to
$600 million
, provides for a
$50 million
sub-limit for the issuance of swing line loans (a loan that can be requested in US Dollars on a same day basis for a short drawing period); and is available in US Dollars, Euros, Pounds Sterling, Canadian Dollars and certain other currencies to be agreed upon, in each case for either borrowings or for the issuance of letters of credit. The proceeds under the Revolving Credit Facility are available for working capital and general corporate purposes of Covanta Energy and its subsidiaries. We have the option to establish additional term loan commitments and/or increase the size of the Revolving Credit Facility (collectively, the “Incremental Facilities”), subject to the satisfaction of certain conditions and obtaining sufficient lender commitments, in an amount up to the greater of
$500 million
and the amount that, after giving effect to the incurrence of such Incremental Facilities, would not result in a leverage ratio, as defined in the credit agreement governing our Credit Facilities (the “Credit Agreement”), exceeding 2.75:1.00.
Unutilized Capacity under Revolving Credit Facility
As of
December 31, 2018
, we had unutilized capacity under the Revolving Credit Facility as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Facility Commitment
|
|
Expiring
|
|
Direct Borrowings
|
|
Outstanding Letters of Credit
|
|
Unutilized Capacity
|
Revolving Credit Facility
|
$
|
900
|
|
|
2023
|
|
$
|
212
|
|
|
$
|
239
|
|
|
$
|
449
|
|
Repayment Terms
As of
December 31, 2018
, the Term Loan has mandatory principal payments of approximately
$10 million
in each year through 2022 and
$355 million
in 2023. 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
0.50%
to
1.50%
. 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.
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, 2018
.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 and may incorporate certain pro forma adjustments.
|
|
|
•
|
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
The table below summarizes our aggregate principal amount of senior unsecured notes:
|
|
|
|
|
|
|
|
|
|
|
|
Maturity
|
|
Rate
|
|
December 31, 2018
|
|
December 31, 2017
|
2027
|
|
6.000%
|
|
$
|
400
|
|
|
$
|
—
|
|
2025
|
|
5.875%
|
|
400
|
|
|
400
|
|
2024
|
|
5.875%
|
|
400
|
|
|
400
|
|
2022
|
|
6.375%
|
|
—
|
|
|
400
|
|
|
|
|
|
$
|
1,200
|
|
|
$
|
1,200
|
|
Senior Notes due 2027 (the “2027 Senior Notes”)
In October 2018, we issued
$400 million
aggregate principal amount of Senior Notes due 2027. The 2027 Senior Note bear interest at
6.00%
per annum, payable semi-annually on January 1 and July 1 of each year, commencing on July 1, 2019. Net proceeds from the sale of the 2027 Senior Notes were approximately
$394 million
and were used along with cash on hand and/or direct borrowings under our Revolving Credit Facility to fund the optional redemption of all of our 2022 Senior Notes.
During the year ended December 31, 2018, 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
$3 million
recognized in our consolidated statements of operations as a Loss on extinguishment of debt. The 2027 Senior Notes are governed by and issued pursuant to the Indenture dated January 18, 2007 between us and Wells Fargo Bank, National Association, as trustee, (the “Base Indenture”) and the Sixth Supplemental Indenture dated as of October 1, 2018.
Senior Notes due 2025 (the "2025 Senior Notes")
In March 2017, we issued
$400 million
aggregate principal amount of
5.875%
Senior Notes due July 2025. The 2025 Notes bear interest at
5.875%
per annum, payable semi-annually on January 1 and July 1 of each year, beginning on July 1, 2017. Net proceeds from the sale of the 2025 Senior Notes were approximately
$394 million
and were used to fund the redemption of our 2020 Senior Notes.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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. The 2025 Senior Notes are governed by and issued pursuant to the Base Indenture and the Fifth Supplemental Indenture dated March 16, 2017.
Senior Notes due 2024 (the "2024 Senior Notes")
In March 2014, we issued
$400 million
aggregate principal amount of
5.875%
Senior Notes due March 2024. The 2024 Senior Notes bear interest at
5.875%
per annum, payable semi-annually on March 1 and September 1 of each year, commencing on September 1, 2014. The 2024 Senior Notes are governed by and issued pursuant to the Base Indenture and the Fourth Supplemental Indenture dated March 6, 2014.
Our Senior Notes are:
|
|
•
|
general unsecured obligations of Covanta and are not guaranteed by any of our subsidiaries;
|
|
|
•
|
rank equally in right of payment with all of our existing and future senior unsecured indebtedness that is not subordinated in right of payment to the Senior Notes;
|
|
|
•
|
are effectively subordinated in right of payment to any of our existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness;
|
|
|
•
|
are structurally subordinated to any existing and future liabilities of any of our subsidiaries, including Covanta Energy, including their guarantees under certain of our Tax-Exempt Bonds;
|
|
|
•
|
governed by the Base Indenture as supplemented by the supplemental indentures;
|
|
|
•
|
are subject to redemption at our option, in whole or in part, subject to the terms of their respective supplemental indentures;
|
|
|
•
|
are redeemable at our option using the proceeds of certain equity offerings subject to the terms of their respective supplemental indentures.
|
The indentures for our Senior Notes further 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;
•
incur liens;
•
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.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Tax-Exempt Bonds
Our Tax-Exempt Bonds are summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
|
|
Maturity
|
|
Coupon
|
|
December 31, 2018
|
|
December 31, 2017
|
New Hampshire Series 2018A
|
|
2027
|
|
4.000%
|
|
$
|
20
|
|
|
$
|
—
|
|
New Hampshire Series 2018B
|
|
2042
|
|
4.625%
|
|
67
|
|
|
—
|
|
New Hampshire Series 2018C
|
|
2042
|
|
4.875%
|
|
82
|
|
|
—
|
|
New York Series 2018A
|
|
2042
|
|
4.750%
|
|
130
|
|
|
—
|
|
New York Series 2018B
|
|
2024
|
|
3.500%
|
|
35
|
|
|
—
|
|
Virginia Series
|
|
2038
|
|
5.000%
|
|
30
|
|
|
—
|
|
New Jersey Series 2015A
|
|
2045
|
|
5.250%
|
|
90
|
|
|
90
|
|
Pennsylvania Series 2015A
|
|
2043
|
|
5.000%
|
|
40
|
|
|
40
|
|
Massachusetts Series 2012A
|
|
2027
|
|
4.875%
|
|
—
|
|
|
20
|
|
Massachusetts Series 2012B
|
|
2042
|
|
4.875%
|
|
—
|
|
|
67
|
|
Massachusetts Series 2012C
|
|
2042
|
|
5.250%
|
|
—
|
|
|
82
|
|
Niagara Series 2012A
|
|
2042
|
|
5.250%
|
|
—
|
|
|
130
|
|
Niagara Series 2012B
|
|
2024
|
|
4.000%
|
|
—
|
|
|
35
|
|
|
|
|
|
|
|
$
|
494
|
|
|
$
|
464
|
|
In September 2018, we completed a refinancing transaction involving the issuance by the National Finance Authority, a component unit of the Business Finance Authority of the State of New Hampshire, of
$170 million
aggregate principal amount of Resource Recovery Bonds Series 2018A, 2018B and 2018C ( the "New Hampshire Series”) and the issuance by the Niagara Area Development Corporation of
$165 million
aggregate principal amount of Solid Waste Disposal Facility Refunding Revenue Bonds Series 2018A and 2018B (the “New York Series”).
The net proceeds of both issuances were loaned to us for the purpose of redeeming the outstanding principal balance of our previously outstanding Massachusetts Development Finance Agency 2012 Series bonds and Niagara Area Development Corporation Series 2012 bonds.
In connection with the 2018 refinancing transaction, we recorded deferred financing costs of
$3 million
, which will be amortized over the term of the New Hampshire and New York Series bonds. In addition, we recorded a
$3 million
write-off of unamortized issuance costs associated with the previously outstanding debt which was recognized as a Loss on extinguishment of debt in our condensed consolidated statement of operations for the year ended December 31, 2018. The New Hampshire Series and New York Series bonds are our senior unsecured obligations and are not guaranteed by any of our subsidiaries.
In June 2018, we completed a financing transaction involving the issuance by the Virginia Small Business Financing Authority (the “VSBFA”) of
$30 million
in aggregate principal amount of Solid Waste Disposal Bonds due 2038 (the “2018 Virginia Series”). The VSBFA has approved an aggregate principal amount of
$50 million
for issuance and
$20 million
remains reserved for potential future issuance at our option. The 2018 Virginia Series bonds are payable semi-annually on January 1 and July 1, of each year, beginning January 1, 2019. The Virginia Series bonds have a legal maturity of January 1, 2048 but, are subject to a mandatory tender for purchase on July 1, 2038. We utilized the net proceeds of the 2018 Virginia Series to fund certain capital expenditures at our facilities in Virginia and paying related costs of issuance. The Virginia Bonds are our senior unsecured obligations and are not guaranteed by any of our subsidiaries. Our New Jersey Series and Pennsylvania Series bonds are guaranteed by Covanta Energy.
Each of the respective loan agreements for our Tax-Exempt Bonds contain customary events of default, including failure to make any payments when due, failure to perform its covenants under the respective loan agreement, and our 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. Our Tax Exempt Bonds also 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, 2018
, the outstanding borrowings under the capital lease have mandatory payments remaining as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Thereafter
|
Future minimum payments
|
|
$
|
5
|
|
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
7
|
|
|
$
|
59
|
|
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
8.16%
. The outstanding borrowings under the equipment financing capital lease arrangements were
$64 million
as of
December 31, 2018
, and have mandatory payments remaining as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Thereafter
|
Future minimum payments
|
|
$
|
5
|
|
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
35
|
|
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 project debt as of
December 31, 2018
are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Thereafter
|
|
Total
|
|
Less:
Current
Portion
|
|
Total
Noncurrent
Project Debt
|
Debt
|
|
$
|
19
|
|
|
$
|
8
|
|
|
$
|
8
|
|
|
$
|
9
|
|
|
$
|
9
|
|
|
$
|
97
|
|
|
$
|
150
|
|
|
$
|
(19
|
)
|
|
$
|
131
|
|
Premium and deferred financing costs
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
2
|
|
|
—
|
|
|
2
|
|
Total
(1)
|
|
$
|
19
|
|
|
$
|
8
|
|
|
$
|
8
|
|
|
$
|
9
|
|
|
$
|
9
|
|
|
$
|
99
|
|
|
$
|
152
|
|
|
$
|
(19
|
)
|
|
$
|
133
|
|
(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 balance sheet. 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, 2018
, such revenue bonds were collateralized by property, plant and equipment with a net carrying value of
$538 million
and restricted funds held in trust of approximately
$22 million
.
Rates on our project debt as of
December 31, 2018
were as follows:
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
Maximum
|
Project debt related to service fee structures due through 2035
|
|
4.00
|
%
|
|
5.00
|
%
|
Project debt related to tip fee structures due through 2020
|
|
5.25
|
%
|
|
6.20
|
%
|
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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, 2018, 2017 and 2016
amortization of deferred financing costs included as a component of interest expense totaled
$5 million
,
$7 million
and
$6 million
, respectively.
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,
|
|
2018
|
|
2017
|
|
2016
|
Capitalized interest
|
$
|
—
|
|
|
$
|
17
|
|
|
$
|
26
|
|
Project Debt Included in Liabilities Held for Sale
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. 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. The transaction was completed in February 2018 and resulted in our loss of a controlling interest in Dublin EfW, which required the entity to be deconsolidated from our financial statements as of the sale date. For additional information see
Note 3. New Business and Asset Management
- Green Investment Group Limited (“GIG”) Joint Ventures.
Project debt included in Liabilities held for sale on our consolidated balance sheet of December 31, 2017 is as follows:
|
|
|
|
|
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: 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 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
.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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
.
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.
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.
|
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 17. 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 to determine whether losses are considered probable and reasonably estimable prior to recording 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. The final consequences of these proceedings are not presently determinable with certainty. As of
December 31, 2018
and
2017
, accruals for our loss contingencies approximated
$16 million
and
$18 million
, respectively.
Environmental Matters
Our operations are subject to environmental regulatory laws and environmental remediation laws. Although our operations are occasionally subject to proceedings and orders pertaining to emissions into the environment and other environmental violations, which may result in fines, penalties, damages or other sanctions, we believe that we are in substantial compliance with existing environmental laws and regulations.
We may be identified, along with other entities, as being among parties potentially responsible for contribution to costs associated with the correction and remediation of environmental conditions at disposal sites subject to federal and/or analogous state laws. In certain instances, we may be exposed to joint and several liabilities for remedial action or damages. Our liability in connection with such environmental claims will depend on many factors, including our volumetric share of waste, the total cost of remediation, and the financial viability of other companies that also sent waste to a given site and, in the case of divested operations, the contractual arrangement with the purchaser of such operations.
The potential costs related to the matters described below and the possible impact on future operations are uncertain due in part to the complexity of governmental laws and regulations and their interpretations, the varying costs and effectiveness of cleanup technologies, the uncertain level of insurance or other types of recovery and the questionable level of our responsibility. Although the ultimate outcome and expense of any litigation, including environmental remediation, is uncertain, we believe that the following proceedings will not have a material adverse effect on our consolidated 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 (“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. In March 2016, the EPA released the Record of Decision (“ROD”) for its Focused Feasibility Study of the lower 8 miles of the LPRSA; the EPA’s selected remedy includes capping/dredging of sediment, institutional controls and long-term monitoring. In June 2018, PRP Occidental Chemical Corporation (“OCC”) filed a federal Superfund lawsuit against 120 PRPs including Essex with respect to past and future response costs expended by OCC with respect to the LPRSA. 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 United States Attorney’s Office for the Northern District of Oklahoma (“US Attorney’s Office”) that our subsidiary, Covanta Tulsa Renewable Energy LLC (“Covanta Tulsa”), was the target of a criminal investigation being conducted by the EPA. The investigation related to 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. In October 2018, Covanta Tulsa entered into a Non‐Prosecution Agreement (“NPA”) with the US Attorney’s Office, pursuant to which no charges will be filed if, for a period of one year, Covanta Tulsa satisfies the requirements of the NPA, including that it comply with applicable laws and regulations. As part of the NPA, Covanta Tulsa also made a
$200,000
community service payment to the Oklahoma Department of Environmental Quality to fund air quality and environmental efforts in Oklahoma.
Other Matters
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. In February 2018, we made a settlement payment of
$7 million
related to this claim.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Durham-York Contractor Arbitration
In January 2019, the arbitrator issued a decision regarding outstanding disputes with our primary contractor for the Durham-York construction project, which related to: (i) claims by the contractor for the balance of the contract price withheld, change orders, delay damages and other expense reimbursement and (ii) claims by us for charges and liquidated damages for project completion delays. Our results as of and for the year ended
December 31, 2018
reflected an adjustment to our previous estimate for this settlement, including interest and fees which was not material to our results of operations.
Other Commitments
Other commitments as of
December 31, 2018
were as follows (in millions):
|
|
|
|
|
|
Letters of credit issued under the Revolving Credit Facility
|
|
$
|
239
|
|
Surety bonds
|
|
180
|
|
Total other commitments — net
|
|
$
|
419
|
|
The letters of credit were issued to secure our performance under various contractual undertakings related to our domestic and international projects or to secure obligations under our insurance program. Each letter of credit relating to a project is required to be maintained in effect for the period specified in related project contracts, and generally may be drawn if it is not renewed prior to expiration of that period.
We believe that we will be able to fully perform under our contracts to which these existing letters of credit relate, and that it is unlikely that letters of credit would be drawn because of a default of our performance obligations. If any of these letters of credit were to be drawn by the beneficiary, the amount drawn would be immediately repayable by us to the issuing bank. If we do not immediately repay such amounts drawn under letters of credit issued under the Revolving Credit Facility, unreimbursed amounts would be treated under the Credit Facilities as either additional term loans or as revolving loans.
The surety bonds listed in the table above relate primarily to construction and performance obligations and support for other obligations, including closure requirements of various energy projects when such projects cease operating. Were these bonds to be drawn upon, we would have a contractual obligation to indemnify the surety company.
We have certain contingent obligations related to our Senior Notes and Tax-Exempt Bonds. Holders may require us to repurchase their Senior Notes and Tax-Exempt Bonds if a fundamental change occurs. For specific criteria related to the redemption features of the Senior Notes and Tax-Exempt Bonds, see
Note 16.
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
We expect to incur a total of approximately
$35 million
of capital expenditures, primarily for transportation equipment related to our New York City waste transport and disposal contract, for additional information see
Note 3. New Business and Asset Management
. As of
December 31, 2018
, we have incurred
$13 million
of these expenditures which is included in
Purchase of property, plant and equipment
on our consolidated statement of cash flows for the
year
ended
December 31, 2018
.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 18. 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,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Operating revenue
|
|
$
|
458
|
|
|
$
|
404
|
|
|
$
|
454
|
|
|
$
|
424
|
|
|
$
|
456
|
|
|
$
|
429
|
|
|
$
|
500
|
|
|
$
|
495
|
|
Operating income (loss)
|
|
$
|
20
|
|
|
$
|
(23
|
)
|
|
$
|
(18
|
)
|
|
$
|
20
|
|
|
$
|
2
|
|
|
$
|
46
|
|
|
$
|
59
|
|
|
$
|
58
|
|
Net income (loss)
|
|
$
|
201
|
|
|
$
|
(52
|
)
|
|
$
|
(31
|
)
|
|
$
|
(37
|
)
|
|
$
|
(27
|
)
|
|
$
|
15
|
|
|
$
|
9
|
|
|
$
|
131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.55
|
|
|
$
|
(0.41
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
0.11
|
|
|
$
|
0.07
|
|
|
$
|
1.02
|
|
Diluted
|
|
$
|
1.53
|
|
|
$
|
(0.41
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
0.11
|
|
|
$
|
0.07
|
|
|
$
|
1.01
|
|
Net income for the quarter ended March 31, 2018 includes a
$204 million
gain on the loss of our controlling interest in Dublin EfW. See
Note 3. New Business and Asset Management
and
Note 4. Dispositions and Assets Held for Sale
for further information.
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 11.
Income Taxes
.