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, 2019. Further information is included in Item 8. Financial Statements And Supplementary Data — Note 12. Financial Instruments and Note 13. Derivative Instruments.
Commodity Price Risk
Waste Price Risk
We have some protection against fluctuations in fuel (municipal waste) price risk because approximately 76% of our municipal waste is provided under multi-year contracts where we are paid for our fuel at fixed rates. At our tip fee energy-from-waste facilities, 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 $5 million and $4 million for ferrous and non-ferrous, respectively.
Interest Rate Risk
Our financial market risk results primarily from changes in interest rates. We reduce our exposure to changes in interest rates by entering into interest rate swap contracts. We utilize the interest rate swaps to convert variable rate debt to fixed rate debt. Our interest rate hedge instruments are designated as cash flow hedges. For further details about our interest rate swaps, see Item 8. Financial Statements And Supplementary Data — Note 13. Derivative Instruments.
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 it's 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%.
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%.For details as to the various election options under the Credit Facility, see Item 8. Financial Statements And Supplementary Data — Note 15. Consolidated Debt.
As of December 31, 2019, the outstanding balances under Covanta Energy's Term Loan and the Revolving Credit Facilities were $384 million and $183 million, respectively. A hypothetical increase of 1% in the underlying December 31, 2019 market interest rates would result in a potential reduction to twelve-month future pre-tax earnings and cash provided by operations of approximately $4 million, based on balances outstanding as of December 31, 2019.
London Interbank Offered Rate ("LIBOR") Transition
The use of the London Interbank Offered Rate (“LIBOR”) is expected to be phased out by the end of 2021. LIBOR is currently used as a reference rate for certain of our debt, including our Credit Facilities. Generally, our contracts include a transition clause in the event LIBOR is discontinued, as such, we do not expect the transition of LIBOR to have a material impact on our business. At this time, there is no definitive information regarding the future utilization of LIBOR or of any particular replacement rate; however, we will continue to monitor the efforts of various parties, including government agencies, seeking to identify an alternative rate to replace LIBOR.
Foreign Currency Exchange Rate Risk
We have operations and investments in various foreign markets, including Canada, Ireland, the UK, China and Italy. As and to the extent that we grow our international business, we expect to invest in foreign currencies to pay either for the construction costs of facilities that 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 11. 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, 2019 and 2018, the related consolidated statements of operations, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2019, 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, 2019 and 2018, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, 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, 2019, 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 25, 2020 expressed an adverse opinion thereon.
Adoption of New Accounting Standard
As discussed in Note 1 to the consolidated financial statements, the Company changed its method for accounting for leases in 2019.
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.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
|
|
|
|
Rookery Equity Method Investment - Variable Interest Model
|
Description of the Matter
|
As disclosed in Note 3 to the consolidated financial statements, in March 2019, the 50/50 jointly owned and governed entity (“Covanta Green”) between Covanta and Green Investment Group was used to fund an 80% investment in the Rookery project, an energy from waste facility being built in Bedfordshire, England (the “Facility”). The Company provides technical oversight and became a service provider for the Facility. The Company accounts for its 50% equity interest in Covanta Green under the equity method of accounting. For the year ended December 31, 2019, the Company recorded a $56 million gain on sale of business and investments which is included in the “Gain (loss) on sale of assets” in the consolidated statement of operations.
Auditing the assessment of whether the Company has a controlling financial interest in Covanta Green, which was determined to be a variable interest entity, was complex and required significant judgment. Management’s assessment of whether Covanta is the primary beneficiary under the variable interest model is highly judgmental and could have a significant effect on the accounting for the Company’s 50% equity interest in Covanta Green and the gain recorded in the consolidated statement of operations.
|
|
|
How We Addressed the Matter in Our Audit
|
We tested the controls over the Company’s evaluation of the accounting conclusions with respect to the variable interest model.
Our audit procedures included, among others, evaluating whether Covanta is the primary beneficiary of Covanta Green, which was determined to be a variable interest entity. We read and evaluated the key elements of all arrangements between Covanta and the entities involved in the transaction and evaluated the underlying legal and governance documents to determine whether Covanta has a controlling financial interest in Covanta Green. We made inquiries of management, obtained an understanding of and evaluated the business purpose of Covanta Green and the activities that most significantly impact the economic performance of the entity. For example, we evaluated how decisions about the most significant activities are made and the party or parties that make them, including evaluating whether Covanta’s service agreement with the Facility resulted in Covanta’s power to direct the activities that most significantly impact performance or the obligation to absorb expected losses.
|
|
|
|
Income Taxes - Uncertain Tax Positions
|
Description of the Matter
|
As discussed in Note 9 of the consolidated financial statements, the Company has recorded a liability of $40 million related to uncertain tax positions as of December 31, 2019. The Company conducts business in the US, various foreign countries and numerous states and is therefore subject to US federal and state income taxes, as well as income taxes of multiple foreign jurisdictions. Due to the multinational and multistate operations of the Company, changes in global, including US federal and state, income tax laws and regulations result in complexity in the accounting for and monitoring of income taxes including the provision for uncertain tax positions.
Auditing management’s identification and measurement of uncertain tax positions involved complex analysis and audit judgment related to the evaluation of the income tax consequences of significant business transactions, including legal entity rationalization and restructurings, and changes in income tax law and regulations in various jurisdictions, which is often subject to interpretation.
|
|
|
|
|
|
How We Addressed the Matter in Our Audit
|
We tested the controls over the Company’s process to account for uncertain tax positions, including management’s review of the related tax technical analyses. For example, we tested controls over management’s identification and assessment of changes to tax laws and significant transactions, which may result in uncertain tax positions.
We performed audit procedures, among others, to evaluate the Company’s assumptions and underlying data used to develop its uncertain tax positions and related unrecognized income tax benefit amounts by jurisdiction. We obtained an understanding of the Company’s legal structure through our review of organizational charts and related legal documents. We further considered the income tax consequences of significant transactions, including internal restructurings, and assessed management’s interpretation of those changes under the relevant jurisdiction’s tax law. Due to the complexity of tax law, we involved our income tax professionals to assess the Company’s interpretation of and compliance with tax laws in these jurisdictions, as well as to identify tax law changes. In certain circumstances, we involved our income tax professionals to evaluate the technical merits of the Company’s tax positions, including assessing the Company’s correspondence with the relevant tax authorities and evaluating income tax opinions or other third-party advice obtained by the Company. We also evaluated the Company’s income tax disclosures included in Note 9 to the consolidated financial statements in relation to these matters.
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|
|
|
Impairment Evaluation of Goodwill - CES Reporting Unit
|
Description of the Matter
|
As discussed in Note 1 of the consolidated financial statements, goodwill is not amortized but rather is tested for impairment at least annually at the reporting unit level. The Company’s goodwill is assigned to its reporting units as of the initial acquisition date. In 2019, the Company performed a quantitative goodwill impairment test on its CES reporting unit, which had goodwill of $46 million as of December 31, 2019. The Company’s quantitative goodwill impairment test compares the fair value of the reporting unit to the reporting unit’s carrying value.
Auditing management’s goodwill impairment test is highly judgmental due to the subjectivity in determining the fair value of the reporting unit. Significant assumptions include future cash flow projections and the discount rate applied to those cash flows, the long-term terminal growth rate, and market proxies. These assumptions are highly subjective and involved significant judgment.
|
|
|
How We Addressed the Matter in Our Audit
|
We tested the controls over the Company’s goodwill impairment process, including management’s review of significant assumptions used in the fair value analysis.
Our audit procedures included, among others, assessing the suitability and application of the valuation methodologies and evaluating the significant assumptions and underlying data used by the Company in its analysis. For example, we compared the significant assumptions used by management to current industry and economic trends, the Company’s business model and other relevant factors. We tested the projected financial information used in the analysis and evaluated the consistency and appropriateness of the discount rates and long-term terminal growth rates used in the assessment. We also tested the market approach by evaluating the market multiple proxies in management’s analysis. We involved a valuation specialist to assist us in assessing the valuation methodologies and testing the significant assumptions used in the fair value models. We also performed sensitivity analyses of significant assumptions to evaluate the changes in fair value of the reporting unit resulting from changes in these assumptions.
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/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2002.
Iselin, New Jersey
February 25, 2020
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
(In millions, except per share amounts)
|
OPERATING REVENUE:
|
|
|
|
|
|
|
Waste and service revenue
|
|
$
|
1,393
|
|
|
$
|
1,327
|
|
|
$
|
1,231
|
|
Energy revenue
|
|
329
|
|
|
343
|
|
|
334
|
|
Recycled metals revenue
|
|
86
|
|
|
95
|
|
|
82
|
|
Other operating revenue
|
|
62
|
|
|
103
|
|
|
105
|
|
Total operating revenue
|
|
1,870
|
|
|
1,868
|
|
|
1,752
|
|
OPERATING EXPENSE:
|
|
|
|
|
|
|
Plant operating expense
|
|
1,371
|
|
|
1,321
|
|
|
1,271
|
|
Other operating expense, net
|
|
64
|
|
|
65
|
|
|
51
|
|
General and administrative expense
|
|
122
|
|
|
115
|
|
|
112
|
|
Depreciation and amortization expense
|
|
221
|
|
|
218
|
|
|
215
|
|
Impairment charges
|
|
2
|
|
|
86
|
|
|
2
|
|
Total operating expense
|
|
1,780
|
|
|
1,805
|
|
|
1,651
|
|
Operating income
|
|
90
|
|
|
63
|
|
|
101
|
|
OTHER (EXPENSE) INCOME
|
|
|
|
|
|
|
Interest expense
|
|
(143
|
)
|
|
(145
|
)
|
|
(147
|
)
|
Net gain (loss) on sale of business and investments
|
|
49
|
|
|
217
|
|
|
(6
|
)
|
Loss on extinguishment of debt
|
|
—
|
|
|
(15
|
)
|
|
(84
|
)
|
Other income (expense), net
|
|
1
|
|
|
(3
|
)
|
|
1
|
|
Total other (expense) income
|
|
(93
|
)
|
|
54
|
|
|
(236
|
)
|
(Loss) income before income tax benefit and equity in net income from unconsolidated investments
|
|
(3
|
)
|
|
117
|
|
|
(135
|
)
|
Income tax benefit
|
|
7
|
|
|
29
|
|
|
191
|
|
Equity in net income from unconsolidated investments
|
|
6
|
|
|
6
|
|
|
1
|
|
NET INCOME
|
|
$
|
10
|
|
|
$
|
152
|
|
|
$
|
57
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding:
|
|
|
|
|
|
|
Basic
|
|
131
|
|
|
130
|
|
|
130
|
|
Diluted
|
|
133
|
|
|
132
|
|
|
131
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share:
|
|
|
|
|
|
|
Basic
|
|
$
|
0.07
|
|
|
$
|
1.17
|
|
|
$
|
0.44
|
|
Diluted
|
|
$
|
0.07
|
|
|
$
|
1.15
|
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
(In millions)
|
Net income
|
|
$
|
10
|
|
|
$
|
152
|
|
|
$
|
57
|
|
Foreign currency translation
|
|
(5
|
)
|
|
(2
|
)
|
|
19
|
|
Net (loss) gain on intra-entity foreign currency transactions
|
|
(2
|
)
|
|
3
|
|
|
(2
|
)
|
Net unrealized gain (loss) on derivative instruments, net of tax expense of $6, $2 and $0, respectively
|
|
4
|
|
|
21
|
|
|
(10
|
)
|
Other comprehensive (loss) income
|
|
(3
|
)
|
|
22
|
|
|
7
|
|
Comprehensive income
|
|
$
|
7
|
|
|
$
|
174
|
|
|
$
|
64
|
|
The accompanying notes are an integral part of the consolidated financial statements.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
|
(In millions, except per
share amounts)
|
ASSETS
|
|
|
|
Current:
|
|
|
|
Cash and cash equivalents
|
$
|
37
|
|
|
$
|
58
|
|
Restricted funds held in trust
|
18
|
|
|
39
|
|
Receivables (less allowances of $9 and $8, respectively)
|
240
|
|
|
338
|
|
Prepaid expenses and other current assets
|
105
|
|
|
64
|
|
Total Current Assets
|
400
|
|
|
499
|
|
Property, plant and equipment, net
|
2,451
|
|
|
2,514
|
|
Restricted funds held in trust
|
8
|
|
|
8
|
|
Intangible assets, net
|
258
|
|
|
279
|
|
Goodwill
|
321
|
|
|
321
|
|
Other assets
|
277
|
|
|
222
|
|
Total Assets
|
$
|
3,715
|
|
|
$
|
3,843
|
|
LIABILITIES AND EQUITY
|
|
|
|
Current:
|
|
|
|
Current portion of long-term debt
|
$
|
17
|
|
|
$
|
15
|
|
Current portion of project debt
|
8
|
|
|
19
|
|
Accounts payable
|
36
|
|
|
76
|
|
Accrued expenses and other current liabilities
|
292
|
|
|
333
|
|
Total Current Liabilities
|
353
|
|
|
443
|
|
Long-term debt
|
2,366
|
|
|
2,327
|
|
Project debt
|
125
|
|
|
133
|
|
Deferred income taxes
|
372
|
|
|
378
|
|
Other liabilities
|
123
|
|
|
75
|
|
Total Liabilities
|
3,339
|
|
|
3,356
|
|
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
|
857
|
|
|
841
|
|
Accumulated other comprehensive loss
|
(35
|
)
|
|
(33
|
)
|
Accumulated deficit
|
(460
|
)
|
|
(334
|
)
|
Treasury stock, at par
|
—
|
|
|
(1
|
)
|
Total Equity
|
376
|
|
|
487
|
|
Total Liabilities and Equity
|
$
|
3,715
|
|
|
$
|
3,843
|
|
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,
|
|
|
2019
|
|
2018
|
|
2017
|
OPERATING ACTIVITIES:
|
|
(In millions)
|
Net income
|
|
$
|
10
|
|
|
$
|
152
|
|
|
$
|
57
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
221
|
|
|
218
|
|
|
215
|
|
Amortization of long-term debt deferred financing costs
|
|
5
|
|
|
5
|
|
|
7
|
|
(Gain) loss on sale of business
|
|
(49
|
)
|
|
(217
|
)
|
|
6
|
|
Impairment charges
|
|
2
|
|
|
86
|
|
|
2
|
|
Loss on extinguishment of debt
|
|
—
|
|
|
15
|
|
|
84
|
|
Provision for doubtful accounts
|
|
2
|
|
|
2
|
|
|
9
|
|
Stock-based compensation expense
|
|
25
|
|
|
24
|
|
|
18
|
|
Equity in net income from unconsolidated investments
|
|
(6
|
)
|
|
(6
|
)
|
|
(1
|
)
|
Deferred income taxes
|
|
(9
|
)
|
|
(31
|
)
|
|
(193
|
)
|
Dividends from unconsolidated investments
|
|
9
|
|
|
13
|
|
|
2
|
|
Other, net
|
|
3
|
|
|
(10
|
)
|
|
(13
|
)
|
Change in working capital, net of effects of acquisitions:
|
|
|
|
|
|
|
Receivables
|
|
94
|
|
|
7
|
|
|
(27
|
)
|
Prepaid and other current assets
|
|
(5
|
)
|
|
(3
|
)
|
|
5
|
|
Accounts payable and accrued expenses
|
|
(77
|
)
|
|
(16
|
)
|
|
66
|
|
Changes in noncurrent assets and liabilities, net
|
|
1
|
|
|
(1
|
)
|
|
5
|
|
Net cash provided by operating activities
|
|
226
|
|
|
238
|
|
|
242
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
Purchase of property, plant and equipment
|
|
(158
|
)
|
|
(206
|
)
|
|
(277
|
)
|
Acquisition of businesses, net of cash acquired
|
|
2
|
|
|
(50
|
)
|
|
(16
|
)
|
Proceeds from asset sales
|
|
27
|
|
|
128
|
|
|
4
|
|
Property insurance proceeds
|
|
—
|
|
|
18
|
|
|
8
|
|
Payment of indemnification claim related to sale of asset
|
|
—
|
|
|
(7
|
)
|
|
—
|
|
Investment in equity affiliate
|
|
(14
|
)
|
|
(16
|
)
|
|
—
|
|
Other, net
|
|
(2
|
)
|
|
(6
|
)
|
|
(8
|
)
|
Net cash used in investing activities
|
|
(145
|
)
|
|
(139
|
)
|
|
(289
|
)
|
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW – (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
(In millions)
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
Proceeds from borrowings on long-term debt
|
|
80
|
|
|
1,165
|
|
|
400
|
|
Proceeds from borrowings on revolving credit facility
|
|
536
|
|
|
740
|
|
|
952
|
|
Proceeds from insurance premium financing
|
|
29
|
|
|
25
|
|
|
24
|
|
Proceeds from borrowings on Dublin project financing
|
|
—
|
|
|
—
|
|
|
643
|
|
Payment related to Dublin interest rate swap
|
|
—
|
|
|
—
|
|
|
(17
|
)
|
Payments on the Dublin Convertible Preferred
|
|
—
|
|
|
—
|
|
|
(132
|
)
|
Payments on long-term debt
|
|
(16
|
)
|
|
(944
|
)
|
|
(420
|
)
|
Payments on revolving credit facility
|
|
(565
|
)
|
|
(973
|
)
|
|
(850
|
)
|
Payments on project debt
|
|
(18
|
)
|
|
(23
|
)
|
|
(382
|
)
|
Payments of deferred financing costs
|
|
(1
|
)
|
|
(16
|
)
|
|
(21
|
)
|
Payment of Dublin financing costs
|
|
—
|
|
|
—
|
|
|
(19
|
)
|
Cash dividends paid to stockholders'
|
|
(133
|
)
|
|
(134
|
)
|
|
(131
|
)
|
Payment of insurance premium financing
|
|
(26
|
)
|
|
(24
|
)
|
|
(4
|
)
|
Other, net
|
|
(8
|
)
|
|
(5
|
)
|
|
(3
|
)
|
Net cash (used in) provided by financing activities
|
|
(122
|
)
|
|
(189
|
)
|
|
40
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
(1
|
)
|
|
1
|
|
|
7
|
|
Net decrease in cash, cash equivalents and restricted cash
|
|
(42
|
)
|
|
(89
|
)
|
|
—
|
|
Cash, cash equivalents and restricted cash at beginning of period
|
|
105
|
|
|
194
|
|
|
194
|
|
Cash, cash equivalents and restricted cash at end of period
|
|
63
|
|
|
105
|
|
|
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
|
|
$
|
63
|
|
|
$
|
105
|
|
|
$
|
117
|
|
|
|
|
|
|
|
|
Reconciliation of cash, cash equivalents and restricted cash:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
37
|
|
|
$
|
58
|
|
|
$
|
46
|
|
Restricted funds held in trust- short term
|
|
18
|
|
|
39
|
|
|
43
|
|
Restricted funds held in trust- long term
|
|
8
|
|
|
8
|
|
|
28
|
|
Total cash, cash equivalents and restricted cash
|
|
$
|
63
|
|
|
$
|
105
|
|
|
$
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Paid for Interest and Income Taxes:
|
|
|
|
|
|
|
Interest
|
|
$
|
152
|
|
|
$
|
136
|
|
|
$
|
149
|
|
Income taxes, net of refunds
|
|
$
|
5
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Covanta Holding Corporation Stockholders’ Equity
|
|
Total
|
|
|
Common Stock
|
|
Additional
Paid-In
Capital
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Accumulated (Deficit)
Earnings
|
|
Treasury Stock
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
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
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
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
|
|
Cumulative effect change in accounting for ASU 2018-02 (see Note1)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Stock-based compensation expense
|
|
—
|
|
|
—
|
|
|
25
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
25
|
|
Dividend declared
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(135
|
)
|
|
—
|
|
|
—
|
|
|
(135
|
)
|
Shares repurchased for tax withholdings for vested stock awards
|
|
—
|
|
|
—
|
|
|
(8
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(8
|
)
|
Shares issued in non-vested stock award
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
Other
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
Comprehensive income, net of income taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
10
|
|
|
—
|
|
|
—
|
|
|
7
|
|
Balance as of December 31, 2019
|
|
136
|
|
|
$
|
14
|
|
|
$
|
857
|
|
|
$
|
(35
|
)
|
|
$
|
(460
|
)
|
|
5
|
|
|
$
|
—
|
|
|
$
|
376
|
|
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 21 million tons of solid waste annually. We operate and/or have ownership positions in 41 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. 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, 2019, 2018 and 2017. 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.
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, 2019 and 2018.
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, 2019 and 2018.
Revenue Recognition
Our EfW projects generate revenue from three primary sources: 1) fees charged for operating facilities or for receiving waste for
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 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,
|
|
2019
|
|
2018
|
|
2017
|
Pass through costs
|
$
|
57
|
|
|
$
|
57
|
|
|
$
|
59
|
|
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 includes 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 7. 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 United States treasury bills.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Restricted fund balances are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2019
|
|
2018
|
|
|
Current
|
|
Noncurrent
|
|
Current
|
|
Noncurrent
|
Debt service funds - principal
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
16
|
|
|
$
|
—
|
|
Debt service funds - interest
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total debt service funds
|
|
2
|
|
|
—
|
|
|
16
|
|
|
—
|
|
Revenue funds
|
|
3
|
|
|
—
|
|
|
4
|
|
|
—
|
|
Other funds
|
|
13
|
|
|
8
|
|
|
19
|
|
|
8
|
|
Total
|
|
$
|
18
|
|
|
$
|
8
|
|
|
$
|
39
|
|
|
$
|
8
|
|
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.
In December 2019, we entered into an agreement whereby we will regularly sell certain receivables on a revolving basis to third-party financial institutions up to an aggregate purchase limit of $100 million (the “Receivables Purchase Agreement or “RPA”). Transfers under the RPA meet the requirements to be accounted for as sales in accordance with the Transfers and Servicing topic of FASB Accounting Standards Codification. We receive a discounted purchase price for each receivable sold under the RPA and will continue to service and administer the subject receivables. For additional information see Note 10. Accounts Receivable Securitization.
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,
|
|
|
2019
|
|
2018
|
Land
|
|
$
|
20
|
|
|
$
|
26
|
|
Facilities and equipment
|
|
4,463
|
|
|
4,367
|
|
Landfills (primarily for ash disposal)
|
|
78
|
|
|
75
|
|
Construction in progress
|
|
58
|
|
|
71
|
|
Total
|
|
4,619
|
|
|
4,539
|
|
Less: accumulated depreciation and amortization
|
|
(2,168
|
)
|
|
(2,025
|
)
|
Property, plant, and equipment — net
|
|
$
|
2,451
|
|
|
$
|
2,514
|
|
Depreciation and amortization expense related to property, plant and equipment was $201 million, $199 million, and $197 million, for the years ended December 31, 2019, 2018 and 2017, respectively. Non-cash investing activities related to capital expenditures totaled $6 million, $37 million and $18 million as of December 31, 2019, 2018 and 2017, respectively, and were recorded in Accrued expenses and other current liabilities on our consolidated balance sheet.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Property, plant and equipment is evaluated for impairment whenever events or changes in circumstances indicate their carrying value may not be recoverable over their estimated useful life. In reviewing for recoverability, we compare the carrying amount of the relevant assets to their estimated undiscounted future cash flows. When the estimated undiscounted future cash flows are less than the assets carrying amount, the carrying amount is compared to the assets fair value. If the assets fair value is less than the carrying amount an impairment charge is recognized to reduce the assets carrying amount to its fair value. For the years ended December 31, 2019, 2018 and 2017, we recognized an impairment on our property, plant and equipment of $2 million, $63 million and $2 million, respectively. For additional information, see Note 8. Supplementary Information - Impairment Charges.
Asset Retirement Obligations
We recognize a liability for asset retirement obligations when it is incurred, which is generally upon acquisition, construction, or development. Our liabilities include closure and post-closure costs for landfill cells and site restoration for certain energy-from-waste and power producing sites. We principally determine the liability using internal estimates of the costs using current information, assumptions, and interest rates, but also use independent appraisals as appropriate to estimate costs. When a new liability for asset retirement obligation is recorded, we capitalize the cost of the liability by increasing the carrying amount of the related long-lived asset. The liability is accreted to its present value each period and the capitalized cost is depreciated over the useful life of the related asset. We recognize period-to-period changes in the liability resulting from revisions to the timing or the amount of the original estimate of the undiscounted cash flows.
Current and noncurrent asset retirement obligations are included in Accrued expenses and other current liabilities and Other liabilities, respectively, on our consolidated balance sheet. Our asset retirement obligation is presented as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2019
|
|
2018
|
Beginning of period asset retirement obligation
|
|
$
|
29
|
|
|
$
|
26
|
|
Accretion expense(1)
|
|
2
|
|
|
3
|
|
Net change (2)
|
|
(3
|
)
|
|
—
|
|
Reclassification to assets held for sale
|
|
(2
|
)
|
|
—
|
|
End of period asset retirement obligation
|
|
26
|
|
|
29
|
|
Less: current portion
|
|
(4
|
)
|
|
(5
|
)
|
Noncurrent asset retirement obligation
|
|
$
|
22
|
|
|
$
|
24
|
|
|
|
(1)
|
Accretion expense is included in Plant operating expense in the consolidated statements of operations.
|
|
|
(2)
|
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 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. For the year ended December 31, 2019, 2018 and 2017, we recognized an impairment on our intangible assets of zero, $22 million and zero, respectively. For additional information, see Note 8. Supplementary Information - Impairment Charges and Note 14. 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,
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
which is comprised of two reporting units, North America EfW and CES. 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. 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.
We performed the required annual impairment review of our recorded goodwill for our two reporting units as of October 1, 2019. We performed a qualitative assessment for our North America EfW reporting unit and concluded that the fair value of this reporting unit continued to substantially exceed the carrying value as of the testing date.
For our CES reporting unit, we bypassed the qualitative assessment and proceeded directly to the first step of the goodwill impairment test. We determined an estimate of the fair value of this reporting unit by combining both the income and market approaches. The market approach was based on current trading multiples of EBITDA for companies operating in businesses similar to our CES reporting unit. In performing the test under the income approach, we utilized a discount rate of 10% and a long-term terminal growth rate of 2.5% beyond our planning period. The assumptions used in evaluating goodwill for impairment are subject to change and are tracked against historical performance.
Based on the results of the test performed, we determined that the estimated fair value of the CES reporting unit exceeded the carrying value by 5%; therefore, we did not record a goodwill impairment charge for the year ended December 31, 2019.
Given the narrow margin, we performed a sensitivity analysis on the above assumptions which determined that, while holding the market approach constant, an increase in the discount rate of 80 bps to 10.8% or a decrease in the long-term growth rate of 120 bps to 1.3% would result in impairment.
While we believe the assumptions used were reasonable and commensurate with the views of a market participant, changes in key assumptions, including increasing the discount rate, lowering forecasts for revenue, operating margin or lowering the long-term growth rate for our CES reporting unit, could result in a future impairment.
The goodwill recorded for our CES reporting unit totaled $46 million as of December 31, 2019, and resulted from previously acquired materials processing facilities that are specially designed to process, treat, recycle, and dispose of solid and liquid wastes.
For additional information, see Note 14. 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.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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
|
|
Unrealized loss on intra-entity foreign currency transactions
|
|
Total
|
Balance at December 31, 2017
|
$
|
(17
|
)
|
|
$
|
2
|
|
|
$
|
(33
|
)
|
|
$
|
(7
|
)
|
|
$
|
(55
|
)
|
Other comprehensive (loss) income before reclassifications
|
(4
|
)
|
|
—
|
|
|
(6
|
)
|
|
3
|
|
|
(7
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
2
|
|
|
—
|
|
|
27
|
|
|
—
|
|
|
29
|
|
Net current period comprehensive (loss) income
|
(2
|
)
|
|
—
|
|
|
21
|
|
|
3
|
|
|
22
|
|
Balance at December 31, 2018
|
$
|
(19
|
)
|
|
$
|
2
|
|
|
$
|
(12
|
)
|
|
$
|
(4
|
)
|
|
$
|
(33
|
)
|
Cumulative effect change in accounting for ASU 2018-02 (see Note1)
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Balance at January 1, 2019
|
(19
|
)
|
|
3
|
|
|
(12
|
)
|
|
(4
|
)
|
|
(32
|
)
|
Other comprehensive (loss) income before reclassifications
|
(5
|
)
|
|
—
|
|
|
4
|
|
|
(2
|
)
|
|
(3
|
)
|
Net current period comprehensive (loss) income
|
(5
|
)
|
|
—
|
|
|
4
|
|
|
(2
|
)
|
|
(3
|
)
|
Balance at December 31, 2019
|
$
|
(24
|
)
|
|
$
|
3
|
|
|
$
|
(8
|
)
|
|
$
|
(6
|
)
|
|
$
|
(35
|
)
|
|
|
|
|
|
|
|
|
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 -Green Investment Group Limited (“GIG”) Joint Ventures-Dublin EfW.
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 13. Derivative Instruments.
Foreign Currency Translation
For foreign operations, assets and liabilities are translated at year-end exchange rates and revenue and expense are translated at the average exchange rates during the year. Unrealized gains and losses resulting from foreign currency translation are included in the consolidated statements of equity as a component of AOCI. Currency transaction gains and losses are recorded in other operating expense in the consolidated statements of operations.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Defined Contribution Plans
Substantially all of our employees in the United States are eligible to participate in the defined contribution plans we sponsor. The defined contribution plans allow employees to contribute a portion of their compensation on a pre-tax basis in accordance with specified guidelines. We match a percentage of employee contributions up to certain limits. We also provide a company contribution to the defined contribution plans for eligible employees. Our costs related to defined contribution plans were $20 million, $18 million and $18 million for the years ended December 31, 2019, 2018 and 2017, 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. There were no share repurchases for the years ended December 31, 2019, 2018 and 2017.
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
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.
Accounting Pronouncements Recently Adopted
In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 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 reduced 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. Effective January 1, 2019, we adopted this standard and recorded a reclassification of AOCI to accumulated deficit totaling $1 million.
In February 2016, the FASB issued ASU 2016-02 Leases (Topic 842) which amended the standard for lease arrangements to increase transparency and comparability by providing additional information to users of financial statements regarding an entity's leasing activities. Subsequent to the issuance of Topic 842, the FASB clarified the standard through several ASUs; hereinafter the collection of lease standards is referred to as Accounting Standards Codification (“ASC") 842. The revised standard 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.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
On January 1, 2019, we adopted ASC 842 using the modified retrospective method and recognized a right of use ("ROU") asset and liability in our condensed consolidated balance sheet in the amount of $57 million and $62 million, respectively, related to our operating leases where we are the lessee. There was no effect on our operating leases as lessor. Results for the year ended December 31, 2019 are presented under ASC 842, while prior period amounts were not adjusted and continue to be reported in accordance with the historic accounting guidance under ASC Topic 840, Leases.
As part of the adoption, we elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allowed us to:
|
|
1.
|
Continue to apply the ASC 840 guidance, including the disclosure requirements, in the comparative periods presented in the year of adoption, the hindsight practical expedient;
|
|
|
2.
|
Continue applying our current policy for accounting for land easements that existed as of, or expired before, January 1, 2019;
|
|
|
3.
|
Not separate non-lease components from lease components and instead to account for each separate lease component and the non-lease components associated with that lease component as a single lease component. We elected to apply this practical expedient to all underlying asset classes;
|
|
|
4.
|
Not apply the recognition requirements in ASC 842 to short-term leases; and
|
|
|
5.
|
Not record a right of use asset or right of use liability for leases with an asset or liability balance that would be considered immaterial.
|
Refer to Note 16. Leases for additional disclosures required by ASC 842.
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
|
ASU 2019-12 Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes
|
This standard was issued with the intent to simplify various aspects of income taxes. The standard requires a prospective basis of adoption and a retrospective basis adjustment for amendments related to franchise taxes.
|
First quarter of 2021, early adoption is permitted.
|
We are currently evaluating the impact this standard will have on our consolidated financial statements.
|
ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
|
The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard provides the option to choose between prospective transition and retrospective transition.
|
First quarter of 2020.
|
This standard is not expected to have a material impact on our consolidated financial statements.
|
ASU 2016-13
Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments as amended by ASU 2018-19, 2019-04, 2019-05, 2019-11 and 2019-10.
|
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 will adopt the standard using a modified retrospective approach, on January 1, 2020.This standard is not expected to have a material impact on our consolidated financial statements.
|
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.
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 Net gain (loss) on sale of business and investments 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, 2019 and 2018, our equity investment of $143 million and $149 million, respectively 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 11. 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"), a 650 metric ton-per-day, 21.5 megawatt equivalent generation capacity 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 early 2022. 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 of accounting. As of December 31, 2019 and 2018, an equity investment of $9 million and $10 million, respectively, and a shareholder loan of $15 million and $6 million, respectively, related to this project are included in Other assets on our consolidated balance sheet. For further information, see Note 11. Equity Method Investments.
Rookery EfW
In March 2019, we reached financial close on the Rookery South Energy Recovery Facility (“Rookery”), a 1,600 metric ton-per-day, 60 megawatt EfW facility under construction in Bedfordshire, England. Rookery is our second investment in the UK with our strategic partner, Green Investment Group Limited (“GIG”). Through a 50/50 jointly-owned and governed entity (“Covanta Green”), we and GIG own an 80% interest in the project. We co-developed the project with Veolia ES (UK) Limited (“Veolia”), who owns the remaining 20%. We provide technical oversight during construction and will provide operations and maintenance (“O&M”) services for the facility, and Veolia will be responsible for supplying at least 70% of the waste processing capacity. The facility is expected to commence commercial operations in 2022.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In connection with the transaction, we received $44 million (£34 million) of total consideration for the value of our development costs incurred to date and related fees, and for GIG’s right to invest 40% in the project (50% investment in Covanta Green). For the year ended December 31, 2019, as a result of this consideration and a step-up in the fair value of our retained equity investment, we recorded a gain of $56 million in Net gain on sale of business and investments in our condensed consolidated statement of operations. As of December 31, 2019, $22 million of the consideration received remains in Covanta Green (to be used by us or distributed to us, at our discretion) and as such this amount is included in Prepaid expenses and other current assets and our $9 million equity method investment is included in Other assets on our condensed consolidated balance sheet. The fair value of our retained equity investment in Covanta Green was determined by the fair value of the consideration received from GIG for the right to invest 40% in the project.
Zhao County, China Venture
In December 2019, we made an equity investment in a venture that signed a concession agreement with Zhao County, China that supports the construction of a new 1,200 ton-per-day EfW facility located approximately 200 miles from Beijing ("Zhao County"). The project is being developed jointly by Covanta and strategic local partner, Longking Energy Development Co. Ltd. Construction is expected to begin in early 2020 with completion in less than two years.
As of December 31, 2019, our equity investment in the venture totaled RMB 35 million ($5 million) which amounted to a 26% ownership interest. This investment is accounted for under the equity method of accounting and is included in Other assets on our consolidated balance sheet. Pursuant to the agreement, we are required to contribute an additional RMB 61 million ($9 million) by the end of 2021 and our eventual ownership interest in the venture is expected to be 49%. For additional information see Note 19. Subsequent Events.
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.
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.
NOTE 4. DISPOSITIONS AND ASSETS HELD FOR SALE
Divestiture of Springfield and Pittsfield EfW facilities
During the second quarter of 2019, as part of our ongoing asset rationalization and portfolio optimization efforts, we divested our Pittsfield and Springfield EfW facilities. During the first quarter, we determined that the assets and liabilities associated with these facilities met the criteria for classification as assets held for sale, but did not meet the criteria for classification as discontinued operations as this sale did not represent a strategic shift in our business. For the year ended December 31, 2019, we recognized a loss of $11 million, which is included in Net gain (loss) on sale of business and investments in our condensed consolidated statement of operations.
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 Net gain (loss) on sale of business and investments on our consolidated statement of operations.
China Investments
During 2016, we completed the exchange of our ownership interests in China and sold our ownership interest in Sanfeng Environment to a third-party, a subsidiary of CITIC Limited ("CITIC"), a leading Chinese industrial conglomerate and investment company.
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 Net gain (loss) on sale of business and investments 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 Net gain (loss) on sale of business and investments on our condensed consolidated statement of operations for the year ended December 31, 2018.
NOTE 5. EQUITY AND EARNINGS PER SHARE ("EPS")
Equity
As of December 31, 2019, 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, 2019, 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.
In May 2014, the stockholders of the Company approved the Covanta Holding Corporation 2014 Equity Award Plan. For additional information, see Note 7. Stock-Based Award Plans.
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.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Basic and diluted weighted average shares outstanding were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Basic weighted average common shares outstanding
|
131
|
|
|
130
|
|
|
130
|
|
Dilutive effect of stock options, restricted stock and restricted stock units
|
2
|
|
|
2
|
|
|
1
|
|
Diluted weighted average common shares outstanding
|
133
|
|
|
132
|
|
|
131
|
|
Anti-dilutive stock options, restricted stock and restricted stock units excluded from the calculation of EPS
|
—
|
|
|
—
|
|
|
—
|
|
NOTE 6. 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, 2019, 2018 and 2017. See Note 1. Organization and Summary of Significant Accounting Policies for a discussion of our reportable segment.
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
|
|
Less than 1 year
|
|
|
|
|
|
|
|
|
|
|
|
(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, 2019. 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”).
|
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Our remaining performance obligation primarily consists of the fixed consideration contained in our contracts. As of December 31, 2019 our total remaining performance obligation was $6.4 billion of which we expect to recognize 11% and 10% in 2020 and 2021, respectively.
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,
2019
|
|
December 31,
2018
|
Unbilled receivables
|
|
$
|
16
|
|
|
$
|
16
|
|
Deferred revenue
|
|
$
|
18
|
|
|
$
|
15
|
|
For the year ended December 31, 2019, revenue recognized that was included in deferred revenue on our consolidated balance sheet at the beginning of the period totaled $5 million.
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 7. 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. During 2019, the Company amended the Plan to reserve an additional 6 million shares of the Company's common stock for issuance under the Plan.
The purpose of the Plan is to promote our interests (including our subsidiaries and affiliates) and our stockholders’ interests by using equity interests to attract, retain and motivate our management, non-employee directors and other eligible persons and to encourage and reward their contributions to our performance and profitability. The Plan provides for awards to be made in the form of (a) shares of restricted stock, (b) restricted stock units, (c) incentive stock options, (d) non-qualified stock options, (e) stock appreciation rights, (f) performance awards, or (g) other stock-based awards which relate to or serve a similar function to the awards described above. Awards may be made on a standalone, combination or tandem basis.
Stock-Based Compensation
Generally, we recognize compensation costs using the graded vesting attribution method over the requisite service period of the award, which is generally three years. Forfeitures are accounted for as they occur. Stock-based compensation expense is as follows (in millions, except for weighted average years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stock-Based Compensation Expense
|
|
Unrecognized
stock-based
compensation expense
|
|
Weighted-average years to be recognized
|
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
As of December 31, 2019
|
Restricted Stock Units
|
|
$
|
17
|
|
|
$
|
14
|
|
|
$
|
5
|
|
|
$
|
9
|
|
|
1.4
|
Performance Awards
|
|
$
|
6
|
|
|
$
|
5
|
|
|
$
|
2
|
|
|
$
|
6
|
|
|
1.7
|
Restricted Stock Awards
|
|
$
|
2
|
|
|
$
|
5
|
|
|
$
|
11
|
|
|
$
|
—
|
|
|
0.3
|
Tax benefit related to compensation expense
|
|
$
|
5
|
|
|
$
|
5
|
|
|
$
|
4
|
|
|
|
|
|
During the year ended December 31, 2019, we withheld 452,025 shares of our common stock in connection with tax withholdings for vested stock awards.
Restricted Stock Units ("RSUs")
We award RSUs to eligible employees and our directors that entitle the recipient to receive shares of our common stock as the units vest. We calculate the fair value of RSUs based on the closing price of our stock on the date the award was granted.
During the year ended December 31, 2019 we awarded certain employees grants of RSUs that 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 2020, 2021, and 2022.
During the year ended December 31, 2019 we awarded RSUs for annual director compensation and 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 RSUs as of December 31, 2019 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
|
|
1,832
|
|
|
$
|
14.74
|
|
Granted
|
|
1,238
|
|
|
$
|
16.70
|
|
Vested
|
|
(691
|
)
|
|
$
|
14.46
|
|
Forfeited
|
|
(107
|
)
|
|
$
|
15.73
|
|
Nonvested at the end of the year
|
|
2,272
|
|
|
$
|
15.86
|
|
The weighted-average grant-date fair value of RSUs granted during the years ended December 31, 2019, 2018, and 2017 was $16.70, $14.87, and $15.08, respectively. The total fair value of shares vested during the years ended December 31, 2019, 2018, and 2017, was $10 million, $8 million, and $1 million, respectively.
Performance Awards
Performance awards represent a contingent right to receive shares of our common stock based on performance targets and consist of two types of awards, free cash flow ("FCF") awards and total stockholder return ("TSR") awards. Issuance and payment of the performance award is dependent upon the employee’s continued employment during the performance period and the achievement of performance goals achieved. As of December 31, 2019, there were 8 million shares of common stock available for future issuance under our equity plans.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For our FCF and TSR awards we recognize compensation costs ratably over the performance period. The FCF Awards and the TSR Awards will each cliff vest at the end of the 3 year performance period, however, the number of shares delivered will vary based upon the attained level of performance and may range from 0 to 2 times the number of target units awarded.
Stock-based compensation expense for the FCF Awards 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.
Stock-based compensation expense for TSR awards are fair valued on the date of grant and expensed over the performance measurement period.
The grant date fair value for the FCF Awards granted were computed using the closing price of the common stock on the grant date. The grant date fair value for the TSR Awards granted were calculated using a Monte Carlo simulation. There were no TSR Awards granted in 2017.
The Monte Carlo valuation assumptions utilized for the TSR awards were:
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Expected life (1)
|
2.82 years
|
|
|
2.82 years
|
|
Expected stock price volatility (2)
|
3.28
|
%
|
|
2.63
|
%
|
Risk-free interest rate (3)
|
2.48
|
%
|
|
2.38
|
%
|
Stock price (4)
|
$
|
16.35
|
|
|
$
|
14.80
|
|
|
|
(1)
|
Represents the remaining performance measurement period as of the valuation date.
|
|
|
(2)
|
Based on each entity’s historical stock price volatility over the remaining performance measurement period.
|
|
|
(3)
|
The risk free rate equals the yield, as of the grant date, on zero coupon US Treasury STRIPS that have a term equal to the length of the remaining performance measurement period.
|
|
|
(4)
|
The stock price is the closing price of our common stock on the grant date.
|
Changes in performance awards as of December 31, 2019 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
|
|
1,166
|
|
|
$
|
15.66
|
|
Granted
|
|
395
|
|
|
$
|
17.90
|
|
Vested
|
|
(368
|
)
|
|
$
|
15.11
|
|
Nonvested at the end of the year
|
|
1,193
|
|
|
$
|
16.57
|
|
The weighted-average grant-date fair value of performance awards granted during the years ended December 31, 2019, 2018, and 2017 was $17.90, $15.50, and $16.30 respectively. The total fair value of shares vested during the years ended December 31, 2019, 2018, and 2017, was $6 million, zero and zero, respectively.
Restricted Stock Awards ("RSAs")
RSAs that have been issued to employees typically vest over a three-year period. RSAs 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.
RSAs to employees are subject to forfeiture if the employee is not employed on the vesting date. RSAs 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. RSAs 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, 2019, we awarded our director's RSAs for the 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.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Changes in nonvested restricted stock awards as of December 31, 2019 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
|
|
727
|
|
|
$
|
15.90
|
|
Granted
|
|
6
|
|
|
$
|
17.64
|
|
Vested
|
|
(474
|
)
|
|
$
|
15.73
|
|
Forfeited
|
|
(17
|
)
|
|
$
|
16.21
|
|
Nonvested at the end of the year
|
|
242
|
|
|
$
|
16.26
|
|
The weighted-average grant-date fair value of RSAs granted during the years ended December 31, 2019, 2018, and 2017 was $17.64, $15.20, and $16.22 respectively. The total fair value of shares vested during the years ended December 31, 2019, 2018, and 2017, was $7 million, $11 million, and $10 million, respectively.
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 3 to 5 years and expire over 10 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 Plan as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-Average Exercise Price
|
|
Weighted-Average Remaining Contractual Term (Years)
|
|
Aggregate Intrinsic Value (2)
|
|
|
(in thousands, except per share amounts)
|
Outstanding at the beginning of the year
|
|
25
|
|
|
$
|
20.58
|
|
|
|
|
|
Granted
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Exercised
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Expired
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Forfeited
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Outstanding at the end of the year (1)
|
|
25
|
|
|
$
|
20.58
|
|
|
4.52
|
|
$
|
—
|
|
Options exercisable at year end
|
|
25
|
|
|
$
|
20.58
|
|
|
4.52
|
|
$
|
—
|
|
|
|
(1)
|
All options outstanding as of December 31, 2019 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 2019 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 2019. The intrinsic value changes based on the fair market value of our common stock.
|
NOTE 8. 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.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Plymouth Energy-from-Waste Facility
In May 2016, our Plymouth energy-from-waste facility experienced a turbine generator failure. Damage to the turbine generator was extensive and operations at the facility were suspended promptly to assess the cause and extent of damage. The facility is capable of processing waste without utilizing the turbine generator to generate electricity, and we resumed waste processing operations in early June of 2016. The facility resumed generating electricity early in the first quarter of 2017 after the generator and other damaged equipment were replaced.
The cost of repair or replacement of assets and business interruption losses for the above matters were 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,
|
|
2019
|
|
2018
|
|
2017
|
Insurance gains for property and clean-up costs, net of impairment charges
|
$
|
—
|
|
|
$
|
18
|
|
|
$
|
7
|
|
Insurance gains for business interruption costs, net of costs incurred
|
$
|
2
|
|
|
$
|
19
|
|
|
$
|
23
|
|
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. In 2017, 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,
|
|
2019
|
|
2018
|
|
2017
|
Impairment charges
|
$
|
2
|
|
|
$
|
86
|
|
|
$
|
2
|
|
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.
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,
|
|
2019
|
|
2018
|
Prepaid expenses
|
$
|
27
|
|
|
$
|
22
|
|
Other receivable
|
22
|
|
|
—
|
|
Spare parts
|
20
|
|
|
21
|
|
Other
|
36
|
|
|
21
|
|
Total prepaid expenses and other current assets (1)
|
$
|
105
|
|
|
$
|
64
|
|
|
|
|
|
Operating expenses, payroll and related expenses
|
$
|
139
|
|
|
$
|
150
|
|
Deferred revenue
|
12
|
|
|
10
|
|
Accrued liabilities to client communities
|
16
|
|
|
26
|
|
Interest payable
|
27
|
|
|
38
|
|
Dividends payable
|
38
|
|
|
36
|
|
Insurance premium financing
|
24
|
|
|
20
|
|
Other
|
36
|
|
|
53
|
|
Total accrued expenses and other current liabilities
|
$
|
292
|
|
|
$
|
333
|
|
|
|
(1)
|
Includes assets held for sale previously disclosed separately on the consolidated balance sheet.
|
Geographic Information
Our operations are principally located in the United States. A summary of our operating revenue and total assets by geographic area is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
Other
|
|
Total
|
Operating Revenue:
|
|
|
|
|
|
Year Ended December 31, 2019
|
$
|
1,800
|
|
|
$
|
70
|
|
|
$
|
1,870
|
|
Year Ended December 31, 2018
|
$
|
1,785
|
|
|
$
|
83
|
|
|
$
|
1,868
|
|
Year Ended December 31, 2017
|
$
|
1,705
|
|
|
$
|
47
|
|
|
$
|
1,752
|
|
|
|
|
United States
|
|
Other
|
|
Total
|
Total Assets:
|
|
|
|
|
|
|
As of December 31, 2019
|
|
$
|
3,466
|
|
|
$
|
249
|
|
|
$
|
3,715
|
|
As of December 31, 2018
|
|
$
|
3,635
|
|
|
$
|
208
|
|
|
$
|
3,843
|
|
As of December 31, 2017
|
|
$
|
3,727
|
|
|
$
|
714
|
|
|
$
|
4,441
|
|
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 9. INCOME TAXES
We file a federal consolidated income tax return with our eligible subsidiaries. Our federal consolidated income tax return also includes the taxable results of certain grantor trusts described below. The components of income tax expense were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4
|
|
State
|
|
2
|
|
|
1
|
|
|
2
|
|
Foreign
|
|
—
|
|
|
1
|
|
|
(1
|
)
|
Total current
|
|
2
|
|
|
2
|
|
|
5
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
(4
|
)
|
|
(1
|
)
|
|
(204
|
)
|
State
|
|
(4
|
)
|
|
(25
|
)
|
|
(2
|
)
|
Foreign
|
|
(1
|
)
|
|
(5
|
)
|
|
10
|
|
Total deferred
|
|
(9
|
)
|
|
(31
|
)
|
|
(196
|
)
|
Total income tax benefit
|
|
$
|
(7
|
)
|
|
$
|
(29
|
)
|
|
$
|
(191
|
)
|
Domestic and foreign pre-tax (loss) income was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Domestic
|
|
$
|
(25
|
)
|
|
$
|
(43
|
)
|
|
$
|
(43
|
)
|
Foreign
|
|
22
|
|
|
160
|
|
|
(92
|
)
|
Total
|
|
$
|
(3
|
)
|
|
$
|
117
|
|
|
$
|
(135
|
)
|
The effective income tax rate was 264%, (25)%, and 142% for the years ended December 31, 2019, 2018 and 2017, respectively.
The increase in the effective tax rate for the year ended December 31, 2019, compared to the year ended December 31, 2018 is primarily due to the $45 million non-taxable gain in 2019 resulting from the formation of the Rookery joint venture as compared to the $206 million non-taxable gain on the sale of 50% of our interests in Dublin EfW to GIG in 2018.
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) a significant deferred tax revaluation related to tax reform in 2017 which did not reoccur in 2018; (ii) no income tax associated with the gain from the sale of 50% of our interests in Dublin EfW; and (iii) the discrete tax benefits attributable to New Jersey state tax law changes and a state audit settlement.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A reconciliation of our income tax (benefit) expense at the federal statutory income tax rate of 21% to our income tax benefit at the effective tax rate is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Income tax (benefit) expense at the federal statutory rate
|
|
$
|
(1
|
)
|
|
$
|
25
|
|
|
$
|
(47
|
)
|
State and other tax expense
|
|
(1
|
)
|
|
(1
|
)
|
|
(2
|
)
|
Tax rate differential on foreign earnings
|
|
(2
|
)
|
|
(3
|
)
|
|
10
|
|
Gain on sale of business
|
|
(9
|
)
|
|
(44
|
)
|
|
—
|
|
Permanent differences
|
|
4
|
|
|
5
|
|
|
(3
|
)
|
Impact of state apportionment & tax rate
|
|
(2
|
)
|
|
(13
|
)
|
|
—
|
|
Change in valuation allowance
|
|
1
|
|
|
3
|
|
|
31
|
|
Liability for uncertain tax positions
|
|
(1
|
)
|
|
(4
|
)
|
|
—
|
|
Impact of deferred tax re-measurement for federal tax rate change
|
|
—
|
|
|
—
|
|
|
(204
|
)
|
Tax reform transition tax
|
|
—
|
|
|
1
|
|
|
21
|
|
Other
|
|
4
|
|
|
2
|
|
|
3
|
|
Total income tax benefit
|
|
$
|
(7
|
)
|
|
$
|
(29
|
)
|
|
$
|
(191
|
)
|
We had consolidated federal NOLs estimated to be approximately $198 million for federal income tax purposes as of December 31, 2019. The majority of these NOLs will expire in 2033 and beyond, if not used.
In addition to the consolidated federal NOLs, as of December 31, 2019, we had state NOL carryforwards of approximately $400 million, which expire between 2028 and 2037, net foreign NOL carryforwards of approximately $161 million with some expiring between 2020 and 2039. 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.
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,
|
|
|
2019
|
|
2018
|
Deferred tax assets:
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
90
|
|
|
$
|
90
|
|
Accrued and prepaid expenses
|
|
63
|
|
|
61
|
|
Tax credits
|
|
49
|
|
|
48
|
|
Interest expense
|
|
26
|
|
|
12
|
|
Other
|
|
8
|
|
|
23
|
|
Total gross deferred tax asset
|
|
236
|
|
|
234
|
|
Less: valuation allowance
|
|
(65
|
)
|
|
(73
|
)
|
Total deferred tax asset
|
|
171
|
|
|
161
|
|
Deferred tax liabilities:
|
|
|
|
|
Property, plant and equipment
|
|
517
|
|
|
521
|
|
Intangible assets
|
|
17
|
|
|
12
|
|
Other, net
|
|
9
|
|
|
6
|
|
Total gross deferred tax liability
|
|
543
|
|
|
539
|
|
Net deferred tax liability
|
|
$
|
372
|
|
|
$
|
378
|
|
US income taxes were not provided on cumulative undistributed foreign earnings as of December 31, 2019 and 2018. Foreign undistributed earnings were considered permanently invested, therefore no provision for US income taxes was accrued as of December 31, 2019 and 2018.
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 "shortfall".
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, 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
|
|
Additions based on tax positions related to the current year
|
2
|
|
Reductions for lapse in applicable statute of limitations
|
(1
|
)
|
Reductions for tax positions of prior years
|
(2
|
)
|
Balance at December 31, 2019
|
$
|
40
|
|
The uncertain tax positions, exclusive of interest and penalties, were $40 million and $41 million as of December 31, 2019 and 2018, 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, 2019 and 2018, we had accrued interest and penalties associated with liabilities for uncertain tax positions of $6 million and $5 million, respectively.
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 10. ACCOUNTS RECEIVABLE SECURITIZATION
In December 2019, we entered into an agreement whereby we will regularly sell certain receivables on a revolving basis to third-party financial institutions (the “Purchasers”) up to an aggregate purchase limit of $100 million (the “Receivables Purchase Agreement or “RPA”). Transfers under the RPA meet the requirements to be accounted for as sales in accordance with the Transfers and Servicing topic of FASB Accounting Standards Codification. We receive a discounted purchase price for each receivable sold under the RPA and will continue to service and administer the subject receivables. The weighted-average discount rate paid on accounts receivable sold was 2.43% for the year ended December 31, 2019.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Amounts recognized in connection with the RPA were as follows (in millions):
|
|
|
|
|
|
For the Year Ended December 31, 2019
|
Accounts receivable sold and derecognized
|
$
|
224
|
|
Cash proceeds received (1)
|
$
|
223
|
|
Loss on accounts receivable sold (2)
|
$
|
2
|
|
|
|
|
December 31, 2019
|
Pledged receivables (3)
|
$
|
142
|
|
(1)Of this amount, $99 million, represented the initial transfer upon commencement of the RPA, which is net of transaction fees and the structuring discount. The remainder represented proceeds from collections reinvested in revolving-period transfers. This amount is included in Net cash provided by operating activities on our consolidated statement of cash flows.
(2)Recorded in Other operating expense, net on our consolidated statements of operations. Amount includes initial transaction costs of $1 million and a guarantee expense of less than $1 million related to the pledged receivables.
(3)Secures our obligations under the RPA and provides a guarantee for the prompt payment, not collection, of all payment obligations relating to the sold receivables.
We are not required to offer to sell any receivables and the Purchasers are not committed to purchase any receivable offered. The RPA has a scheduled termination date of December 5, 2020. Additionally, we may terminate the RPA at any time upon 30 days’ prior written notice. The agreement governing the RPA contains certain covenants and termination events. An occurrence of an event of default or the occurrence of a termination event could lead to the termination of the RPA. As of December 31, 2019 we were in compliance with the covenants, and no termination events had occurred. As of December 31, 2019, $100 million, the maximum amount available under the RPA, was fully utilized.
NOTE 11. EQUITY METHOD INVESTMENTS
Investments accounted for under the equity method of $167 million and $160 million are included in Other assets in our consolidated balance sheet as of December 31, 2019 and 2018, respectively. A shareholder loan of $15 million related to the Earls Gate project is included in Other assets in our consolidated balance sheet as of December 31, 2019. For additional information on our equity investments in Ireland, the UK and China, see Note 3. New Business and Asset Management.
Our ownership percentages in our equity method investments are as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
Ownership interest:
|
|
2019
|
|
2018
|
Dublin EfW (Ireland) (1)
|
|
50
|
%
|
|
50
|
%
|
Ambiente 2000 S.r.l. (Italy)
|
|
40
|
%
|
|
40
|
%
|
Earls Gate (UK) (2)
|
|
25
|
%
|
|
25
|
%
|
Rookery EfW (UK) (3)
|
|
40
|
%
|
|
—
|
%
|
Zhao County EfW (China) (4)
|
|
26
|
%
|
|
—
|
%
|
South Fork Plant (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.
|
|
|
(3)
|
We have a 40% indirect ownership of Rookery through our 50/50 joint venture with GIG, Covanta Green UK Ltd.
|
|
|
(4)
|
We have a 26% interest in Zhao County through our venture with Longking Energy Development Co. Ltd.
|
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Summarized financial information of our equity method investments is presented as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Statement of Operations:
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
120
|
|
|
$
|
112
|
|
|
$
|
17
|
|
Operating income
|
|
$
|
28
|
|
|
$
|
31
|
|
|
$
|
1
|
|
Net income
|
|
$
|
11
|
|
|
$
|
13
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2019
|
|
2018
|
Balance Sheet:
|
|
|
|
|
|
|
Current assets
|
|
|
|
$
|
180
|
|
|
$
|
80
|
|
Long-term assets
|
|
|
|
$
|
1,008
|
|
|
$
|
834
|
|
Current liabilities
|
|
|
|
$
|
104
|
|
|
$
|
69
|
|
Long-term liabilities
|
|
|
|
$
|
735
|
|
|
$
|
521
|
|
We serve as the O&M service provider for the Dublin EfW facility which is owned by CEAL, our joint venture with GIG. For the years ended December 31, 2019 and 2018 we recognized $30 million and $27 million in revenues related to this agreement.
NOTE 12. FINANCIAL INSTRUMENTS
Fair Value Measurements
Authoritative guidance associated with fair value measurements provides a framework for measuring fair value and establishes a fair value hierarchy that prioritizes the inputs used to measure fair value, giving the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs), then significant other observable inputs (Level 2 inputs) and the lowest priority to significant unobservable inputs (Level 3 inputs). The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
|
|
•
|
For 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 value of our floating to fixed rate interest rate swaps is determined using discounted cash flow valuation methodologies that apply the appropriate forward floating rate curve observable in the market to the contractual terms of our swap agreements. The fair value of the interest rate swaps is adjusted to reflect counterparty risk of non-performance, and is based on the counterparty’s credit spread in the credit derivatives market.
|
|
|
•
|
The fair values of our energy hedges were determined using the spread between our fixed price and the forward curve information available within the market.
|
The 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, 2019. 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, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
Financial Instruments Recorded at Fair Value on a Recurring Basis:
|
|
Fair Value Measurement Level
|
|
2019
|
|
2018
|
|
|
|
|
(In millions)
|
Assets:
|
|
|
|
|
|
|
Investments — mutual and bond funds (1)
|
|
1
|
|
$
|
2
|
|
|
$
|
2
|
|
Derivative asset — energy hedges(2)
|
|
2
|
|
12
|
|
|
—
|
|
Total assets:
|
|
|
|
$
|
14
|
|
|
$
|
2
|
|
Liabilities:
|
|
|
|
|
|
|
Derivative liability — energy hedges (3)
|
|
2
|
|
$
|
—
|
|
|
$
|
13
|
|
Derivative liability — interest rate swaps (3)
|
|
2
|
|
$
|
2
|
|
|
$
|
—
|
|
Total liabilities:
|
|
|
|
$
|
2
|
|
|
$
|
13
|
|
|
|
(1)
|
Included in other noncurrent assets in the consolidated balance sheets.
|
|
|
(2)
|
The short-term balance is included in Prepaid expenses and other current assets and the long-term balance is included in Other assets in the consolidated balance sheets.
|
|
|
(3)
|
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.
|
The following financial instruments are recorded at their carrying amount (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
As of December 31, 2018
|
Financial Instruments Recorded at Carrying Amount:
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
Liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
2,383
|
|
|
$
|
2,459
|
|
|
$
|
2,342
|
|
|
$
|
2,245
|
|
Project debt
|
|
$
|
133
|
|
|
$
|
138
|
|
|
$
|
152
|
|
|
$
|
154
|
|
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. For the purpose of impairment testing, we review the recoverable amount of individual assets or groups of assets at the lowest level of which there are 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 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.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 13. 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, 2019 is indicated in the following table (in millions):
|
|
|
|
Calendar Year
|
|
Hedged MWh
|
2020
|
|
2.7
|
2021
|
|
0.8
|
2022
|
|
0.1
|
Total
|
|
3.6
|
As of December 31, 2019 and 2018, the fair value of the energy derivative asset and liability was $12 million and $13 million, respectively.
During the year ended December 31, 2019, cash provided by and used in energy derivative settlements of $18 million and $2 million, respectively, was included in the change in net cash provided by operating activities on our consolidated statement of cash flows.
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 the change 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
We may utilize derivative instruments to reduce our exposure to fluctuations in cash flows due to changes in variable interest rates paid on our direct borrowings under the senior secured revolving credit facility and the term loan of our subsidiary Covanta Energy (collectively referred to as the "Credit Facilities"). To achieve that objective, during December 31, 2019, we entered into pay-fixed, receive-variable swap agreements on $150 million notional amount of our variable rate debt under the Credit Facilities. The interest rate swaps are designated specifically to the Credit Facilities as a cash flow hedge and are recorded at fair value with changes in fair value recorded as a component of AOCI.
As of December 31, 2019, the fair value of the interest rate swap derivative liability of $2 million was recorded in Other long-term liabilities on our condensed consolidated balance sheet.
NOTE 14. 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, 2019
|
|
As of December 31, 2018
|
|
|
Remaining Weighted Average Useful
Life
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
Waste, service and energy contracts
|
|
18 years
|
|
$
|
447
|
|
|
$
|
211
|
|
|
$
|
236
|
|
|
$
|
522
|
|
|
$
|
271
|
|
|
$
|
251
|
|
Customer relationships, permits and other
|
|
5 years
|
|
52
|
|
|
30
|
|
|
22
|
|
|
52
|
|
|
24
|
|
|
28
|
|
Intangible assets, net
|
|
|
|
$
|
499
|
|
|
$
|
241
|
|
|
$
|
258
|
|
|
$
|
574
|
|
|
$
|
295
|
|
|
$
|
279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Waste and service contracts (liability)
|
|
14 years
|
|
$
|
(72
|
)
|
|
$
|
(66
|
)
|
|
$
|
(6
|
)
|
|
$
|
(72
|
)
|
|
$
|
(64
|
)
|
|
$
|
(8
|
)
|
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,
|
|
|
2019
|
|
2018
|
|
2017
|
Intangible assets, net
|
|
$
|
22
|
|
|
$
|
20
|
|
|
$
|
20
|
|
Waste and service contracts (contra-expense)
|
|
$
|
(2
|
)
|
|
$
|
(2
|
)
|
|
$
|
(2
|
)
|
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, 2019 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
Intangible assets, net
|
|
21
|
|
|
20
|
|
|
20
|
|
|
18
|
|
|
15
|
|
Waste and service contracts (contra-expense)
|
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The weighted average number of years prior to the next renewal period for contracts that we have an intangible recorded is 8 years.
Goodwill
The following table details the changes in carrying value of goodwill (in millions):
|
|
|
|
|
|
Total
|
Balance at December 31, 2017
|
$
|
313
|
|
Goodwill related to acquisitions
|
8
|
|
Balance at December 31, 2018
|
321
|
|
Goodwill related to acquisitions
|
—
|
|
Balance at December 31, 2019
|
$
|
321
|
|
As of December 31, 2019, goodwill of approximately $46 million was deductible for federal income tax purposes.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 15. CONSOLIDATED DEBT
Consolidated debt is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Rate(1)
|
|
December 31, 2019
|
|
December 31, 2018
|
LONG-TERM DEBT:
|
|
|
|
Revolving credit facility
|
4.17
|
%
|
|
$
|
183
|
|
|
$
|
212
|
|
Term loan, net due 2023
|
4.26
|
%
|
|
384
|
|
|
394
|
|
Credit Facilities Sub-total
|
|
|
$
|
567
|
|
|
$
|
606
|
|
Senior Notes
|
|
|
1,200
|
|
|
1,200
|
|
Less: deferred financing costs related to senior notes
|
|
|
(14
|
)
|
|
(16
|
)
|
Senior Notes Sub-total
|
|
|
$
|
1,186
|
|
|
$
|
1,184
|
|
Tax-exempt bonds
|
|
|
$
|
544
|
|
|
$
|
494
|
|
Less: deferred financing costs related to tax-exempt bonds
|
|
|
(5
|
)
|
|
(6
|
)
|
Tax-Exempt Bonds Sub-total
|
|
|
$
|
539
|
|
|
$
|
488
|
|
Equipment financing arrangements due 2020 through 2031
|
|
|
85
|
|
|
59
|
|
Finance Leases (2)
|
|
|
6
|
|
|
5
|
|
Total long-term debt
|
|
|
$
|
2,383
|
|
|
$
|
2,342
|
|
Less: current portion
|
|
|
(17
|
)
|
|
(15
|
)
|
Noncurrent long-term debt
|
|
|
$
|
2,366
|
|
|
$
|
2,327
|
|
PROJECT DEBT:
|
|
|
|
|
|
Project debt related to service fee structures
|
|
|
$
|
47
|
|
|
$
|
58
|
|
Union County EfW facility finance lease (tip fee structure)
|
|
|
84
|
|
|
89
|
|
Project debt related to tip fee structures
|
|
|
—
|
|
|
3
|
|
Unamortized debt premium, net
|
|
|
2
|
|
|
3
|
|
Less: deferred financing costs
|
|
|
—
|
|
|
(1
|
)
|
Total project debt
|
|
|
$
|
133
|
|
|
$
|
152
|
|
Less: Current portion
|
|
|
(8
|
)
|
|
(19
|
)
|
Noncurrent project debt
|
|
|
$
|
125
|
|
|
$
|
133
|
|
TOTAL CONSOLIDATED DEBT
|
|
|
$
|
2,516
|
|
|
$
|
2,494
|
|
Less: Current debt
|
|
|
(25
|
)
|
|
(34
|
)
|
TOTAL NONCURRENT CONSOLIDATED DEBT
|
|
|
$
|
2,491
|
|
|
$
|
2,460
|
|
|
|
(1)
|
During the year ended December 31, 2019 we entered into pay-fixed, receive-variable swap agreements on $150 million notional amount of our variable rate debt under the Credit Facilities. See Note 13. Derivative Instruments for further information.
|
|
|
(2)
|
Excludes Union County EfW facility finance lease which is presented within project debt in our consolidated balance sheets.
|
Credit Facility Refinancing
In August 2018, our subsidiary, Covanta Energy, refinanced its existing credit facilities with an amended $1.3 billion senior secured credit facilities consisting of a $900 million revolving credit facility expiring August 2023 (the “Revolving Credit Facility”) and a $400 million term loan (the “Term Loan”), (collectively referred to as the "Credit Facilities").
We incurred approximately $7 million in financing costs related to the refinancing 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 credit facilities 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.
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
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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, 2019, 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
|
|
$
|
183
|
|
|
$
|
228
|
|
|
$
|
489
|
|
Repayment Terms
As of December 31, 2019, the Term Loan has mandatory principal payments of approximately $10 million in each year through 2022 and a final repayment of $355 million due at maturity 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 it's 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% determined by a pricing grid based on Covanta Energy’s leverage ratio on the unused amount of commitments under the Revolving Credit Facility.
Borrowings under the Term Loan bear interest at either (i) the base rate plus an applicable margin ranging from 0.75% to 1.00% or (ii) LIBOR plus an applicable margin ranging from 1.75% to 2.00%, in each determined by a pricing grid based on Covanta Energy’s leverage ratio.
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, 2019.
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, our ("Senior Notes"):
|
|
|
|
|
|
|
|
|
|
|
|
Maturity
|
|
Rate
|
|
December 31, 2019
|
|
December 31, 2018
|
2027
|
|
6.000%
|
|
$
|
400
|
|
|
$
|
400
|
|
2025
|
|
5.875%
|
|
400
|
|
|
400
|
|
2024
|
|
5.875%
|
|
400
|
|
|
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.
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
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
Tax-Exempt Bonds
Our Tax-Exempt Bonds are summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
|
|
Maturity
|
|
Coupon
|
|
December 31, 2019
|
|
December 31, 2018
|
Pennsylvania Series 2019A
|
|
2039
|
|
3.250%
|
|
$
|
50
|
|
|
$
|
—
|
|
New Hampshire Series 2018A
|
|
2027
|
|
4.000%
|
|
20
|
|
|
20
|
|
New Hampshire Series 2018B
|
|
2042
|
|
4.625%
|
|
67
|
|
|
67
|
|
New Hampshire Series 2018C
|
|
2042
|
|
4.875%
|
|
82
|
|
|
82
|
|
New York Series 2018A
|
|
2042
|
|
4.750%
|
|
130
|
|
|
130
|
|
New York Series 2018B
|
|
2024
|
|
3.500%
|
|
35
|
|
|
35
|
|
Virginia Series 2018A-1
|
|
2038
|
|
5.000%
|
|
30
|
|
|
30
|
|
New Jersey Series 2015A
|
|
2045
|
|
5.250%
|
|
90
|
|
|
90
|
|
Pennsylvania Series 2015A
|
|
2043
|
|
5.000%
|
|
40
|
|
|
40
|
|
|
|
|
|
|
|
$
|
544
|
|
|
$
|
494
|
|
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In August 2019, we entered into a loan agreement with the Pennsylvania Economic Development Financing Authority under which they agreed to issue $50 million in aggregate principal amount of tax-exempt Solid Waste Disposal Bonds for the purpose of funding qualified capital expenditures at certain of our facilities in Pennsylvania and paying related costs of issuance (the “Pennsylvania Bonds”). The Pennsylvania Bonds bear interest at a fixed rate of 3.25%, payable on February 1 and August 1 of each year, and have a legal maturity of August 1, 2039. The Pennsylvania Bonds are senior unsecured obligations of Covanta Holding Corporation and are not guaranteed by any of our subsidiaries.
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 are being 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.
Union County EfW Facility Finance 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. Please see Note 16. Leases for further information.
Equipment Financing Arrangements
In 2014, we entered into equipment financing arrangements to finance the purchase of barges, railcars, containers and intermodal equipment related to our New York City contract. During March 2019, we commenced operations at the East 91st Street Marine Transfer Station, which is the second of a pair of marine transfer stations utilized under a 20-year waste transport and disposal agreement between Covanta and New York City's Department of Sanitation ("DSNY"). In accordance with the contract, we are responsible for purchasing and maintaining a sufficient number of transportation assets to allow the DSNY owned transfer stations to effectively handle the expected volumes of waste. As such, we entered into financing arrangements for the purchase of railcars,
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
trailers, containers and barges (the "Equipment") to continue to meet the requirements of the DSNY contract. We commenced investing in the Equipment during 2019 and borrowed $31 million during the twelve months ended December 31, 2019. The borrowings maturity dates range from 2024 and 2031 with fixed interest rates ranging from 3.55% to 4.75%.
The outstanding borrowings under the equipment financing arrangements were $85 million as of December 31, 2019, and have mandatory payments remaining as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
Thereafter
|
Future minimum payments
|
|
$
|
7
|
|
|
$
|
7
|
|
|
$
|
7
|
|
|
$
|
8
|
|
|
$
|
7
|
|
|
$
|
49
|
|
Depreciation associated with these assets 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, 2019 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
Thereafter
|
Project debt (1)
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
37
|
|
(1) Amounts exclude the Union County EfW facility finance 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, 2019, such revenue bonds were collateralized by property, plant and equipment with a net carrying value of $511 million and restricted funds held in trust of approximately $7 million.
Rates on our project debt as of December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
Maximum
|
Project debt related to service fee structures due through 2035
|
|
5.00
|
%
|
|
5.00
|
%
|
Project debt related to tip fee structures due through 2053(1)
|
|
5.00
|
%
|
|
5.25
|
%
|
(1) Union County EfW facility finance lease discussed above.
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, 2019, 2018 and 2017 amortization of deferred financing costs included as a component of interest expense totaled $5 million, $5 million and $7 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,
|
|
2019
|
|
2018
|
|
2017
|
Capitalized interest
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17
|
|
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
NOTE 16. LEASES
We determine if an arrangement contains a lease at inception. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.
Our leases consist of leaseholds on EfW facilities, land, trucks and automobiles, office space, and machinery and equipment. We utilized a portfolio approach in determining our discount rate. The portfolio approach takes into consideration the range of the term, the range of the lease payments, the category of the underlying asset and our estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments. We also give consideration to our recent debt issuances as well as publicly available data for instruments with similar characteristics when calculating our incremental borrowing rates.
Our lease term includes options to extend the lease when it is reasonably certain that we will exercise that option. Leases with a term of 12 months or less are not recorded on the balance sheet, per the election of the practical expedient noted above in Note 1. Organization and Summary of Significant Accounting Policies - Accounting Pronouncements Recently Adopted.
We recognize lease expense for these leases on a straight-line basis over the lease term. We recognize variable lease payments in the period in which the obligation for those payments is incurred. Variable lease payments that depend on an index or a rate are initially measured using the index or rate at the commencement date, otherwise variable lease payments are recognized in the period incurred.
The components of lease expense were as follows (in millions):
|
|
|
|
|
|
For the Year Ended
|
|
December 31, 2019
|
Finance lease:
|
|
Amortization of assets, included in Depreciation and amortization expense
|
$
|
7
|
|
Interest on lease liabilities, included in Interest expense
|
4
|
|
Operating lease:
|
|
Amortization of assets, included in Total operating expense
|
8
|
|
Interest on lease liabilities, included in Total operating expense
|
2
|
|
Total net lease cost
|
$
|
21
|
|
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Supplemental balance sheet information related to leases was as follows (in millions, except lease term and discount rate):
|
|
|
|
|
|
|
|
December 31, 2019
|
Operating leases:
|
|
|
Operating lease ROU assets, included in Other assets
|
|
$
|
46
|
|
|
|
|
Current operating lease liabilities, included in Accrued expenses and other current liabilities
|
|
$
|
6
|
|
Noncurrent operating lease liabilities, included in Other liabilities
|
|
46
|
|
Total operating lease liabilities
|
|
$
|
52
|
|
|
|
|
Finance leases:
|
|
|
Property and equipment, at cost
|
|
$
|
168
|
|
Accumulated amortization
|
|
(25
|
)
|
Property and equipment, net
|
|
$
|
143
|
|
|
|
|
Current obligations of finance leases, included in Current portion of long-term debt
|
|
$
|
6
|
|
Finance leases, net of current obligations, included in Long-term debt
|
|
84
|
|
Total finance lease liabilities
|
|
$
|
90
|
|
Supplemental cash flow and other information related to leases was as follows (in millions):
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
December 31, 2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
Operating cash flows related to operating leases
|
|
$
|
10
|
|
Financing cash flows related to finance leases
|
|
$
|
6
|
|
|
|
|
Weighted average remaining lease term (in years):
|
|
|
Operating leases
|
|
11.9
|
|
Finance leases
|
|
32.3
|
|
|
|
|
Weighted average discount rate:
|
|
|
Operating leases
|
|
4.64
|
%
|
Finance leases
|
|
5.05
|
%
|
Maturities of lease liabilities were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Operating Leases
|
|
Finance Leases
|
2020
|
$
|
8
|
|
|
$
|
8
|
|
2021
|
8
|
|
|
12
|
|
2022
|
7
|
|
|
12
|
|
2023
|
6
|
|
|
11
|
|
2024
|
6
|
|
|
11
|
|
2025 and thereafter
|
33
|
|
|
104
|
|
Total lease payments
|
68
|
|
|
158
|
|
Less: Amounts representing interest
|
(16
|
)
|
|
(68
|
)
|
Total lease obligations
|
$
|
52
|
|
|
$
|
90
|
|
Disclosures related to periods prior to the adoption of ASC 842
Rental expense was $23 million and $22 million for the years ended December 31, 2018 and 2017, respectively.
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, 2019 and 2018, accruals for our loss contingencies approximated $3 million and $16 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.
Other Matters
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. The final settlement for this matter was paid in July 2019.
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)
Other Commitments
Other commitments as of December 31, 2019 were as follows (in millions):
|
|
|
|
|
|
Letters of credit issued under the Revolving Credit Facility
|
|
$
|
228
|
|
Letters of credit - other
|
|
40
|
|
Surety bonds
|
|
137
|
|
Total other commitments — net
|
|
$
|
405
|
|
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. The bonds do not have stated expiration dates. Rather, we are released from the bonds as the underlying performance is completed.
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 15. 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.
We have entered into certain guarantees of performance in connection with our recent divestiture activities. Under the terms of the arrangements, we guarantee performance should the guaranteed party fail to fulfill its obligations under the specified arrangements.
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,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Operating revenue
|
|
$
|
453
|
|
|
$
|
458
|
|
|
$
|
467
|
|
|
$
|
454
|
|
|
$
|
465
|
|
|
$
|
456
|
|
|
$
|
485
|
|
|
$
|
500
|
|
Operating (loss) income
|
|
$
|
(8
|
)
|
|
$
|
20
|
|
|
$
|
10
|
|
|
$
|
(18
|
)
|
|
$
|
44
|
|
|
$
|
2
|
|
|
$
|
44
|
|
|
$
|
59
|
|
Net income (loss)
|
|
$
|
5
|
|
|
$
|
201
|
|
|
$
|
(21
|
)
|
|
$
|
(31
|
)
|
|
$
|
14
|
|
|
$
|
(27
|
)
|
|
$
|
12
|
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.04
|
|
|
$
|
1.55
|
|
|
$
|
(0.16
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
0.11
|
|
|
$
|
(0.21
|
)
|
|
$
|
0.09
|
|
|
$
|
0.07
|
|
Diluted
|
|
$
|
0.03
|
|
|
$
|
1.53
|
|
|
$
|
(0.16
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
0.10
|
|
|
$
|
(0.21
|
)
|
|
$
|
0.09
|
|
|
$
|
0.07
|
|
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.
NOTE 19. SUBSEQUENT EVENTS
In January 2020, in connection with our Zhao County agreement, we received proceeds of RMB 61 million ($9 million) through a loan agreement with a third party. We subsequently contributed the entire amount of the loan proceeds to the equity investment entity which owns the project in the form of a shareholder loan which is convertible to equity. The third party loan bears an annual interest rate of 12%, payable bi-annually. The loan is collateralized through an equity pledge agreement whereby a portion of our equity in the entity is pledged as collateral for loan repayment. We have agreed to use commercially reasonable efforts to repay the loan principal and interest accrued within one year. For additional information see Note 3. New Business and Asset Management-Zhao County, China Venture
In February 2020, we reached financial close on the Newhurst Energy Recovery Facility (“Newhurst”), a 350,000 metric ton-per-year, 42 megawatt EfW facility under construction in Leicestershire, England. Newhurst is our third investment in the UK with our strategic partner, GIG. Through a 50/50 jointly-owned and governed entity, Covanta Green, we and GIG will own a 50% interest in Newhurst, with Biffa plc, a UK waste services provider, holding the remaining 50% interest. Biffa will provide approximately 70% of the waste supply to the project, and we will provide operations and maintenance services, in each case under a 20 year arrangement. Newhurst is expected to commence commercial operations in 2023.